Pantry 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

____________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 26, 2009

Commission file number: 000-25813

THE PANTRY, INC.

(Exact name of registrant as specified in its charter)

Delaware

56-1574463

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1801 Douglas Drive

Sanford, North Carolina 27330

(Address of principal executive offices and zip code)

(919) 774-6700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes

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		22,470,757 SHARES
(Class)		(Outstanding at May 1, 2009)

THE PANTRY, INC.

FORM 10-Q

March 26, 2009

TABLE OF CONTENTS


		Page
Part I—Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Operations (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	30
Item 4T.	Controls and Procedures	30

Part II—Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 4.	Submission of Matters to a Vote of Security Holders	41
Item 6.	Exhibits	42

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

THE PANTRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	March 26, 2009			September 25, 2008
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	242,768		$	217,188
Receivables, net		71,779			109,050
Inventories		116,373			132,248
Prepaid expenses and other current assets		14,311			12,706
Deferred income taxes		16,072			14,845
Total current assets		461,303			486,037
Property and equipment, net		973,312			990,916
Other assets:
Goodwill		627,662			627,653
Other intangible assets		31,710			32,564
Other noncurrent assets		28,900			31,560
Total other assets		688,272			691,777
Total assets	$	2,122,887		$	2,168,730
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	4,315		$	27,385
Current maturities of lease finance obligations		5,615			5,322
Accounts payable		132,759			171,216
Accrued compensation and related taxes		19,766			20,217
Other accrued taxes		17,952			27,226
Self-insurance reserves		32,978			33,775
Other accrued liabilities		38,595			39,936
Total current liabilities		251,980			325,077
Other liabilities:
Long-term debt		790,099			819,115
Lease finance obligations		458,392			459,711
Deferred income taxes		96,971			90,708
Deferred vendor rebates		19,443			20,875
Other noncurrent liabilities		68,788			63,385
Total other liabilities		1,433,693			1,453,794
Commitments and contingencies (Note 3)
Shareholders’ equity:
Common stock, $.01 par value, 50,000,000 shares authorized; 22,470,757 and 22,209,615 issued and outstanding at March 26, 2009 and September 25, 2008, respectively		222			222
Additional paid-in capital		176,332			169,851
Accumulated other comprehensive deficit, net of deferred income taxes of $3,633 at March 26, 2009 and $517 at September 25, 2008		(5,721	)		(819	)
Retained earnings		266,381			220,605
Total shareholders’ equity		437,214			389,859
Total liabilities and shareholders’ equity	$	2,122,887		$	2,168,730

See Notes to Condensed Consolidated Financial Statements

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended						Six Months Ended
	March 26, 2009			March 27, 2008			March 26, 2009			March 27, 2008
	(13 weeks)			(13 weeks)			(26 weeks)			(26 weeks)
Revenues:
Merchandise	$	389,397		$	380,276		$	779,513		$	775,656
Gasoline		924,240			1,656,703			2,166,605			3,239,624
Total revenues		1,313,637			2,036,979			2,946,118			4,015,280
Costs and operating expenses:
Merchandise cost of goods sold (exclusive of items shown separately below)		244,585			237,778			496,020			486,795
Gasoline cost of goods sold (exclusive of items shown separately below)		868,801			1,609,764			1,981,025			3,136,528
Store operating		126,677			126,838			257,284			252,976
General and administrative		23,877			22,793			50,362			45,767
Depreciation and amortization		26,273			26,769			53,155			53,411
Total costs and operating expenses		1,290,213			2,023,942			2,837,846			3,975,477
Income from operations		23,424			13,037			108,272			39,803
Other income (expense):
Gain on extinguishment of debt		6,693			—			7,163			—
Interest expense, net		(20,883	)		(21,873	)		(42,395	)		(43,480	)
Miscellaneous		56			272			217			462
Total other expense		(14,134	)		(21,601	)		(35,015	)		(43,018	)
Income (loss) before income taxes		9,290			(8,564	)		73,257			(3,215	)
Income tax (expense) benefit		(2,952	)		3,485			(27,481	)		1,385
Net income (loss)	$	6,338		$	(5,079	)	$	45,776		$	(1,830	)
Earnings (loss) per share:
Basic	$	0.29		$	(0.23	)	$	2.06		$	(0.08	)
Diluted	$	0.28		$	(0.23	)	$	2.06		$	(0.08	)

See Notes to Condensed Consolidated Financial Statements

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended
	March 26, 2009			March 27, 2008
	(26 weeks)			(26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	45,776		$	(1,830	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,155			53,411
Provision for deferred income taxes		8,152			(4,729	)
Gain on extinguishment of debt		(7,163)			—
Stock-based compensation expense		3,759			1,737
Other		3,590			4,296
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables		37,168			(5,833	)
Inventories		15,875			7,107
Prepaid expenses and other current assets		(1,655	)		(4,603	)
Other noncurrent assets		653			(333	)
Accounts payable		(38,457	)		(6,380	)
Other current liabilities and accrued expenses		(9,877	)		(10,305	)
Other noncurrent liabilities		(4,072	)		(1,306	)
Net cash provided by operating activities		106,904			31,232
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment		(37,648	)		(64,345	)
Proceeds from sales of property and equipment		2,036			743
Insurance recoveries		103			—
Acquisitions of businesses, net of cash acquired		(9	)		(13,953	)
Net cash used in investing activities		(35,518	)		(77,555	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt		(44,486	)		(1,770	)
Repayments of lease finance obligations		(2,705	)		(2,223	)
Borrowings under revolving credit facility		—			20,000
Proceeds from lease finance obligations		1,350			7,558
Proceeds from exercise of stock options		29			417
Excess income tax benefits from stock-based compensation arrangements		6			7
Other financing costs		—			(254	)
Net cash (used) provided in financing activities		(45,806	)		23,735
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		25,580			(22,588	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		217,188			71,503
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	242,768		$	48,915
Cash paid during the period:
Interest	$	43,627		$	43,363
Income taxes	$	23,431		$	4,265
Non-cash investing and financing activities:
Accrued purchases of property and equipment	$	4,989		$	8,310

See Notes to Condensed Consolidated Financial Statements

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiaries (references to “the Company,” “Pantry,” “The Pantry,” “we,” “us” and “our” mean The Pantry, Inc. and its subsidiaries). All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of each of our wholly owned subsidiaries are immaterial to the condensed consolidated financial statements.

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements have been prepared from the accounting records of The Pantry, Inc. and its subsidiaries, and all amounts as of March 26, 2009 and for the three and six months ended March 26, 2009 and March 27, 2008 are unaudited. 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. The condensed consolidated balance sheet at September 25, 2008 has been derived from our audited consolidated financial statements.

The condensed consolidated financial statements included herein should 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 25, 2008.

Our results of operations for the three and six months ended March 26, 2009 and March 27, 2008 are not necessarily indicative of results to be expected for the full fiscal year. The convenience store industry in our marketing areas generally experiences higher levels of revenues during the summer months than during the winter months.

References in this report to “fiscal 2009” refer to our current fiscal year, which ends on September 24, 2009, and references to “fiscal 2008” refer to our fiscal year which ended September 25, 2008.

Accounting Period

We operate on a 52-53 week fiscal year ending on the last Thursday in September. Fiscal 2009 is a 52 week year. Fiscal 2008 was also a 52 week year.

The Pantry

As of March 26, 2009, we operated 1,647 convenience stores located in Florida (445), North Carolina (385), South Carolina (283), Georgia (133), Tennessee (104), Mississippi (99), Alabama (83), Virginia (50), Kentucky (30), Louisiana (26), and Indiana (9). Our stores offer a broad selection of merchandise, gasoline and ancillary 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 all states, except Alabama and Mississippi, we also sell lottery products. As of March 26, 2009, we operated 239 quick service restaurants within 229 of our locations and 281 of our stores included car wash facilities. Self-service gasoline is sold at 1,628 locations, 1,108 of which sell gasoline under major oil company brand names including BP®, Chevron ®, CITGO®, Texaco ®, ExxonMobil ® and Shell ®.

Excise Taxes

We collect and remit federal and state excise taxes on petroleum products. Gasoline sales and cost of goods sold included excise and other taxes of approximately $219.0 million and $440.5 million for the three and six months ended March 26, 2009, respectively, and $224.2 million and $455.9 million for the three and six months ended March 27, 2008, respectively.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for merchandise inventories and using the weighted-average method for gasoline inventories. The gasoline we purchase from our vendors is temperature adjusted. The gasoline we sell at retail is sold at ambient temperatures. The volume of gasoline we maintain in inventory can expand or contract with changes in temperature.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Depending on the actual temperature experience and other factors, we may realize a net increase or decrease in the volume of our gasoline inventory during our fiscal year. At interim periods, we record any projected increases or decreases through cost of goods sold through the year based on gallon volume, which we believe more fairly reflects our results by better matching our costs to our retail sales. As of March 26, 2009 and March 27, 2008, we have increased inventory by capitalizing variances of approximately $7.1 million and $15.3 million, respectively. At the end of any fiscal year, the entire variance is absorbed during the year into cost of goods sold.

New Accounting Standards

In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of FASB Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset in not active. FSP 157-3 was effective for the Company for the quarter ended December 25, 2008. The adoption of this position did not have a material impact on our financial statements.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The purpose of this standard is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of an asset under SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”) and other accounting principles generally accepted in the United States. FSP 142-3 is effective for the Company beginning in fiscal 2010. The measurement provisions for this standard will apply only to intangible assets acquired after the effective date.

In March 2008, the FASB concluded its re-deliberations on FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), deciding to retain its original proposal related to this matter. FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. FSP APB 14-1 will require that the issuer of a convertible debt instrument within its scope separately account for the liability and equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The excess of the principal amount of the liability component over its initial fair value must be amortized to interest cost using the interest method. FSP APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods thereafter and will be applied retrospectively to all periods presented. Early adoption is not permitted. The provisions of FSP APB 14-1 will apply to our senior subordinated convertible notes due 2012 (“convertible notes”). We are currently evaluating FSP APB 14-1 to determine the impact it will have on our financial statements. While it is still early in our evaluation process, we expect adoption of this FSP could have a material impact on our financial statements given the large amount of indebtedness we have incurred through the issuance of convertible notes. Preliminarily, we expect the impact will include a reduction in the carrying amount of our convertible notes and increased interest expense over the term of the convertible notes.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, with the intent to provide users of financial statements adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for quarterly interim periods beginning after November 15, 2008 and fiscal years that include those quarterly interim periods. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 in the second quarter of fiscal 2009 did not affect our financial position, financial performance or cash flows.

In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, Fair Value Measurements, which delays the effective date of SFAS No.157 to September 25, 2009 for us for all nonfinancial assets and nonfinancial liabilities, except for items recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We will adopt FSP No. 157-2 starting with fiscal year 2010 beginning September 25, 2009, but we do not expect the provisions of FSP No. 157-2 will have a material effect on our financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No.51. SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for deconsolidation of a subsidiary. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We are currently evaluating SFAS No. 160 to determine the impact, if any, it will have on our financial statements.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In December 2007, the FASB also issued SFAS No. 141 (revised 2007), Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal 2010.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 on September 26, 2008, and the adoption of SFAS No. 159 did not have a material impact on our financial statements.

NOTE 2—GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and other intangible assets acquired through business combinations in accordance with SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 clarifies the criteria for recognizing other intangible assets separately from goodwill in a business combination. SFAS No. 142 states that goodwill and other intangible assets deemed to have indefinite lives are not amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not determined to have an indefinite life are amortized over their useful lives and assessed for impairment under the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Other intangible assets are included in other noncurrent assets.

In accordance with our policy, we conducted our annual impairment testing of goodwill in the second quarter of fiscal 2009. We test goodwill for possible impairment on an annual basis and more frequently if impairment indicators arise. No impairment charges related to goodwill or other intangible assets were recognized during the first six months of fiscal 2009 or fiscal 2008. Our annual testing of indefinite-lived intangibles will be conducted in the fourth quarter of fiscal 2009. Indefinite-lived intangibles are also reviewed for impairment more frequently if impairment indicators arise.

We generally focus on selectively acquiring convenience store chains within and contiguous to our existing market areas. Our ability to create synergies due to our relative size and geographic concentration contributes to a purchase price that is generally in excess of the fair value of assets acquired and liabilities assumed, which results in the recognition of goodwill.

The following table reflects goodwill and other intangible asset balances as of September 25, 2008 and the activity thereafter through March 26, 2009 (amounts in thousands, except weighted-average life data):


	Unamortized				Amortized
	Goodwill		Trade names		Trade names			Customer Agreements			Non-compete Agreements
Weighted-average useful life in years		N/A		N/A		3.0			10.1			23.7
Gross balance at September 25, 2008	$	627,653	$	24,050	$	2,850		$	1,928		$	12,593
Acquisitions		9		—		—			—			—
Gross balance at March 26, 2009	$	627,662	$	24,050	$	2,850		$	1,928		$	12,593
Accumulated amortization at September 25, 2008					$	(2,850	)	$	(757	)	$	(5,250	)
Amortization						—			(131	)		(723	)
Accumulated amortization at March 26, 2009					$	(2,850	))	$	(888	)	$	(5,973	)
Net book value	$	627,662	$	24,050	$	—		$	1,040		$	6,620

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The contractual lives of our non-compete agreements range from 3 – 35 years. The estimated future amortization expense for trade names, customer agreements and non-compete agreements as of March 26, 2009 is as follows (amounts in thousands):


Fiscal Year Ending September:
2009	$	771
2010		953
2011		464
2012		362
2013		317
Thereafter		4,793
Total estimated amortization expense	$	7,660

NOTE 3—COMMITMENTS AND CONTINGENCIES

As of March 26, 2009, we were contingently liable for outstanding letters of credit in the amount of approximately $79.9 million primarily related to several self-insurance programs, vendor contracts and regulatory requirements. The letters of credit are not to be drawn against unless we default on the timely payment of related liabilities.

As previously reported, on July 17, 2004 Constance Barton, Kimberly Clark, Wesley Clark, Tracie Hunt, Eleanor Walters, Karen Meredith, Gilbert Breeden, LaCentia Thompson and Mathesia Peterson, on behalf of themselves and on behalf of classes of those similarly situated, filed suit against The Pantry, Inc. seeking class action status and asserting claims on behalf of our North Carolina present and former employees for unpaid wages under North Carolina Wage and Hour laws. The suit also seeks an injunction against any unlawful practices, damages, liquidated damages, costs and attorneys’ fees. We filed an Answer denying any wrongdoing or liability to plaintiffs in any regard. The suit originally was filed in the Superior Court for Forsyth County, State of North Carolina. On August 17, 2004, the case was removed to the United States District Court for the Middle District of North Carolina and on July 18, 2005, plaintiffs filed an Amended Complaint asserting certain additional claims under the federal Fair Labor Standards Act on behalf of all our present and former store employees. We filed a motion to dismiss parts of the Amended Complaint and on May 17, 2006, the court granted in part and denied in part our motion. On January 16, 2007, plaintiffs filed a motion to file a Second Amended Complaint asserting on behalf of themselves and classes of those similarly situated state law claims for alleged unpaid wages in all 11 states in which we do business. On February 8, 2007, we filed a motion opposing the filing of the Second Amended Complaint. The motion is pending before the court. While we deny liability in this case, to avoid the burdens, expense and uncertainty of further litigation, on March 26, 2007, we reached a proposed settlement in principle with class counsel. The proposed settlement will establish a settlement fund of $1.0 million from which payments will be made to settlement class members and class counsel. Additionally, the proposed settlement provides for us to bear all costs of sending notices, processing and preparing payments and other administrative costs of the settlement. No other payments will be made to class members or class counsel. On September 26, 2008, the court issued an order preliminarily approving the settlement. On April 6, 2009, the court held a hearing at which it granted final approval of the settlement. The deadline for any appeal of that order is May 6, 2009. We incurred a one-time charge in the second quarter of fiscal 2007 of $1.25 million for the proposed settlement and associated costs.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

including the seven in which we are named, have been transferred to the United States District Court for the District of Kansas where the cases will be consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers in non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants filed motions to dismiss all cases for failure to state a claim, which were denied by the court on February 21, 2008. The defendants expect to contest class certification and to file motions for summary judgment after appropriate discovery. We believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits. As the cases are at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

We are party to various other legal actions in the ordinary course of our business. We believe these other actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.

On July 28, 2005, we announced that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. Beginning in September 2005, we received requests from the Securities and Exchange Commission (“SEC”) that we voluntarily provide certain information to the SEC Staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. We are cooperating with the SEC in this ongoing investigation.

Our Board of Directors has adopted employment agreements for several of our executives, which create certain liabilities in the event of the termination of these executives following a change of control. These agreements have original terms of at least one year and specify the executive’s current compensation, benefits and perquisites, the executive’s entitlements upon termination of employment and other employment rights and responsibilities.

Unamortized Liabilities Associated with Vendor Payments

Service and supply allowances are amortized over the life of each service or supply agreement, respectively, in accordance with the agreement’s specific terms. As of March 26, 2009, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $257 thousand and $19.4 million, respectively. As of September 25, 2008, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $337 thousand and $20.9 million, respectively.

McLane Company, Inc.—we purchase over 50% of our general merchandise from a single wholesaler, McLane Company, Inc. (“McLane”). Our arrangement with McLane is governed by a distribution service agreement which expires in December 2014. We receive annual service allowances based on the number of stores operating on each contract anniversary date. The distribution service agreement requires us to reimburse McLane the unearned, unamortized portion, if any, of all service allowance payments received to date if the agreement is terminated under certain conditions. We amortize service allowances received as a reduction to merchandise cost of goods sold using the straight-line method over the life of the agreement.

Major Oil Companies—we have entered into product brand imaging agreements with numerous oil companies to buy gasoline at market prices. The initial terms of these agreements have expiration dates ranging from 2010 to 2013. In connection with these agreements, we may receive upfront vendor allowances, volume incentive payments and other vendor assistance payments. If we default under the terms of any contract or terminate any supply agreement prior to the end of the initial term, we must reimburse the respective oil company for the unearned, unamortized portion of the payments received to date. These payments are amortized and recognized as a reduction to gasoline cost of goods sold using the specific amortization periods based on the terms of each agreement, either using the straight-line method or based on gasoline volume purchased.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Environmental Liabilities and Contingencies

We are subject to various federal, state and local environmental laws and regulations. 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 U.S. Environmental Protection Agency to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g., overfills, spills and underground storage tank releases).

Federal and state laws and 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 these requirements, as of March 26, 2009, we maintained letters of credit in the aggregate amount of approximately $1.4 million in favor of state environmental agencies in North Carolina, South Carolina, Virginia, Georgia, Indiana, Tennessee, 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 for releases occurring through December 31, 1998 and meet such requirements for releases thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by a combination of state trust fund coverage, private commercial liability insurance and a letter of credit.

Environmental reserves of $19.7 million and $19.9 million as of March 26, 2009 and September 25, 2008, respectively, represent our estimates for future expenditures for remediation, tank removal and litigation associated with 256 known contaminated sites as of March 26, 2009 and September 25, 2008, as a result of releases (e.g., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We estimate that approximately $17.8 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result, we estimate we will spend approximately $1.9 million for remediation, tank removal and litigation. Also, as of March 26, 2009 and September 25, 2008, there were an additional 509 and 518 sites, respectively, that are known to be contaminated sites that are being remediated by third parties, and therefore, the costs to remediate such sites are not included in our environmental reserve. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental reserves have been established with remediation costs based on internal and external estimates for each site. Future remediation for which the timing of payments can be reasonably estimated is discounted at 9.0% to determine the reserve.

We anticipate that we will be reimbursed for expenditures from state trust funds and private insurance. As of March 26, 2009, anticipated reimbursements of $18.2 million are recorded as other noncurrent assets and $3.8 million are recorded as current receivables related to all sites. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We anticipate performing remediation in other states through independent contractor firms engaged by us. For certain sites, the trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. 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 or private insurance.

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.

Gasoline Contractual Contingencies

Our Branded Jobber Contract with BP^® dated as of February 1, 2003, as subsequently amended, sets forth minimum volume requirements per year and a minimum volume guarantee if such minimum volume requirements are not met.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

•

Minimum Volume—Our obligation to purchase a minimum volume of BP^® branded gasoline is subject to increase each year during the remaining term of the agreement and is measured over a one-year period. We exceeded the requirement for the one-year period ending September 30, 2008. The minimum requirement for the one-year period ending September 30, 2009 is approximately 570 million gallons of BP^® branded product. For the six months ended March 26, 2009, we purchased approximately 267 million gallons of BP^® branded gasoline.

•

Minimum Volume Guarantee—Subject to certain adjustments, in any one-year period in which we fail to meet our minimum volume purchase obligation, we have agreed to pay BP^® two cents per gallon times the difference between the actual volume of BP^® branded product purchased and the minimum volume requirement. Based on current forecasts, we anticipate meeting the minimum volume requirements for the one-year period ending September 30, 2009.

NOTE 4—LONG-TERM DEBT

Long-term debt consisted of the following (amounts in thousands):


	March 26, 2009			September 25, 2008
Senior credit facility; interest payable monthly at LIBOR plus 1.75%; principal due in quarterly installments through May 15, 2014	$	421,211		$	446,250
Senior subordinated notes payable; due February 15, 2014; interest payable semi-annually at 7.75%		247,000			250,000
Senior subordinated convertible notes payable; due November 15, 2012; interest payable semi-annually at 3.0%		125,975			150,000
Other notes payable; various interest rates and maturity dates		228			250
Total long-term debt		794,414			846,500
Less: Current maturities		(4,315	)		(27,385	)
Long-term debt, net of current maturities	$	790,099		$	819,115

We are party to a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our existing $675.0 million senior credit facility. Our senior credit facility includes: (i) a $225.0 million six-year revolving credit facility; (ii) a $350.0 million seven-year initial term loan facility; and (iii) a $100.0 million seven-year delayed draw term loan facility. In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement. The revolving credit facility matures in May 2013, and the term loan facility and delayed draw term loan facility mature in May 2014. We incurred approximately $2.5 million in costs associated with our current senior credit facility. We deferred these costs and are amortizing them over the life of the facility.

On March 31, 2008 and May 5, 2008, we borrowed delayed draw term loans in aggregate principal amounts of $30.0 million and $70.0 million, respectively, under our senior credit facility. Our delayed draw term loans are subject to the same terms and conditions, including interest rate and maturity date, as our initial $350.0 million term loan under our credit agreement. The total principal amount of the delayed draw term loans will be repaid in quarterly installments of $250 thousand, and the remaining outstanding principal amount of our delayed draw term loans will be due and payable on May 15, 2014, unless such payments are accelerated in the event of a default under our credit agreement. The proceeds from our delayed draw term loan were used to pay off amounts outstanding under our revolving credit facility, to provide working capital and for general corporate purposes.

If our consolidated total leverage ratio (as defined in our credit agreement) is greater than 3.50 to 1.0 at the end of any fiscal year, the terms of our credit agreement require us to prepay our term loans using up to 50% of our excess cash flow (as defined in our credit agreement). At the end of fiscal 2008, our consolidated total leverage ratio was in excess of 3.50 to 1.0, and we were required to make a principal payment of approximately $22.8 million during the first six months of fiscal 2009. We made this payment during the first quarter of fiscal 2009.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Our borrowings under the term loans bore interest through the first quarter of fiscal 2008, which ended on December 27, 2007, at our option, at either the base rate (generally the applicable prime lending rate of Wachovia Bank, as announced from time to time) plus 0.50% or LIBOR plus 1.75%. Beginning in the second quarter of fiscal 2008, if our consolidated total leverage ratio (as defined in our credit agreement) is less than 4.00 to 1.00, the applicable margins on the borrowings under the term loans are decreased by 0.25%. Changes, if any, to the applicable margins are effective five business days after we deliver to our lenders the financial information for the previous fiscal quarter that is required under the terms of our credit agreement. Our consolidated total leverage ratio was greater than 4.00 to 1.00 for the first quarter of fiscal 2009, so the applicable margins on our term loans during the second quarter of fiscal 2009 were 0.50% for base rate term loans and 1.75% for LIBOR rate term loans.

Our borrowings under the revolving credit facility bore interest through the first quarter of fiscal 2008, which ended on December 27, 2007, at our option, at either the base rate (generally the applicable prime lending rate of Wachovia Bank, as announced from time to time) plus 0.25% or LIBOR plus 1.50%. Beginning in the second quarter of fiscal 2008, if our consolidated total leverage ratio (as defined in our credit agreement) is greater than or equal to 4.00 to 1.00, the applicable margins on borrowings under the revolving credit facility are increased by 0.25%, and if the consolidated total leverage ratio is less than or equal to 3.00 to 1.00, the applicable margins on borrowings under the revolving credit facility are decreased by 0.25%. Changes, if any, to the applicable margins are effective five business days after we deliver to our lenders the financial information for the previous fiscal quarter that is required under the terms of our credit agreement. Our consolidated total leverage ratio was greater than 4.00 to 1.00 for the first quarter of fiscal 2009, so the applicable margins on our borrowings under the revolving credit facility during the second quarter of fiscal 2009 were 0.50% for base rate revolving credit facility borrowings and 1.75% for LIBOR rate revolving credit facility borrowings.

We may use up to $15.0 million of the revolving credit facility for swingline loans and up to $120.0 million for the issuance of commercial and standby letters of credit. As of March 26, 2009, there were no outstanding borrowings under our revolving credit facility and we had approximately $79.9 million of standby letters of credit issued under the facility. As a result, we had approximately $145.1 million in available borrowing capacity under our revolving credit facility (approximately $40.1 million of which was available for issuance of letters of credit). The letters of credit primarily related to several self-insurance programs, vendor contracts and regulatory requirements. The LIBOR associated with our senior credit facility resets periodically, and was reset to 0.48% on February 27, 2009.

Our senior credit facility is secured by substantially all of our assets and is required to be fully and unconditionally guaranteed by any material, direct and indirect, domestic subsidiaries (of which we currently have none). In addition, our credit agreement contains customary affirmative and negative covenants for financings of its type, including the following financial covenants: maximum total adjusted leverage ratio and minimum interest coverage ratio, as each is defined in our credit agreement. Additionally, our credit agreement contains restrictive covenants regarding our ability to incur indebtedness, make capital expenditures, enter into mergers, acquisitions, and joint ventures, pay dividends or change our line of business, among other things. As of March 26, 2009, we were in compliance with these covenants and restrictions.

Provided that we are in pro forma compliance with the senior secured leverage incurrence test (as defined in our credit agreement) and no default under our credit agreement is continuing or would result therefrom, the covenant in our credit agreement that limits our ability to pay dividends or make other distributions with respect to our common stock permits us to pay dividends or make such distributions in an aggregate amount not to exceed $35.0 million per fiscal year, plus either annual excess cash flow for the previous fiscal year (if our consolidated total leverage ratio was less than or equal to 3.50 to 1.0 at the end of such previous fiscal year) or the portion of annual excess cash flow for the previous fiscal year that we are not required to utilize to prepay outstanding amounts under our senior credit facility (if our consolidated total leverage ratio was greater than 3.50 to 1.0 at the end of the previous fiscal year).

We have outstanding $247.0 million of our 7.75% senior subordinated notes due 2014. We incurred approximately $2.5 million in costs associated with the sale of these notes. We deferred these costs and are amortizing them over the life of the notes. During the second quarter of fiscal 2009 we repurchased $3.0 million in principal amount of the notes on the open market resulting in a gain on the extinguishment of debt of approximately $705 thousand.

As of September 25, 2008, we had outstanding $150.0 million of convertible notes. During the first six months of fiscal 2009, we purchased approximately $24.0 million in principal amount of our convertible notes on the open market resulting in a gain on the extinguishment of debt of approximately $6.9 million. Our convertible notes bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. The stock price at which the notes would be convertible is $60.11, and as of March 26, 2009, our closing stock price was $18.10. If, upon the occurrence of certain events, the holders of the convertible

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount of the outstanding convertible notes as a current liability. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the additional conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 3,206,278.

The remaining annual maturities of our long-term debt as of March 26, 2009 are as follows (amounts in thousands):


Fiscal Year Ending September:
2009	$	2,157
2010		4,317
2011		4,321
2012		4,325
2013		130,294
Thereafter		649,000
Total principal payments	$	794,414

The fair value of our indebtedness approximated $619.3 million at March 26, 2009. Substantially all of our net assets are restricted as to payment of dividends and other distributions.

NOTE 5—DERIVATIVE FINANCIAL INSTRUMENTS

We enter into interest rate swap agreements to modify the interest rate characteristics of our outstanding long-term debt, and we have designated each qualifying instrument as a cash flow hedge. We formally document our hedge relationships (including identifying the hedge instruments and hedged items) and our risk-management objectives and strategies for entering into hedge transactions. At hedge inception, and at least quarterly thereafter, we assess whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. We measure effectiveness by the ability of the interest rate swaps to offset cash flows associated with changes in the variable LIBOR rate associated with our 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 or loss. To the extent there is any hedge ineffectiveness, any changes in fair value relating to the ineffective portion are immediately recognized in earnings as interest expense. When it is determined that a derivative ceases to be a highly effective hedge, we discontinue hedge accounting, and subsequent changes in the fair value of the hedge instrument are recognized in earnings.

In the second quarter of fiscal 2008, we established hedging positions on approximately 60.9 million gasoline gallons to hedge against the volatility of gasoline cost and the expected impact on retail gasoline margin from the seasonal expansion of refining margin that typically occurs in the April through August timeframe. Although we have used derivative instruments to reduce the effect of price volatility associated with forecasted transactions, we have not used derivative instruments for speculative trading purposes. These instruments were not designated as cash flow hedges for hedge accounting purposes, and the mark-to-market gains or losses of these cash flow hedges used to hedge future purchases were immediately recognized in gasoline cost of goods sold. During this program, refining margin futures declined due to an unusual change in the relative pricing of crude oil futures and gasoline futures leading to an after-tax loss on our initial positions of approximately $6.1 million during fiscal 2008. We settled all outstanding hedging positions in May 2008.

The Company's derivative and hedging activities are presented in the following tables (in thousands):

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	Location of Fair Value in Balance Sheet	Fair Value March 26, 2009		Fair Value September 25, 2008
Derivatives designated as hedging instruments under SFAS No. 133
Interest rate contracts	Other noncurrent assets	$	—	$	548
Interest rate contracts	Other accrued liabilities	$	2,053	$	475
Interest rate contracts	Other noncurrent liabilities	$	7,301	$	1,409
Derivatives not designated as hedging instruments under SFAS No.133
Gasoline contracts	Other accrued liabilities	$	—	$	—


	Location of Gain (Loss) on Derivatives in Statement of Operations	Amount of Gain or (Loss) Three Months Ended						Amount of Gain or (Loss) Six Months Ended
		March 26, 2009			March 27, 2008			March 26, 2009			March 27, 2008
Derivatives in SFAS No. 133 Cash Flow Hedging Relationships
Interest rate contracts	Interest expense, net	$	(2,066	)	$	21		$	(2,176	)	$	420

Derivatives not designated as hedging instruments under SFAS No. 133
Gasoline contracts	Gasoline cost of goods sold	$	—		$	(8,467	)	$	—		$	(8,467	)

Derivatives in SFAS No. 133 Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Six Months Ended						Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Six Months Ended						Location of Gain or (Loss) Recognized in Income on Derivative (ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Six Months Ended
		March 26, 2009			March 27, 2008				March 26, 2009			March 27, 2008				March 26, 2009		March 27, 2008
Interest rate contracts	$	(6,233	)	$	(4,216	)	Interest expense, net	$	(1,331	)	$	(255	)	N/A	$	—	$	—

Interest income was $0 and $72 thousand for the three months ended March 26, 2009 and March 27, 2008, respectively, and $0 and $34 thousand for the six months ended March 26, 2009 and March 27, 2008, respectively, for the mark-to-market adjustment of those instruments that did not qualify for hedge accounting and adjustments for hedge ineffectiveness.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The fair values for our interest rate swaps are obtained from dealer quotes. These values represent the estimated amounts that we 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 March 26, 2009, other accrued liabilities and other noncurrent liabilities included derivative liabilities of approximately $2.1 million and $7.3 million, respectively. At September 25, 2008, other noncurrent assets, other accrued liabilities and other noncurrent liabilities included derivative assets and liabilities of approximately $548 thousand, $475 thousand and $1.4 million, respectively. Cash flow hedges at March 26, 2009 represent interest rate swaps with a notional amount of $320.0 million, a weighted-average pay rate of 3.99% and have various settlement dates, the latest of which is October 2011.

NOTE 6—STOCK COMPENSATION PLANS

Effective September 30, 2005, we adopted SFAS No. 123 (revised 2004),Share-Based Payment, using the modified-prospective-transition method. Prior to the adoption of SFAS No. 123(R), we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees.

The Pantry, Inc. 2007 Omnibus Plan (the “Omnibus Plan”) permits the award of cash incentives and equity incentive grants covering 2.4 million shares of our common stock, plus shares subject to outstanding options under our 1999 Stock Option Plan that are forfeited or that otherwise cease to be outstanding after March 29, 2007 other than by reason of their having been exercised for, or settled in, vested and nonforfeitable shares. Awards made under the Omnibus Plan may take the form of stock options (including both incentive stock options and nonqualified options), stock appreciation rights, restricted stock and restricted stock units, performance shares and performance units, annual incentive awards, cash-based awards and other stock-based awards. The Omnibus Plan is administered by the Compensation and Organization Committee of our Board of Directors.

During the first six months of fiscal 2009, we granted options to purchase 246 thousand shares of our common stock at purchase prices equal to the fair market value of the related common stock on the date the options were granted. These options had an aggregate fair value of $1.8 million, which will be amortized to expense over the options’ requisite service periods. During the first six months of fiscal 2009, we granted 226 thousand shares of restricted stock with an aggregate fair value of $4.0 million, which will be amortized over the requisite service period. We recognized $3.8 million (of which $1.3 million related to restricted stock) and $1.7 million (of which $128 thousand related to restricted stock) in stock-based compensation expense in general and administrative expenses during the six months ended March 26, 2009 and March 27, 2008, respectively.

NOTE 7—COMPREHENSIVE INCOME

The components of comprehensive income, net of deferred income taxes, for the periods presented are as follows (amounts in thousands):


	Three Months Ended					Six Months Ended
	March 26, 2009		March 27, 2008			March 26, 2009			March 27, 2008
Net income (loss)	$	6,338	$	(5,079	)	$	45,776		$	(1,830	)
Other comprehensive income:
Net unrealized (losses) gains on qualifying cash flow hedges (net of deferred income taxes of ($188), $1,709, $3,116 and $2,518, respectively)		297		(2,687	)		(4,902	)		(3,961	)
Comprehensive income (loss)	$	6,635	$	(7,766	)	$	40,874		$	(5,791	)

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The components of unrealized losses on qualifying cash flow hedges, net of deferred income taxes, for the periods presented are as follows (amounts in thousands):


	Three Months Ended						Six Months Ended
	March 26, 2009			March 27, 2008			March 26, 2009			March 27, 2008
Unrealized losses on qualifying cash flow hedges	$	(966	)	$	(2,700	)	$	(6,233	)	$	(4,216	)
Reclassification adjustment recorded in interest expense		1,263			13			1,331			255
Net unrealized gains (losses) on qualifying cash flow hedges	$	297		$	(2,687	)	$	(4,902	)	$	(3,961	)

NOTE 8—INTEREST EXPENSE, NET AND GAIN ON EXTINGUISHMENT OF DEBT

The components of interest expense, net and gain on extinguishment of debt are as follows (amounts in thousands):


	Three Months Ended						Six Months Ended
	March 26, 2009			March 27, 2008			March 26, 2009			March 27, 2008
Interest on long-term debt, including amortization of deferred financing costs	$	8,676		$	11,744		$	20,198		$	24,268
Interest on lease finance obligations		10,706			10,863			21,271			21,017
Interest rate swap agreements		2,066			(21	)		2,176			(420	)
Fair market value change in non-qualifying derivatives		—			(72	)		—			(34	)
Capitalized interest		(86	)		(417	)		(171	)		(939	)
Miscellaneous		13			27			36			222
Subtotal: Interest expense	$	21,375		$	22,124		$	43,510		$	44,114
Interest income		(492	)		(251	)		(1,115	)		(634	)
Total interest expense, net	$	20,883		$	21,873		$	42,395		$	43,480
Gain on extinguishment of debt		(6,693	)		—			(7,163	)		—
Total interest expense, net and gain on extinguishment of debt	$	14,190		$	21,873		$	35,232		$	43,480

NOTE 9—EARNINGS PER SHARE AND COMMON STOCK

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, restricted stock, stock options and convertible notes using the “treasury stock” method.

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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


	Three Months Ended					Six Months Ended
	March 26, 2009		March 27, 2008			March 26, 2009		March 27, 2008
Net income (loss)	$	6,338	$	(5,079	)	$	45,776	$	(1,830	)
Earnings (loss) per share—basic:
Weighted-average shares outstanding		22,221		22,205			22,217		22,200
Earnings (loss) per share—basic	$	0.29	$	(0.23	)	$	2.06	$	(0.08	)
Earnings (loss) per share—diluted:
Weighed-average shares outstanding		22,221		22,205			22,217		22,200
Dilutive impact of options and restricted stock		27		-			24		-
Weighted-average shares and potential dilutive shares outstanding		22,248		22,205			22,241		22,200
Earnings (loss) per share—diluted	$	0.28	$	(0.23	)	$	2.06	$	(0.08	)

There were restricted stock and options to purchase 1.4 million and 1.2 million shares of common stock that were not included in the computation of diluted earnings per share, because their inclusion would have been antidilutive, for the three months ended March 26, 2009 and March 27, 2008, respectively, and there were 1.5 million and 1.2 million such restricted stock and options for the six months ended March 26, 2009 and March 27, 2008, respectively. The aggregate number of shares of common stock, approximately 3.0 million, which we may issue upon exercise of warrants was excluded from the three and six months ended March 26, 2009 and March 27, 2008 computations as their inclusion would have been antidilutive.

NOTE 10—FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements. We adopted the provisions of SFAS No. 157 as of September 26, 2008 for financial instruments. Although the adoption of SFAS No. 157 did not materially impact our financial statements, we are now required to provide additional disclosures as part of our consolidated financial statements.

We are exposed to various market risks, including changes in interest rates. We periodically enter into certain interest rate swap agreements to effectively convert floating rate debt to a fixed rate basis and to hedge anticipated future financings similar to those described in Note 5, Derivative Financial Instruments.

SFAS No. 157 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of inputs are defined as follows:

Tier	Description
Level 1	Defined as observable inputs such as quoted prices in active markets
Level 2	Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3	Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The valuation of our financial instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:


	Fair Value Measurements at Reporting Date Using (in thousands)
	Quoted prices
	in active markets	Significant other	Significant
	for identical assets	observable inputs	unobservable inputs
	Level 1	Level 2	Level 3
Liabilities:
Derivative financial instruments (1)	—	$(9,354)	—

(1) Included in “Other accrued liabilities” and “Other noncurrent liabilities” in the accompanying condensed consolidated balance sheet.

NOTE 11—SUBSEQUENT EVENTS

On April 14, 2009, we announced that we signed a definitive agreement to acquire 40 convenience stores from Herndon Oil Corp. We expect the purchase, which includes the real estate underlying 32 of the 40 locations, to be funded with cash on hand. Thirty-two of the stores are located in the Mobile, Alabama area; six are in Florida and the remaining two are in Mississippi and Louisiana. The acquisition, which is subject to regulatory approvals and other customary closing conditions, is expected to close in the second half of fiscal 2009.

On April 23, 2009, we announced that our Chairman and Chief Executive Officer, Peter J. Sodini, is retiring at the expiration of his current employment agreement on September 30, 2009. Effective September 30, 2009, Mr. Sodini will resign from all of his positions with us. In connection with his announced retirement, Mr. Sodini entered into a Separation Agreement with us on April 22, 2009. Subject to Mr. Sodini’s compliance with certain restrictive covenants and the execution and non-revocation of a release of claims, he will be entitled to receive certain payments and benefits described in the Separation Agreement, which was filed with the SEC as an exhibit to a Current Report on Form 8-K filed on April 24, 2009. Approximately $1.3 million is expected to be expensed in the third quarter of 2009 related to a separation payment equal to 18 months of Mr. Sodini’s current base salary and other reimbursable expenses.

Item 2.

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

This discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our business is contained in our Annual Report on Form 10-K for the fiscal year ended September 25, 2008. References to “the Company,” “The Pantry,” “Pantry,” “we,” “us” and “our” mean The Pantry, Inc. and its subsidiaries.

Safe Harbor Discussion

This report, including, without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,” “forecast” or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies from acquisitions, and expectations regarding remodeling, rebranding, re-imaging or otherwise converting our stores are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

	•	Competitive pressures from convenience stores, gasoline stations and other non-traditional retailers located in our markets;
	•	Volatility in crude oil and wholesale petroleum costs;
	•	Political conditions in crude oil producing regions and global demand;
	•	Changes in economic conditions generally and in the markets we serve;
	•	Consumer behavior, travel and tourism trends;
	•	Wholesale cost increases of, and tax increases on, tobacco products;
	•	Unfavorable weather conditions or other trends or developments in the southeastern United States;
	•	Inability to identify, acquire and integrate new stores;
	•	Financial leverage and debt covenants;
	•	Changes in state and federal environmental and other laws and regulations;
	•	Dependence on one principal supplier for merchandise and two principal suppliers for gasoline;
	•	Dependence on senior management;
	•	Litigation risks, including with respect to food quality, health and other related issues;
	•	Inability to maintain an effective system of internal control over financial reporting; and
	•	Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to “Part II.—Item 1A. Risk Factors.” The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of May 5, 2009. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available.

Executive Overview

We are the leading independently operated convenience store chain in the southeastern United States with 1,647 stores in 11 states as of March 26, 2009. Our stores operate under a number of select banners, with 1,530 of our stores operating under Kangaroo and Kangaroo Express, our primary operating banners. We derive our revenue from the sale of merchandise, gasoline and other ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States in the following ways:

	•	generating profitable growth through merchandising initiatives;
	•	sophisticated management of our gasoline business;
	•	benefiting from consumer trends towards convenience formats;
	•	leveraging our geographic economies of scale;
	•	benefiting from the favorable demographics of our markets;
	•	selectively pursuing acquisitions; and
	•	developing new stores.

The second quarter of fiscal 2009 began with a favorable environment in the energy markets as oil prices continued to fall, bottoming out at approximately $34 a barrel in early February and then gradually increasing the remainder of the quarter. The progressive increase in gasoline prices towards the latter part of the quarter offset early strong margins, which resulted in a margin of 11.2 cents per gallon for the second quarter of fiscal 2009, compared to 9.0 cents per gallon for the second quarter of fiscal 2008. Our net income for the second quarter of fiscal 2009 was $6.3 million, or $0.28 per share on a fully diluted basis, compared to a net loss of $5.1 million, or $0.23 per share on a fully diluted basis, for the second quarter of fiscal 2008.

During the second quarter of fiscal 2009 we made significant progress in improving the Company's leverage metrics. We acquired approximately $26.0 million in principal amount of our outstanding debt which resulted in a pre-tax gain on extinguishment of debt of approximately $6.7 million. This activity coupled with our first quarter payment of $22.8 million in principal outstanding under our senior credit facility brings our year-to-date debt and lease finance obligations reduction to approximately $53.1 million. In addition, our liquidity position has improved as our cash balance has grown to approximately $242.8 million as of the end of the second quarter of fiscal 2009.

These results were achieved despite continued declines in comparable store gasoline volumes and a deteriorating retail environment. These trends primarily reflect the continuing slowdown in U.S. consumer spending and increased unemployment. With fewer miles driven, demand for gasoline is reduced, which also impacts traffic in our stores and merchandise sales.

In the gasoline business, our volumes remained relatively soft with a 6.4 percent decline in comp store retail gas gallons. Again this quarter, a significant portion of the drop is attributable to diesel sales, which were down 22 percent in comparable stores versus a year ago. While miles driven in our markets in January/February improved to be down only 2.4% versus the Q4 decline of 6.3%, our region still trailed the national average which showed miles driven down 1.9%.

For the quarter, comparable store merchandise revenues were up 1.3 percent, versus a 3.0 percent decline in the first quarter. Our merchandise gross margin was 37.2 percent, up 170 basis points from our first quarter margin of 35.5 percent but down 30 basis points from a year ago. Both merchandise sales and margin results were positively impacted by cigarette cost increases and corresponding retail price increases taken in anticipation of the federal excise tax to support the State Children’s Health Insurance Program (SCHIP In addition to the improvement in cigarette margin, we saw improved package beverage margins as a result of our 2009 reset. Finally, we were also able to improve shrink performance by our increased focus on operating efficiency.

We anticipate continuing our efforts to grow through new stores, remodels, acquisitions and expense controls. We will also continue to explore opportunities to reduce debt as we seek to balance growth with de-leveraging the business.

Market and Industry Trends

In February 2009, the President signed a bill reauthorizing the State Children’s Health Insurance Program, which is to be funded primarily through increases in the federal excise taxes on cigarette and tobacco products. For cigarettes, the federal excise tax increased from $0.39 per pack to $1.01 per pack. We will attempt to pass on the increased cost to our customers, however, doing so will likely result in lower unit volumes and reduced merchandise margins in the future. The new law also includes a floor stocks tax for inventory as of March 31, 2009, which will apply to all tobacco products and which will be payable by July 31, 2009. We took steps to reduce our inventory on hand during the second quarter, however we estimate that our floor stocks tax payable will be approximately $4.0 million. Our business, financial condition and results of operations could be adversely affected if these increases in federal taxes on our tobacco products materially adversely impact our cigarette unit volume and revenues, merchandise gross profit and overall customer traffic.

In our markets, we saw our state weighted average unemployment rate increase to 9.6% during our second fiscal quarter up from 7.3% in the first fiscal quarter and 5.2% during the second fiscal quarter last year. While these factors and a slumping housing market have weighed on consumers, we saw sequential improvement in our merchandise comparable store sales. We anticipate gas prices will remain much lower than last year in the coming months but expect the challenging economic conditions might limit the benefits we could receive from having substantially lower gasoline prices.

During the second quarter of fiscal 2009, crude oil prices started the quarter at $38 per barrel and climbed to a high of $54 per barrel. We attempt to pass along wholesale gasoline cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs.

Results of Operations

The table below provides a summary of our selected financial data for the three and six months ended March 26, 2009 and March 27, 2008 (dollars and gallons, except per gallon data, in thousands):


	Three Months Ended						Six Months Ended
	March 26, 2009			March 27, 2008			March 26, 2009			March 27, 2008
Selected financial data:
Merchandise gross profit [1]	$	144,812		$	142,498		$	283,493		$	288,861
Merchandise margin		37.2	%		37.5	%		36.4	%		37.2	%
Retail gasoline data:
Gallons		492,245			517,421			991,918			1,043,604
Margin per gallon	$	0.1120		$	0.0899		$	0.1857		$	0.0978
Retail price per gallon	$	1.84		$	3.10		$	2.14		$	3.01
Total gasoline gross profit [1]	$	55,439	��	$	46,939		$	185,580		$	103,096

Comparable store data:
Merchandise sales increase (decrease)		1.3	%		(3.4	%)		(0.9	%)		(1.3	%)
Merchandise sales increase (decrease)	$	4,718		$	(11,965	)	$	(6,991	)	$	(9,233	)
Gasoline gallons decrease (%)		(6.4	%)		(3.4	%)		(6.9	%)		(3.1	%)
Gasoline gallons decrease		(33,041	)		(15,718	)		(71,261	)		(28,160	)
Number of stores:
End of period		1,647			1,659			1,647			1,659
Weighted-average store count		1,648			1,644			1,650			1,644

[1]	We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.

Three Months Ended March 26, 2009 Compared to the Three Months Ended March 27, 2008

Merchandise Revenue and Gross Profit. Merchandise revenue for the second quarter of fiscal 2009 increased $9.1 million, or 2.4%, from the second quarter of fiscal 2008. This increase is primarily attributable to an increase in comparable store merchandise revenue of 1.3%, or $4.7 million, as well as an increase in merchandise revenue from stores acquired since the beginning of the second quarter of fiscal 2008 of $3.2 million. The increase was also attributable to merchandise revenue of $2.7 million from newly constructed stores offset by lost merchandise revenue from closed stores of $2.4 million. Merchandise gross profit for the second quarter of 2009 increased $2.3 million, or 1.6%, from the second quarter of fiscal 2008. This increase is primarily attributable to higher merchandise revenue during the second quarter of fiscal 2009 offset by a 30 basis point decrease in merchandise gross margin to 37.2% for the second quarter of fiscal 2009 compared to 37.5% for the second quarter of fiscal 2008. The decrease in merchandise gross margin was primarily due to an unfavorable mix shift away from higher margin categories, and a decrease in food service margin offset by higher cigarette margins and improved shrink controls.

Gasoline Revenue, Gallons and Gross Profit. Total gasoline revenue for the second quarter of fiscal 2009 decreased $732.5 million, or 44.2%, from the second quarter of fiscal 2008. This decrease is primarily attributable to the 40.6% decrease in the average retail price per gallon to $1.84 and a decrease in gasoline gallons sold. Retail gasoline gallons sold for the second quarter of fiscal 2009 decreased 25.2 million gallons, or 4.9%, from the second quarter of fiscal 2008. The decrease is primarily attributable to a decrease in comparable store gasoline gallons sold of 33.0 million gallons, or 6.4% offset by the increase of 4.7 million gallons sold by stores acquired since the beginning of the second quarter of fiscal 2008. Newly-constructed stores accounted for an increase in gasoline gallons sold of 4.4 million offset by lost gallons from closed stores of 2.0 million. The decrease in comparable store gasoline gallons sold was primarily due to decreased consumer demand for gasoline due to a decline in miles driven and a 22% decline in comparable diesel volume. Excluding diesel, our comparable store gasoline volumes were down 4.4%.

Gasoline gross profit for the second quarter of fiscal 2009 increased $8.5 million, or 18.1%, from the second quarter of fiscal 2008. The increase is primarily attributable to the 2.2 cent increase in retail gross profit per gallon to 11.2 cents for the second quarter of fiscal 2009 from 9.0 cents in the second quarter of fiscal 2008. The increase in retail gross profit per gallon is primarily due to declining wholesale fuel costs during the second quarter of fiscal 2009 and decreased credit card fees resulting from a lower average retail price per gallon. The second quarter of fiscal 2008 included hedging losses of approximately $8.5 million or 1.6 cents per gallon. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.0 cents per gallon and 5.5 cents per gallon for the three months ended March 26, 2009 and March 27, 2008, respectively.

Store Operating and General and Administrative. Store operating and general and administrative expenses for the second quarter of fiscal 2009 increased $923 thousand, or 0.6%, from the second quarter of fiscal 2008. This increase is a result of higher utilities costs, taxes and licenses and telecommunication expense, offset by improvements in store labor and other cash controls. Average per store operating expenses for the second quarter of fiscal 2009 remained consistent with the second quarter of fiscal 2008.

Depreciation and Amortization. Depreciation and amortization expenses for the second quarter of fiscal 2009 decreased $496 thousand, or 1.9%, from the second quarter of fiscal 2008.

Income from Operations. Income from operations for the second quarter of fiscal 2009 increased $10.4 million, or 79.7%, from the second quarter of fiscal 2008. This increase is primarily attributable to the increase in gasoline gross profit, partially offset by increases in store operating and general and administrative expenses, each of which are discussed above.

EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, gain/loss on extinguishment of debt, income taxes and depreciation and amortization. Adjusted EBITDA includes the lease payments we make under our lease finance obligations as a reduction to EBITDA. EBITDA for the second quarter of fiscal 2009 increased $9.7 million, or 24.1%, from the second quarter of fiscal 2008. Adjusted EBITDA for the second quarter of fiscal 2009 increased $9.4 million, or 32.9%, from the second quarter of fiscal 2008. These increases are primarily attributable to the variances discussed above.

EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity under GAAP and should not be considered as substitutes for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning EBITDA and Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses EBITDA and Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations compensation targets.

In accordance with GAAP, certain of our leases, including all of our sale-leaseback arrangements, are accounted for as lease finance obligations. As a result, payments made under these lease arrangements are accounted for as interest expense and a reduction of the principal amounts outstanding under our lease finance obligations. By including in Adjusted EBITDA the amounts we pay under our lease finance obligations, we are able to present such payments as operating costs instead of financing costs. We believe that this presentation helps investors better understand our operating performance relative to other companies that do not account for their leases as lease finance obligations.

Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use EBITDA and Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

Because non-GAAP financial measures are not standardized, EBITDA and Adjusted EBITDA, each as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of EBITDA and Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net income (amounts in thousands):

	Three Months Ended
	March 26, 2009			March 27, 2008
Adjusted EBITDA	$	37,975		$	28,579
Payments made for lease finance obligations		11,778			11,499
EBITDA		49,753			40,078
Gain on extinguishment of debt		6,693			—
Interest expense, net		(20,883	)		(21,873	)
Depreciation and amortization		(26,273	)		(26,769	)
Income tax (expense) benefit		(2,952	)		3,485
Net income (loss)	$	6,338		$	(5,079	)

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net cash provided by operating activities (amounts in thousands):

	Three Months Ended
	March 26, 2009			March 27, 2008
Adjusted EBITDA	$	37,975		$	28,579
Payments made for lease finance obligations		11,778			11,499
EBITDA		49,753			40,078
Gain on extinguishment of debt		6,693			—
Interest expense, net		(20,883	)		(21,873	)
Income tax (expense) benefit		(2,952	)		3,485
Stock-based compensation		988			860
Changes in operating assets and liabilities		(17,527	)		(15,568	)
Other		1,879			(2,120	)
Net cash provided by operating activities	$	17,951		$	4,862
Net cash used in investing activities	$	(10,127	)	$	(38,753	)
Net cash (used in) provided by financing activities	$	(19,834	)	$	25,276

Gain on Extinguishment of Debt. The gain on extinguishment of debt of $6.7 million during the second quarter of fiscal 2009 represents a gain on the buyback of approximately $23.0 million in principal amount of our 3.0% senior subordinated convertible notes due 2012 (“convertible notes”) and $3.0 million in principal amount of our 7.75% senior subordinated notes due 2014 (“subordinated notes”). We recognized a gain of $6.4 million and $705 thousand related to the repurchase of our convertible notes and our subordinated notes, respectively, offset partially by the write-off of $438 thousand of unamortized deferred financing costs.

Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the second quarter of fiscal 2009 was $21.0 million compared to $21.9 million for the second quarter of fiscal 2008. This decrease is primarily due to the reduction in the principal outstanding on our debt and changes in the interest rates on our variable rate debt. Please refer to “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 4—Long-Term Debt” for a discussion of the interest rates on our variable rate debt.

Six Months Ended March 26, 2009 Compared to the Six Months Ended March 27, 2008

Merchandise Revenue and Gross Profit. Merchandise revenue for the first six months of fiscal 2009 increased $3.9 million, or 0.5%, from the first six months of fiscal 2008. This increase is primarily attributable to the merchandise revenue from stores acquired since the beginning of fiscal 2008 of $6.0 million, partially offset by a decrease in comparable store merchandise revenue of 0.9%, or $7.0 million. Newly-constructed stores accounted for an increase of $6.7 million in merchandise revenue offset by lost revenue from closed stores of $4.9 million. Merchandise gross profit for the first six months of 2009 decreased $5.4 million, or 1.9%, from the first six months of fiscal 2008. This decrease is primarily attributable to an 80 basis point decrease in merchandise gross margin to 36.4% for the first six months of fiscal 2009 compared to 37.2% for the first six months of fiscal 2008. The decrease in merchandise gross margin was primarily due to an unfavorable mix shift away from higher margin categories, and a decrease in food service margin offset by higher cigarette margins.

Gasoline Revenue, Gallons and Gross Profit. Total gasoline revenue for the first six months of fiscal 2009 decreased $1.1 billion, or 33.1%, from the first six months of fiscal 2008. This decrease is primarily attributable to the 28.9% decrease in the average retail price per gallon to $2.14 and a decrease in gasoline gallons sold. Retail gasoline gallons sold for the first six months of fiscal 2009 decreased 51.7 million gallons, or 5.0%, from the first six months of fiscal 2008. The decrease is primarily attributable to a decrease in comparable store gasoline gallons sold of 71.3 million gallons, or 6.9%. The decrease in comparable store gasoline gallons sold was primarily due to decreased consumer demand for gasoline as evidenced by a decline in miles driven in our markets. Newly-constructed stores accounted for an increase of 12.4 million gallons, offset by lost gallons sold from closed stores of 4.1 million.

Gasoline gross profit for the first six months of fiscal 2009 increased $82.5 million, or 80.0%, from the first six months of fiscal 2008. The increase is primarily attributable to the 8.8 cent increase in retail gross profit per gallon to 18.6 cents for the first six months of fiscal 2009 from 9.8 cents for the first six months of fiscal 2008. The increase in retail gross profit per gallon is primarily due to declining wholesale fuel costs during the first six months of fiscal 2009 and decreased credit card fees resulting from a lower average retail price per gallon. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.3 cents per gallon and 5.1 cents per gallon for the six months ended March 26, 2009 and March 27, 2008, respectively.

Store Operating and General and Administrative. Store operating and general and administrative expenses for the first six months of fiscal 2009 increased $8.9 million, or 3.0%, from the first six months of fiscal 2008. This increase is a result of higher utilities costs, repairs and maintenance expense, store lease expense and stock-based compensation expense. Average per store operating expenses for the first six months of fiscal 2009 increased 1.3% from the first six months of fiscal 2008 primarily due to increased utilities, telecommunications and repairs and maintenance expenses.

Depreciation and Amortization. Depreciation and amortization expenses for the first six months of fiscal 2009 decreased $256 thousand, or 0.5%, from the first six months of fiscal 2008.

Income from Operations. Income from operations for the first six months of fiscal 2009 increased $68.5 million, or 172.0%, from the first six months of fiscal 2008. This increase is primarily attributable to the increase in gasoline gross profit, partially offset by increases in store operating and general and administrative expenses, each of which are discussed above.

EBITDA and Adjusted EBITDA. EBITDA for the first six months of fiscal 2009 increased $68.0 million, or 72.6%, from the first six months of fiscal 2008. Adjusted EBITDA for the first six months of fiscal 2009 increased $67.3 million, or 94.8%, from the first six months of fiscal 2008. These increases are primarily attributable to the variances discussed above.

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net income (amounts in thousands):

	Six Months Ended
	March 26, 2009			March 27, 2008
Adjusted EBITDA	$	138,155		$	70,905
Payments made for lease finance obligations		23,489			22,771
EBITDA		161,644			93,676
Gain on extinguishment of debt		7,163			—
Interest expense, net		(42,395	)		(43,480	)
Depreciation and amortization		(53,155	)		(53,411	)
Income tax (expense) benefit		(27,481	)		1,385
Net income (loss)	$	45,776		$	(1,830	)

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net cash provided by operating activities (amounts in thousands):

	Six Months Ended
	March 26, 2009			March 27, 2008
Adjusted EBITDA	$	138,155		$	70,905
Payments made for lease finance obligations		23,489			22,771
EBITDA		161,644			93,676
Gain on extinguishment of debt		7,163			—
Interest expense, net		(42,395	)		(43,480	)
Income tax (expense) benefit		(27,481	)		1,385
Stock-based compensation		3,759			1,737
Changes in operating assets and liabilities		(365	)		(21,653	)
Other		4,579			(433	)
Net cash provided by operating activities	$	106,904		$	31,232
Net cash used in investing activities	$	(35,518	)	$	(77,555	)
Net cash (used in) provided by financing activities	$	(45,806	)	$	23,735

Gain on Extinguishment of Debt. The gain on extinguishment of debt of $7.2 million during the first six months of fiscal 2009 represents a gain on the buyback of approximately $24.0 million of our convertible notes and $3.0 million of our subordinated notes. We recognized a gain of $6.9 million and $705 thousand related to the repurchase of our convertible notes and senior subordinated notes, respectively, partially offset by the write-off of $438 thousand of unamortized deferred financing costs.

Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the first six months of fiscal 2009 was $42.4 million compared to $43.5 million for the first six months of fiscal 2008. This decrease is primarily due to the reduction in the principal outstanding on our debt and changes in the interest rates on our variable rate debt. Please refer to “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 4—Long-Term Debt” for a discussion of the interest rates on our variable rate debt.

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 on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility and lease finance transactions to finance our operations, pay principal and interest on our debt and fund capital expenditures. Our working capital as of March 26, 2009 was $209.3 million. Cash provided by operating activities increased to $106.9 million for the first six months of fiscal 2009 compared to $31.2 million for the first six months of fiscal 2008. The increase in cash flow from operations is primarily due to an increase in net income of $47.6 million and certain changes in working capital. We had $242.8 million of cash and cash equivalents on hand at March 26, 2009.

Capital Expenditures. Our capital expenditures are primarily expenditures for 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 flows from operations, proceeds from lease financing transactions, asset dispositions and vendor reimbursements.

Capital expenditures (excluding accrued purchases) for the first six months of fiscal 2009 were $37.6 million. In the first six months of fiscal 2009, we had proceeds of $2.0 million from asset dispositions, $1.3 million from lease finance obligations and $3.8 million from vendor reimbursements. As a result, our net capital expenditures for the first six months of fiscal 2009 were $30.5 million, compared to $53.8 million in the first six months of fiscal 2008. The decrease is primarily due to a continued focus on reducing non-essential capital expenditures, reduced spending on new stores and acquisition upgrades, partially offset by the acquisition of our new headquarters facility. We anticipate that net capital expenditures for fiscal 2009 will be approximately $100.0 million to 105.0 million.

Cash Flows from Financing Activities. For the first six months of fiscal 2009, net cash used in financing activities was $45.8 million, of which $44.5 million was used to repay long-term debt and $2.7 million was used to repay lease finance obligations. As of March 26, 2009, our debt consisted primarily of $421.2 million in loans under our senior credit facility, $247.0 million of our subordinated notes and $126.0 million of our convertible notes. As of March 26, 2009, we also had outstanding $464.0 million of lease finance obligations.

Senior Credit Facility. We are party to a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our senior credit facility, which includes (i) a $225.0 million revolving credit facility, (ii) a $350.0 million initial term loan facility and (iii) a $100.0 million delayed draw term loan facility. In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement. The revolving credit facility has been, and will continue to be, used for our working capital and general corporate requirements and is also available for refinancing or repurchasing certain of our existing indebtedness and issuing commercial and standby letters of credit. A maximum of $120.0 million of the revolving credit facility is available as a letter of credit sub-facility.

As of March 26, 2009, we had no outstanding borrowings under our revolving credit facility and approximately $79.9 million of standby letters of credit had been issued. As of March 26, 2009, we had approximately $145.1 million in available borrowing capacity under the revolving credit facility (approximately $40.1 million of which was available for issuances of letters of credit). On March 31, 2008 and May 5, 2008, we borrowed delayed draw term loans in aggregate principal amounts of $30.0 million and $70.0 million, respectively, under our senior credit facility. Our delayed draw term loans are subject to the same terms and conditions, including interest rate and maturity date, as our initial $350.0 million term loan under our credit agreement. The total principal amount of the delayed draw term loans will be repaid in quarterly installments of $250 thousand, and the remaining outstanding principal amount of our delayed draw term loans will be due and payable on May 15, 2014, unless such payments are accelerated in the event of a default under our credit agreement. The proceeds from our delayed draw term loan were used to pay off amounts outstanding under our revolving credit facility, to provide working capital and for general corporate purposes.

Senior Subordinated Notes. We have outstanding $247.0 million of our subordinated notes. Interest on the subordinated notes is due on February 15 and August 15 of each year. During the second quarter of fiscal 2009, we repurchased $3.0 million in principal amount of the subordinated notes on the open market resulting in a gain on the extinguishment of debt of approximately $705 thousand.

Senior Subordinated Convertible Notes. We have outstanding $126.0 million of our convertible notes, which bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. If, upon the occurrence of certain events, the holders of the convertible notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount outstanding of the convertible notes as a

current liability upon occurrence of these events. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we anticipate delivering, at our election, cash or common stock or a combination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 3,206,278. During the first six months of fiscal 2009, we repurchased approximately $24.0 million in principal amount of our convertible notes on the open market resulting in a gain on the extinguishment of debt of approximately $6.9 million.

Shareholders’ Equity. As of March 26, 2009, our shareholders’ equity totaled $437.2 million. The $47.4 million increase from September 25, 2008 is primarily attributable to the net income in the first six months of fiscal 2009 of $45.8 million, $6.5 million increase in additional paid-in capital during the first six months of fiscal 2009, offset by $4.9 million in unrealized losses on cash flow hedges during the first six months of fiscal 2009. The increase in additional paid-in capital is primarily due to stock compensation expense and related tax benefits.

Long Term Liquidity. We believe that anticipated cash flows from operations, funds available from our existing revolving credit facility, cash on hand and vendor reimbursements will provide sufficient funds to finance our operations at least for the next 12 months. As of March 26, 2009, we had approximately $145.1 million in available borrowing capacity under our revolving credit facility, approximately $40.1 million of which was available for issuances of letters of credit. Changes in our operating plans, lower than anticipated sales, increased expenses, additional acquisitions or other events may cause us to need to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Additional equity financing could be dilutive to the holders of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.

We may from time to time seek to purchase or otherwise retire some or all of our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may have a material effect on our liquidity, financial condition and results of operations. During the first six months of fiscal 2009, we purchased approximately $24.0 million in principal amount of our convertible notes and approximately $3.0 million in principal amount of our subordinated notes on the open market.

New Accounting Standards

In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset in not active. FSP 157-3 was effective for the Company for the quarter ended December 25, 2008. The adoption of this position did not have a material impact on our financial statements.

In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The purpose of this standard is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of an asset under SFAS 141(R), Business Combinations and other accounting principles generally accepted in the United States. FSP 142-3 is effective for the Company beginning in fiscal 2010. The measurement provisions for this standard will apply only to intangible assets acquired after the effective date.

settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. FSP APB 14-1 will require that the issuer of a convertible debt instrument within its scope separately account for the liability and equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The excess of the principal amount of the liability component over its initial fair value must be amortized to interest cost using the interest method. FSP APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods thereafter and will be applied retrospectively to all periods presented. Early adoption is not permitted. The provisions of FSP APB 14-1 will apply to our convertible notes. We are currently evaluating FSP APB 14-1 to determine the impact it will have on our financial statements. While it is still early in our evaluation process, we expect adoption of this FSP could have a material impact on our financial statements given the large amount of indebtedness we have incurred through the issuance of convertible notes. Preliminarily, we expect the impact will include a reduction in the carrying amount of our convertible notes and increased interest expense over the term of the convertible notes.

In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No.157 to September 25, 2009 for us for all nonfinancial assets and nonfinancial liabilities, except for items recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We will adopt FSP No. 157-2 starting with fiscal year 2010 beginning September 25, 2009, but we do not expect the provisions of FSP No. 157-2 will have a material effect on our financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Quantitative Disclosures. 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 convertible notes, and our variable rate debt relates to borrowings under our senior credit facility. 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 hold derivative instruments primarily to manage our exposure to these risks and all such derivative instruments are matched against specific debt obligations. Our debt and interest rate swap instruments outstanding at March 26, 2009, including applicable interest rates, are discussed above in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 5—Derivative Financial Instruments” and “Part I. —Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The following table presents the future principal cash flows and weighted-average interest rates on our existing long-term debt instruments based on rates in effect at March 26, 2009. Fair values have been determined based on quoted market prices as of March 26, 2009.

Expected Maturity Date
as of March 26, 2009
(Dollars in thousands)
	Fiscal 2009			Fiscal 2010			Fiscal 2011			Fiscal 2012			Fiscal 2013			Thereafter			Total			Fair Value
Long-term debt (fixed rate)	$	22		$	48		$	52		$	56		$	126,025		$	247,000		$	373,203		$	303,424
Weighted-average interest rate		6.15	%		6.15	%		5.96	%		5.96	%		7.42	%		7.75	%		6.35	%
Long-term debt (variable rate)	$	2,135		$	4,269		$	4,269		$	4,269		$	4,269		$	402,000		$	421,211		$	315,908
Weighted-average interest rate		3.64	%		2.67	%		2.38	%		2.01	%		1.98	%		1.98	%		2.38	%

In order to reduce our exposure to interest rate fluctuations on our variable rate debt, we have entered into interest rate swap arrangements in which we agree to exchange, at specified intervals, the difference between fixed and 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 March 26, 2009, the interest rate on approximately 87.3% of our debt was fixed by either the nature of the obligation or through interest rate swap arrangements compared to 79.2% at September 25, 2008. The increase in the fixed portion of our long-term debt for the first six months of fiscal 2009 was due to the $22.8 million excess cash flow payment we made under our senior credit facility, which reduced our outstanding variable rate debt. The annualized effect of a one percentage point change in floating interest rates on our interest rate swap agreements and other floating rate debt obligations at March 26, 2009 would be to change interest expense by approximately $1.0 million.

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

Interest Rate Swap Contracts
(Dollars in thousands)

	March 26, 2009			September 25, 2008
Notional principal amount	$	320,000		$	270,000
Weighted-average fixed pay rate		3.99	%		4.16	%
Weighted-average variable receive rate		0.97	%		2.37	%
Weighted-average years to maturity		0.94			1.13

As of March 26, 2009, the fair value of our swap agreements represented a net liability of $9.4 million.

Qualitative Disclosures. Our primary exposure relates to:

	•	interest rate risk on long-term and short-term borrowings resulting from changes in LIBOR;
	•	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
	•	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 that 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.

Item 4.

Controls and Procedures.

As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of fiscal 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.

Item 4T.

Controls and Procedures.

Not Applicable

THE PANTRY, INC.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. To date, we have been named as a defendant in seven cases: one in Florida (Cozza, et al. v. Murphy Oil USA, Inc. et al., S.D. Fla., No. 9:07-cv-80156-DMM, filed 2/16/07); one in Delaware (Becker, et al. v. Marathon Petroleum Company LLC, et al., D. Del., No. 1:07-cv-00136, filed 3/7/07); one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Snable, et al. v. Murphy Oil USA, Inc., et al., N.D. Ala., No. 7:07-cv-00535-LSC, filed 3/26/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07). Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including the seven in which we are named, have been transferred to the United States District Court for the District of Kansas where the cases will be consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers in non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs and prejudgment interest. The defendants filed motions to dismiss all cases for failure to state a claim, which were denied by the court on February 21, 2008. The defendants expect to contest class certification and to file motions for summary judgment after appropriate discovery. We believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits. As the cases are at an early stage, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

Item 1A.

Risk Factors.

You should carefully consider the risks described below and under “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making a decision to invest in our securities. The risks and uncertainties described below and elsewhere in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our results of operations or financial condition in the future. If any such risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Industry

The convenience store and retail gasoline industries are highly competitive and impacted by new entrants. Increased competition could result in lower margins.

The convenience store and retail gasoline industries in the geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, gasoline service stations, mass merchants, 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 we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry. To remain competitive, we must constantly analyze consumer preferences and competitors’ offerings and prices to ensure we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our stores. Principal competitive factors include, among others, location, ease of access, gasoline brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. In a number of our markets, our competitors that sell ethanol-blended gasoline may have a competitive advantage over us because, in certain regions of the country, the wholesale cost of ethanol-blended gasoline may, at times, be less than pure gasoline. Competitive pressures could materially impact our gasoline gallon volume, gasoline gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Volatility in crude oil and wholesale petroleum costs could impact our operating results.

Over the past three fiscal years, our gasoline revenue accounted for approximately 79.0% of total revenues and our gasoline gross profit accounted for approximately 31.1% of total gross profit. Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism and instability in oil producing regions, particularly in the Middle East and South America, could significantly impact crude oil supplies and wholesale petroleum costs. In addition, the supply of gasoline and our wholesale purchase costs could be adversely impacted in the event of a shortage, which could result from, among other things, lack of capacity at United States oil refineries or the fact that our gasoline contracts do not guarantee an uninterrupted, unlimited supply of gasoline. Significant increases and volatility in wholesale petroleum costs have resulted, and could in the future result, in significant increases in the retail price of petroleum products and in lower gasoline gross margin per gallon. During fiscal 2008, increases in the retail price of petroleum products impacted consumer demand for gasoline, and we expect that future increases would have the same effect. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in crude oil prices squeeze retail fuel margins because fuel costs typically increase faster than retailers are able to pass them along to customers. Higher fuel prices also trigger higher credit card expenses, because credit card fees are calculated as a percentage of the transaction amount, not as a percentage of gasoline gallons sold. A significant change in any of these factors could materially impact our gasoline gallon volume, gasoline gross profit and overall customer traffic, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Changes in economic conditions, consumer behavior, travel and tourism could impact our business.

In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for automobile and commercial truck traffic and trends in travel, tourism and weather. Changes in economic conditions generally, or in the southeastern United States specifically, could adversely impact consumer spending patterns and travel and tourism in our markets. In particular, weakening economic conditions may result in decreases in miles driven and discretionary consumer spending and travel, which impact spending on gasoline and convenience items. In addition, approximately 33% of our stores are located in coastal, resort or tourist destinations. Historically, travel and consumer behavior in such markets is more severely impacted by weak economic conditions, such as those currently impacting the United States. If visitors to coastal resort or tourist locations decline due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Recent market turmoil and uncertain economic conditions, including increases in food and fuel prices, changes in the credit and housing markets leading to the current financial and credit crisis, actual and potential job losses among many sectors of the economy, significant declines in the stock market resulting in large losses in consumer retirement and investment accounts and uncertainty regarding future federal tax and economic policies have resulted in reduced consumer confidence, curtailed retail spending and decreases in miles driven. There can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence. During fiscal 2008 and fiscal 2009, we have experienced sales declines in both gasoline and merchandise as a result of these economic conditions. If these economic conditions persist or deteriorate further, we may continue to experience sales declines in both gasoline and merchandise, which could have a material adverse effect on our business, financial condition and results of operations.

Wholesale cost increases of, and tax increases on, tobacco products could adversely impact our operating results.

Sales of tobacco products accounted for approximately 5.8% of total revenues over the past three fiscal years, and our tobacco gross profit accounted for approximately 12.5% of total gross profit for the same period. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage smoking in the United States, may have an adverse effect on demand for cigarettes. Although the states in which we operate have historically imposed relatively low taxes on tobacco products, each year one or more of these states consider increasing the tax rate for tobacco products, either to raise revenues or deter the use of tobacco. Additionally, a federal excise tax is imposed on the sale of cigarettes, and an increase of $0.62 per pack in the federal excise tax on cigarettes became effective on April 1, 2009. Any increase in federal or state taxes on our tobacco products could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Currently, major cigarette manufacturers offer substantial rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

Hedging transactions could limit our potential gains or cause losses.

We have previously taken and may in the future take steps to manage our exposure to volatility in wholesale petroleum costs by entering into a variety of hedging arrangements related to the future prices of crude oil and gasoline, including futures, forwards, option contracts and swaps traded on the New York Mercantile Exchange (NYMEX). While hedging transactions are intended to offset the adverse effects of volatile wholesale gasoline prices that may be associated with lagging retail gasoline prices, we may be required, in connection with such hedging transactions, to make payments to maintain margin accounts related to these transactions and to settle the contracts at their value upon termination. The maintenance of required margins and the settlement of hedging contracts at termination could cause us to suffer losses or limited gains. In particular, hedging transactions could expose us to the risk of financial loss upon unanticipated or atypical variations in the sales price of crude oil and that of wholesale gasoline. These financial losses could have a material adverse effect on our financial condition and results of operations. For example, during the second and third quarters of fiscal 2008, we incurred aggregate losses of approximately $9.9 million related to hedging transactions prior to closing out all of our hedging positions on May 5, 2008. At this time, we have no plans to engage in any further gasoline hedging activities.

Risks Related to Our Business

Unfavorable weather conditions or other trends or developments in the southeastern United States could adversely affect our business.

Substantially all of our stores are located in the southeastern United States. Although the southeast region is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes, thunderstorms, extended periods of rain, ice storms and heavy snow, all of which we have historically experienced. Inclement weather conditions as well as severe storms in the southeast region could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our stores. In addition, we typically generate higher revenues and gross margins during warmer weather months in the Southeast, which fall within our third and fourth fiscal quarters. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected. We could also be impacted by regional occurrences in the southeastern United States such as energy shortages or increases in energy prices, fires or other natural disasters.

Inability to identify, acquire and integrate new stores could adversely affect our business.

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. Since 1996, we have successfully completed and integrated more than 90 acquisitions, growing our store base from 379 to 1,647 stores as of March 26, 2009, and we expect to continue to selectively pursue acquisition opportunities as an element of our growth strategy. Acquisitions involve risks that could cause our actual growth or operating results to differ significantly from our expectations or the expectations of securities analysts. For example:

•

We may not be able to identify suitable acquisition candidates or acquire additional convenience stores on favorable terms. We compete with others to acquire convenience stores. We believe that this competition may increase and could result in decreased availability or increased prices for suitable acquisition candidates. It may be 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 that we acquire. These liabilities may result from a prior owner’s noncompliance with applicable federal, state or local laws or regulations.

•

We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of 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.

•

We face the risk that our existing financial controls, information systems, management resources and human resources will need to grow to support future growth.

Our indebtedness could negatively impact our financial health.

As of March 26, 2009, we had consolidated debt, including lease finance obligations, of approximately $1.3 billion. As of March 26, 2009, the availability under our revolving credit facility for borrowing was approximately $145.1 million (approximately $40.1 million of which was available for issuance of letters of credit).

Our substantial indebtedness could have important consequences. For example, it could:

•

make it more difficult for us to satisfy our obligations with respect to our debt and our leases;

•

increase our vulnerability to general adverse economic and industry conditions;

•

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, including lease finance obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

place us at a competitive disadvantage compared to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets or renovate our stores; and

•

limit our ability to borrow additional funds in the future.

We are vulnerable to increases in interest rates because the debt under our senior credit facility is subject to a variable interest rate. Although we have entered into certain hedging instruments in an effort to manage our interest rate risk, we may not be able to continue to do so, on favorable terms or at all, in the future.

If we are unable to meet our debt obligations, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.

In addition, the credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health and could prevent us from fulfilling our obligations.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further increase the risks associated with our substantial leverage.

We are able to incur additional indebtedness. The terms of the indenture that governs our senior subordinated notes permit us to incur additional indebtedness under certain circumstances. The indenture governing our convertible notes does not contain any limit on our ability to incur debt. In addition, the credit agreement governing our senior credit facility permits us to incur additional indebtedness (assuming certain financial conditions are met at the time) beyond the $225.0 million available under our revolving credit facility. If we incur additional indebtedness, the related risks that we now face could increase.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on our indebtedness, including without limitation any payments required to be made to holders of our senior subordinated notes and our convertible notes, and to refinance our indebtedness and fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

For example, upon the occurrence of a “fundamental change” (as such term is defined in the indenture governing our convertible notes), holders of our convertible notes have the right to require us to purchase for cash all outstanding convertible notes at 100% of their principal amount plus accrued and unpaid interest, including additional interest (if any), up to but not including the date of purchase. We also may be required to make substantial cash payments upon other conversion events related to the convertible notes. We may not have enough available cash or be able to obtain third-party financing to satisfy these obligations at the time we are required to make purchases of tendered notes.

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next 12 months.

We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our failure to fund indebtedness obligations at any time could constitute an event of default under the instruments governing such indebtedness, which would likely trigger a cross-default under our other outstanding debt.

If we do not comply with the covenants in the credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes or otherwise default under them or the indenture governing our convertible notes, we may not have the funds necessary to pay all of our indebtedness that could become due.

The credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes require us to comply with certain covenants. In particular, our credit agreement prohibits us from incurring any additional indebtedness, except in specified circumstances, or materially amending the terms of any agreement relating to existing indebtedness without lender approval. Further, our credit agreement restricts our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends or make investments or capital expenditures. Other restrictive covenants require that we meet a maximum total adjusted leverage ratio and a minimum interest coverage ratio, as defined in our credit agreement. A violation of any of these covenants could cause an event of default under our credit agreement.

If we default on the credit agreement governing our senior credit facility, the indenture governing our senior subordinated notes or the indenture governing our convertible notes because of a covenant breach or otherwise, all outstanding amounts could become immediately due and payable. We cannot assure you that we would have sufficient funds to repay all the outstanding amounts, and any acceleration of amounts due under our credit agreement or either of the indentures governing our outstanding indebtedness likely would have a material adverse effect on us.

We are subject to state and federal environmental laws and other regulations. Failure to comply with these laws and regulations may result in penalties or costs that could have a material adverse effect on our business.

We are subject to extensive governmental laws and regulations including, but not limited to, environmental regulations, employment laws and regulations, regulations governing the sale of alcohol and tobacco, minimum wage requirements, working condition requirements, public accessibility requirements, citizenship requirements and other laws and regulations. A violation or change of these laws or regulations could have a material adverse effect on our business, financial condition and results of operations.

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.

Compliance with existing and future environmental laws and regulations regulating underground storage tanks may require significant capital expenditures and increased operating and maintenance costs. The remediation costs and other costs required to clean up or treat contaminated sites could be substantial. We pay tank registration fees and other taxes to state trust funds established in our operating areas and maintain private insurance coverage in Florida and Georgia in support of future remediation obligations.

These state trust funds or other responsible third parties (including insurers) are expected to pay or reimburse us for remediation expenses less a deductible. To the extent third parties do not pay for remediation as we anticipate, we will be obligated to make these payments. These payments could materially adversely affect our business, financial condition and results of operations. Reimbursements from state trust funds will be dependent on the maintenance and continued solvency of the various funds.

In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing or acquired locations. 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. In addition, failure to comply with any environmental laws, ordinances or regulations or an increase in regulations could adversely affect our business, operating results and financial condition.

Failure to comply with state laws regulating the sale of alcohol and tobacco products may result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material adverse effect on 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. Such a loss or imposition could have a material adverse effect on our business. In addition, certain states regulate relationships, including overlapping ownership, among alcohol manufacturers, wholesalers and retailers, and may deny or revoke licensure if relationships in violation of the state laws exist. We are not aware of any alcoholic beverage manufacturers or wholesalers having a prohibited relationship with our company.

Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material adverse effect on our business.

Our business is subject to various other state and federal regulations, including, without limitation, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, or adoption of mandated healthcare benefits would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material adverse effect on our business, financial condition and results of operations. For example, the federal minimum wage increased from $5.85 per hour to $6.55 per hour effective July 24, 2008, and will increase to $7.25 per hour effective July 24, 2009.

We depend on one principal supplier for the majority of our merchandise. A disruption in supply or a change in our relationship could have a material adverse effect on our business.

We purchase over 50% of our general merchandise, including most tobacco products and grocery items, from a single wholesale grocer, McLane. We have a contract with McLane through December 31, 2014, but we may not be able to renew the contract when it expires, or on similar terms. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with our principal merchandise suppliers could have a material adverse effect on our business, cost of goods sold, financial condition and results of operations.

We depend on two principal suppliers for the majority of our gasoline. A disruption in supply or a change in our relationship could have a material adverse effect on our business.

BP^® and CITGO^® supply approximately 65% of our gasoline purchases. We have contracts with CITGO^® until 2010 and BP^® until 2012, but we may not be able to renew either contract upon expiration. A change of suppliers, a disruption in supply or a significant change in our relationship with our principal suppliers could materially increase our cost of goods sold, which would negatively impact our financial condition and results of operations.

CITGO^® obtains a significant portion of the crude oil it refines from its ultimate parent, Petroleos de Venezuela, SA (“PDVSA”), which is owned and controlled by the government of Venezuela. The political and economic environment in Venezuela can disrupt PDVSA’s operations and adversely affect CITGO^® ’s ability to obtain crude oil. In addition, the Venezuelan government can order, and in the past has ordered, PDVSA to curtail the production of oil in response to a decision by the Organization of Petroleum Exporting Countries to reduce production. The inability of CITGO^® to obtain crude oil in sufficient quantities would adversely affect its ability to provide gasoline to us and could have a material adverse effect on our business, financial condition and results of operations.

Because we depend on our senior management’s experience and knowledge of our industry, we would be adversely affected if we were to lose any members of our senior management team.

We are dependent on the continued efforts of our senior management team. Recently, we were informed by our President and Chief Executive Officer, Peter J. Sodini, that he intends to retire at the expiration of his employment contract on September 30, 2009. Our Board of Directors is actively conducting a search for Mr. Sodini’s replacement, but there can be no assurance that a replacement will be found prior to the expected date of Mr. Sodini’s retirement. If, for any reason, our senior executives do not continue to be active in management or our Board of Directors is unable to successfully locate a successor for Mr. Sodini, our business, financial condition or results of operations could be adversely affected. We may not 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. We also rely on our ability to recruit qualified store and field managers. If we fail to continue to attract these individuals at reasonable compensation levels, our operating results may be adversely affected.

Pending litigation could adversely affect our financial condition, results of operations and cash flows.

We are party to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.

Litigation and publicity concerning food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our convenience stores.

Convenience store businesses and other food service operators can be adversely affected by litigation and complaints from customers or government agencies resulting from food quality, illness, or other health or environmental concerns or operating issues stemming from one or more locations. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing gasoline, merchandise or food at one or more of our convenience stores. We could also incur significant liabilities if a lawsuit or claim results in a decision against us. Even if we are successful in defending such litigation, our litigation costs could be significant, and the litigation may divert time and money away from our operations and hurt our performance.

Pending SEC matters could adversely affect us.

As previously disclosed, on July 28, 2005 we announced that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. In connection with our decision to restate, we filed a Form 8-K on July 28, 2005, as well as a Form 10-K/A on August 31, 2005 restating the transactions. The SEC issued a comment letter to us in connection with the Form 8-K, and we responded to the comments. Beginning in September 2005, we received requests from the SEC that we voluntarily provide certain

information to the SEC Staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. As previously disclosed, we are cooperating with the SEC in this ongoing investigation. We are unable to predict how long this investigation will continue or whether it will result in any adverse action.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC, NASDAQ and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have increased our legal and financial compliance costs and made many activities more time-consuming and more burdensome. These laws, rules and regulations are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance, which could result in continuing uncertainty regarding compliance matters. The costs of compliance with these laws, rules and regulations have adversely affected our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations or the trading price of our stock.

We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement. We have devoted significant resources to remediate our deficiencies and improve our internal control over financial reporting. Although we believe that these efforts have strengthened our internal control over financial reporting, we are continuing to work to improve our internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Other Risks

Future sales of additional shares into the market may depress the market price of our common stock.

If we or our existing stockholders sell shares of our common stock in the public market, including shares issued upon the exercise of outstanding options, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of March 26, 2009, there were 22,470,757 shares of our common stock outstanding, most of which are freely tradable (unless held by one of our affiliates). Pursuant to Rule 144 under the Securities Act of 1933, as amended, during any three-month period our affiliates can resell up to the greater of (a) 1.0% of our aggregate outstanding common stock or (b) the average weekly trading volume for the four weeks prior to the sale. Sales by our existing stockholders 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.

In addition, we have filed with the SEC a registration statement that covers up to 839,385 shares issuable upon the exercise of stock options currently outstanding under our 1999 Stock Option Plan, as well as a registration statement that covers up to 2.4 million shares issuable pursuant to share-based awards under our Omnibus Plan, plus any options issued under our 1999 Stock Option Plan that are forfeited or cancelled after March 29, 2007. Generally, shares registered on a registration statement may be sold freely at any time after issuance.

Any issuance of shares of our common stock in the future could have a dilutive effect on your investment.

We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital at that time. In other circumstances, we may issue shares of our common stock pursuant to existing agreements or arrangements. For example, upon conversion of our outstanding convertible notes, we may, at our option, issue shares of our common stock. In addition, if our convertible notes are converted in connection with a change of control, we may be required to deliver additional shares by increasing the conversion rate with respect to such notes. Notwithstanding the requirement to issue additional shares if convertible notes are converted on a change of control, the maximum conversion rate for our outstanding convertible notes is 25.4517 per $1,000 principal amount of convertible notes.

We have also issued warrants to purchase up to 2,993,000 shares of our common stock to an affiliate of Merrill Lynch in connection with the note hedge and warrant transactions entered into at the time of our offering of convertible notes.

Raising funds by issuing securities dilutes the ownership of our existing stockholders. Additionally, certain types of equity securities that we may issue in the future could have rights, preferences or privileges senior to your rights as a holder of our common stock. We could choose to issue additional shares for a variety of reasons including for investment or acquisitive purposes. Such issuances may have a dilutive impact on your investment.

The market price for our common stock has been and may in the future be volatile, which could cause the value of your investment to decline.

There currently is a public market for our common stock, but there is no assurance that there will always be such a market. Securities markets worldwide experience significant price and volume fluctuations. This market volatility could significantly affect the market price of our common stock without regard to our operating performance. In addition, the price of our common stock could be subject to wide fluctuations in response to the following factors among others:

•

A deviation in our results from the expectations of public market analysts and investors;

•

Statements by research analysts about our common stock, our company or our industry;

•

Changes in market valuations of companies in our industry and market evaluations of our industry generally;

•

Additions or departures of key personnel;

•

Actions taken by our competitors;

•

Sales or other issuances of common stock by us or our senior officers or other affiliates; or

•

Other general economic, political or market conditions, many of which are beyond our control.

The market price of our common stock will also be impacted by our quarterly operating results and quarterly comparable store sales growth, which may fluctuate from quarter to quarter. Factors that may impact our quarterly results and comparable store sales include, among others, general regional and national economic conditions, competition, unexpected costs and changes in pricing, consumer trends, the number of stores we open and/or close during any given period, costs of compliance with corporate governance and Sarbanes-Oxley requirements and other factors discussed in this Item 1A and throughout “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You may not be able to resell your shares of our common stock at or above the price you pay.

Provisions in our certificate of incorporation, our bylaws and Delaware law may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.

Provisions in our certificate of incorporation and our bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Our certificate of incorporation and bylaws:

•

authorize the issuance of up to five million shares of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt without further stockholder approval;

•

prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

•

limit who may call special meetings;

•

limit stockholder action by written consent, generally requiring all actions to be taken at a meeting of the stockholders; and

•

establish advance notice requirements for any stockholder that wants to propose a matter to be acted upon by stockholders at a stockholders’ meeting, including the nomination of candidates for election to our Board of Directors.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved.

These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares 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. Such measures may be adopted without vote or action by our stockholders.

Item 4.

Submission of Matters to a Vote of Security Holders.

On March 17, 2009, we held our Annual Meeting of Stockholders, during which our stockholders:

(1) Elected ten nominees to serve as directors each for a term of one year or until his or her successor is duly elected and qualified. The votes were cast as follows:


Name	Votes For	Votes Withheld
Peter J. Sodini	20,321,476	390,349
Robert F. Bernstock	20,497,486	214,339
Paul L. Brunswick	20,494,785	217,040
Wilfred A. Finnegan	20,495,025	216,800
Edwin J. Holman	20,494,813	217,012
Terry L. McElroy	20,494,132	217,693
Mark D. Miles	20,493,683	218,142
Bryan E. Monkhouse	20,496,155	215,670
Thomas M. Murnane	20,498,277	213,548
Maria C. Richter	20,498,486	213,339

(2) Ratified the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending September 24, 2009. The votes were cast as follows:

Votes For

Votes

Against

Abstained

Ratification of Deloitte & Touche LLP

20,607,330

94,815

9,680

Item 6.

Exhibits.

Exhibit Number		Description of Document
10.1		Independent Director Compensation Program, Third Amendment January 2009 *
10.2		Form of Award Agreement (Awarding Nonqualified Stock Option to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.3 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.3		Form of Award Agreement (Awarding Restricted Stock to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.4 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.4		Form of Award Agreement (Awarding RSUs to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.5 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008) *
10.5		First Amendment to Amended and Restated Employment Agreement dated January 30, 2009 by and between Robert B. Williams and The Pantry (incorporated by reference to Exhibit 10.6 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.6		Separation Agreement dated April 22, 2009 by and between Peter J. Sodini and The Pantry (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2009)*
31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]

*	Represents a management contract or compensatory plan or arrangement

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE PANTRY, INC.
	By:		/s/ Frank G. Paci
			Frank G. Paci
			Executive Vice President of Business Operations, Chief Financial Officer and Secretary (Authorized Officer and Principal Financial Officer)
	Date:		May 5, 2009

EXHIBIT INDEX

Exhibit Number		Description of Document
10.1		Independent Director Compensation Program, Third Amendment January 2009 *
10.2		Form of Award Agreement (Awarding Nonqualified Stock Option to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.3 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.3		Form of Award Agreement (Awarding Restricted Stock to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.4 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.4		Form of Award Agreement (Awarding RSUs to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.5 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008) *
10.5		First Amendment to Amended and Restated Employment Agreement dated January 30, 2009 by and between Robert B. Williams and The Pantry (incorporated by reference to Exhibit 10.6 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008)*
10.6		Separation Agreement dated April 22, 2009 by and between Peter J. Sodini and The Pantry (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2009)*
31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2		Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]

*	Represents a management contract or compensatory plan or arrangement

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Pantry (PTRY) Inactive 10-Q2009 Q2 Quarterly report

Content analysis