PANTRY INC - 10-Q Quarterly Report

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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 December 30, 2004

Commission File: Number 33-72574

THE PANTRY, INC.

(Exact name of registrant as specified in its charter)


Delaware		56-1574463
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1801 Douglas Drive

Sanford, North Carolina 27330

(Address of principal executive office 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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


COMMON STOCK, $0.01 PAR VALUE		20,322,242 SHARES
(Class)		(Outstanding at February 2, 2005)

THE PANTRY, INC.

FORM 10-Q

DECEMBER 30, 2004

TABLE OF CONTENTS


		Page
Part I—Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Cash Flows		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		33

Part II—Other Information
Item 1. Legal Proceedings		34
Item 6. Exhibits		34

PART I-FINANCIAL INFORMATION.

Item 1.

Financial Statements.

THE PANTRY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)


	December 30, 2004		September 30, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	112,109	$	108,048
Receivables, net		38,852		43,664
Inventories		94,645		95,228
Prepaid expenses		12,929		13,446
Property held for sale		5,592		5,939
Deferred income taxes		9,549		7,507

Total current assets		273,676		273,832

Property and equipment, net		406,337		411,501

Other assets:
Goodwill (Note 2)		341,652		341,652
Other (Notes 2, 3, 5, and 7)		35,688		35,155

Total other assets		377,340		376,807

Total assets	$	1,057,353	$	1,062,140


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt (Note 4)	$	16,029	$	16,029
Current maturities of capital lease obligations		1,197		1,197
Accounts payable		102,369		121,151
Accrued interest (Note 4)		8,725		2,742
Accrued compensation and related taxes		12,293		14,369
Income and other accrued taxes		15,676		18,849
Accrued insurance		18,674		17,228
Other accrued liabilities		11,456		19,393

Total current liabilities		186,419		210,958

Long-term debt (Note 4)		551,003		551,010

Other liabilities:
Deferred income taxes		66,488		63,257
Deferred revenue		34,963		35,051
Capital lease obligations		14,275		14,582
Other noncurrent liabilities (Note 3)		37,061		35,096

Total other liabilities		152,787		147,986

Commitments and contingencies (Notes 3 and 4)
Shareholders’ equity (Notes 5, 6, and 9)
Common stock, $.01 par value, 50,000,000 shares authorized; 20,322,242 and 20,271,757 issued and outstanding at December 30, 2004 and September 30, 2004, respectively		203		204
Additional paid-in capital		135,232		132,879
Accumulated other comprehensive income, net (Note 6)		660		206
Accumulated earnings		31,049		18,897

Total shareholders’ equity		167,144		152,186

Total liabilities and shareholders’ equity	$	1,057,353	$	1,062,140

See Notes to Consolidated Financial Statements

THE PANTRY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended
	December 30, 2004			December 25, 2003
	(13 weeks)			(13 weeks)
Revenues:
Merchandise	$	287,067		$	270,149
Gasoline		654,476			474,292

Total revenues		941,543			744,441

Cost of sales:
Merchandise		182,975			170,975
Gasoline		604,589			433,356

Total cost of sales		787,564			604,331

Gross profit		153,979			140,110
Operating expenses:
Operating, general and administrative expenses		111,270			105,126
Depreciation and amortization		14,386			14,075

Total operating expenses		125,656			119,201

Income from operations		28,323			20,909

Other income (expense):
Interest expense (Note 7)		(8,986	)		(13,141	)
Miscellaneous		422			261

Total other expense		(8,564	)		(12,880	)

Income before income taxes		19,759			8,029
Income tax expense		(7,607	)		(3,092	)

Net Income	$	12,152		$	4,937

Earnings per share (Note 8):
Basic	$	0.60		$	0.27
Diluted		0.58			0.24

See Notes to Consolidated Financial Statements

THE PANTRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Three Months Ended
	December 30, 2004			December 25, 2003
	(13 weeks)			(13 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,152		$	4,937
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,386			14,075
Provision for income taxes		3,231			3,092
Fair market value change in non-qualifying derivatives		(486	)		(755	)
Amortization of deferred loan costs		258			853
Amortization of long-term debt discount		—			288
Other		(73	)		505
Changes in operating assets and liabilities (net of effects of acquisitions):
Receivables		2,034			(555	)
Inventories		583			(820	)
Prepaid expenses		518			780
Other noncurrent assets		(294	)		(58	)
Accounts payable		(18,782	)		(4,047	)
Other current liabilities and accrued expenses		42			(13,938	)
Other noncurrent liabilities		2,572			(3,155	)

Net cash provided by operating activities		16,141			1,202

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property held for sale		(147	)		(513	)
Additions to property and equipment		(15,065	)		(9,336	)
Proceeds from sale of land, building and equipment		4,567			97,721
Acquisitions of related businesses, net of cash acquired		(1,431	)		(184,849	)

Net cash used in investing activities		(12,076	)		(96,977	)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments under capital leases		(307	)		(337	)
Principal repayments of long-term debt		(7	)		(2,517	)
Proceeds from issuance of long-term borrowings		—			80,000
Proceeds from exercise of stock options		310			205
Repayments of shareholder loans		—			104
Other financing costs		—			(2,581	)

Net cash provided by (used in) financing activities		(4	)		74,874

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,061			(20,901	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		108,048			72,901

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	112,109		$	52,000

Cash paid during the period:
Interest	$	3,231		$	14,177

Income taxes	$	497		$	200

See Notes to Consolidated Financial Statements

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—BASIS OF PRESENTATION

Unaudited Consolidated Financial Statements

The accompanying 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 our consolidated subsidiaries). All inter-company transactions and balances have been eliminated in consolidation. Transactions and balances of each of these wholly owned subsidiaries are immaterial to the consolidated financial statements.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim consolidated financial statements have been prepared from the accounting records of The Pantry, Inc. and its subsidiaries and all amounts at December 30, 2004 and for the three months ended December 30, 2004 and December 25, 2003 are unaudited. References herein to “The Pantry” or “the Company” include all subsidiaries. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature.

We suggest that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

Our results of operations for the three months ended December 30, 2004 and December 25, 2003 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 and profit margins during the summer months than during the winter months. As a result, we have historically achieved higher revenues and earnings in our third and fourth fiscal quarters.

Accounting Period

We operate on a 52-53 week fiscal year ending on the last Thursday in September. Our 2005 fiscal year ends on September 29, 2005 and is a 52 week year. Fiscal 2004 was a 53 week year.

The Pantry

As of December 30, 2004, we operated 1,353 convenience stores located in Florida (457), North Carolina (321), South Carolina (237), Tennessee (103), Georgia (98), Mississippi (51), Kentucky (37), Virginia (30), Indiana (11), and Louisiana (8). 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 North Carolina and Mississippi, we also sell lottery products. Self-service gasoline is sold at 1,327 locations, 889 of which sell gasoline under major oil company brand names including Amoco^®, BP^®, Chevron^®, Citgo^®, Mobil^®, Shell^®, Exxon^® and Texaco^®.

Recently Issued Accounting Standards

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

in cash in interim and annual periods beginning after June 15, 2005. In addition, this new standard will apply to unvested options granted prior to the effective date. We will adopt this new standard effective for the fourth fiscal quarter of 2005, and have not yet determined what impact this standard will have on our financial position or results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

Stock-Based Compensation

We account for stock options under the intrinsic value method recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:


	Three Months Ended
	December 30, 2004			December 25, 2003
Net income (in thousands):
As reported	$	12,152		$	4,937
Deduct—Total stock-based compensation expense determined under fair value method for all awards, net of tax		(180	)		(125	)

Pro forma	$	11,972		$	4,812

Basic earnings per share:
As reported	$	0.60		$	0.27
Pro forma	$	0.59		$	0.26
Diluted earnings per share:
As reported	$	0.58		$	0.24
Pro forma	$	0.57		$	0.24

The above pro forma disclosures are not necessarily representative of pro forma effects on reported net income for future years.

NOTE 2—GOODWILL AND OTHER INTANGIBLES

Effective September 28, 2001, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, and as a result, our goodwill asset is no longer amortized but reviewed at least annually for impairment. Other intangible assets which have finite useful lives will continue to be amortized over their useful lives. We determined that we operate in one reporting unit based on our current reporting structure and have thus assigned goodwill at the enterprise level. There were no changes in the balance of goodwill during the three months ended December 30, 2004.

Other intangible assets consist of noncompete agreements and a trademark. For each of the dates presented, noncompete agreements consisted of the following (in thousands):


	December 30, 2004			September 30, 2004
Gross carrying value	$	7,909		$	7,959
Less—accumulated amortization		(1,809	)		(1,766	)

Noncompete agreements, net	$	6,100		$	6,193

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Amortization expense related to noncompete agreements was $93 thousand and $142 thousand for the three months ended December 30, 2004 and December 25, 2003, respectively. The weighted average amortization period of all noncompete agreements is 31.4 years. Additionally, as a result of the acquisition of 138 convenience stores operating in Tennessee and Georgia under the Golden Gallon^® banner in October 2003, we recorded $2.8 million related to the Golden Gallon^® trademark. This asset was determined to have an indefinite useful life and therefore no amortization was recorded. Estimated amortization expense for each of the five fiscal years following September 30, 2004 and thereafter is: $258 thousand for the remainder of fiscal 2005; $305 thousand in fiscal 2006; $206 thousand in fiscal 2007; $197 thousand in fiscal 2008; $197 thousand in fiscal 2009 and $4.9 million thereafter. Other intangible assets are classified in other noncurrent assets in the accompanying consolidated balance sheets.

NOTE 3—ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES

As of December 30, 2004, we were contingently liable for outstanding letters of credit in the amount of approximately $34.8 million primarily related to several self-insurance programs, vendor contract terms and regulatory requirements. The letters of credit are not to be drawn against unless we default on the timely payment of the related liabilities.

We are party to various legal actions arising 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, we believe that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition or prospects.

Environmental Liabilities and Contingencies

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

Federal and state regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, as of December 30, 2004, we maintain letters of credit in the aggregate amount of approximately $1.3 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 state trust fund coverage for releases occurring through December 29, 1999 and meet such requirements for releases thereafter through private commercial liability insurance and a letter of credit. The trust funds generally require us to pay deductibles ranging from $10 thousand to $150 thousand per occurrence depending on the upgrade status of our underground storage tank system, the date the release is discovered and/or reported and the type of cost for which reimbursement is sought.

Environmental reserves of $14.6 million and $14.1 million as of as of December 30, 2004 and September 30, 2004 respectively, represent our estimates for future expenditures for remediation, tank removal and litigation associated with 256 and 251 known contaminated sites, respectively, 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

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

estimate that approximately $13.4 million of our environmental obligation will be funded by state trust funds and third party insurance; as a result we may spend up to $1.2 million for remediation, tank removal and litigation. Also, as of December 30, 2004 and September 30, 2004 there were an additional 498 and 503, respectively, sites 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 are discounted using an appropriate rate to determine the reserve.

We anticipate that we will be reimbursed for expenditures from state trust funds and private insurance. As of December 30, 2004, anticipated reimbursements of $15.5 million are recorded as long-term environmental receivables and $2.3 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 will perform 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.

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

NOTE 4—LONG-TERM DEBT

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


	December 30, 2004			September 30, 2004
Senior subordinated notes payable; due February 19, 2014; interest payable semi-annually at 7.75%	$	250,000		$	250,000
Senior credit facility; interest payable monthly at LIBOR plus 2.25%; principal due in quarterly installments through March 12, 2011		317,000			317,000
Other notes payable; various interest rates and maturity dates		32			39

Total long-term debt		567,032			567,039
Less—current maturities		(16,029	)		(16,029	)

Long-term debt, net of current maturities	$	551,003		$	551,010

At December 30, 2004, our senior credit facility consists of a $317.0 million term loan and a $70.0 million revolving credit facility, which bear interest at a rate of LIBOR plus 2.25%. Our senior credit facility is secured by substantially all of our assets, other than our leased real property and is guaranteed by our subsidiaries. As of December 30, 2004, there were no outstanding borrowings under the revolving credit facility, and we had approximately $34.8 million of standby letters of credit issued under the facility. As a result, we had approximately $35.2 million in available borrowing capacity. Furthermore, the revolving credit facility limits our total outstanding letters of credit to $50.0 million. The LIBOR associated with our senior credit facility resets periodically, and as of December 30, 2004, the effective LIBOR rate was 2.21.

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The remaining annual maturities of our long-term debt as of December 30, 2004 are as follows (amounts in thousands):


Year Ended September:
2005	$	12,022
2006		16,010
2007		16,000
2008		16,000
2009		16,000
Thereafter		491,000

Total long-term debt	$	567,032

Payments due in fiscal 2005 do not include a $4.0 million payment due September 30, 2005 as this date is in fiscal 2006, however, this payment is included in current maturities of long-term debt on the accompanying Consolidated Balance Sheets as a result of such payment being due within one year of the Balance Sheet date.

As of December 30, 2004, we were in compliance with all covenants and restrictions relating to all outstanding borrowings and substantially all of our net assets are restricted as to payment of dividends and other distributions.

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 have designated each qualifying instrument as a cash flow hedge. We formally document our hedge relationships, including identifying the hedge instruments and hedged items, as well as our risk management objectives and strategies for entering into the hedge transaction. 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 (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense). When it is determined that a derivative ceases to be a highly effective hedge, we discontinue hedge accounting, and subsequent changes in fair value of the hedge instrument are recognized in earnings. Interest income for the mark-to-market adjustment of those instruments that do not qualify for hedge accounting was $486 thousand and $755 thousand for the first quarter of fiscal 2005 and fiscal 2004, respectively.

The fair values of our interest rate swaps are obtained from dealer quotes. These values represent the estimated amount 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 December 30, 2004, other noncurrent assets include derivative assets of $1.1 million. At September 30, 2004 other noncurrent liabilities included derivative liabilities of approximately $700 thousand and other noncurrent assets included derivative assets of approximately $600 thousand. Cash flow hedges at December 30, 2004 represent interest rate swaps with a notional amount of $202.0 million, a weighted average pay rate of 2.72% and have various settlement dates, the latest of which is April 2006.

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 6—COMPREHENSIVE INCOME

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


	Three Months Ended
	December 30, 2004		December 25, 2003
Net income	$	12,152	$	4,937
Other comprehensive income:
Net unrealized gains on qualifying cash flow hedges (net of deferred income taxes of $284 and $174, respectively)		454		278

Comprehensive income	$	12,606	$	5,215

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


	Three Months Ended
	December 30, 2004			December 25, 2003
Unrealized gains on qualifying cash flow hedges	$	701		$	456
Less: Reclassification adjustment for expenses included in net income		(247	)		(178	)

Net unrealized gains on qualifying cash flow hedges	$	454		$	278

Accumulated other comprehensive income, net of related income taxes, is composed of unrealized gains on qualifying cash flow hedges of $660 thousand and $206 thousand as of December 30, 2004 and September 30, 2004, respectively.

NOTE 7—INTEREST EXPENSE

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


	Three Months Ended
	December 30, 2004			December 25, 2003
Interest on long-term debt	$	8,257		$	11,137
Interest rate swap settlements		402			1,351
Interest on capital lease obligations		516			553
Fair market value change in non-qualifying derivatives		(486	)		(755	)
Amortization of deferred financing costs		258			853
Miscellaneous		39			2

Total Interest expense	$	8,986		$	13,141

NOTE 8—EARNINGS PER SHARE

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

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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


	Three Months Ended
	December 30, 2004		December 25, 2003
Net income	$	12,152	$	4,937

Earnings per share—basic:
Weighted average shares outstanding		20,289		18,407

Earnings per share—basic	$	0.60	$	0.27

Earnings per share—diluted:
Weighted average shares outstanding		20,289		18,407
Dilutive impact of options outstanding		813		1,961

Weighted average shares and potential dilutive shares outstanding		21,102		20,368

Earnings per share—diluted	$	0.58	$	0.24

Options to purchase shares of common stock that were not included in the computation of diluted earnings per share, because their inclusion would have been antidilutive, were 360 thousand for the three months ended December 30, 2004. There were no options or warrants to purchase shares of common stock that were not included in the computation of diluted earnings per share for the three months ended December 25, 2003.

NOTE 9—FORWARD SALE OF EQUITY

During October 2004, we completed a secondary stock offering in which Freeman Spogli & Co., or Freeman Spogli, sold 3,850,000 shares of our stock at a public offering price of $22.96 per share. As a result of this sale, Freeman Spogli beneficially owns 3,884,369 shares, or approximately 19.1%, of our common stock as of December 30, 2004. In connection with this secondary stock offering, we sold 1,500,000 shares of our common stock under a forward sale agreement with Merrill Lynch International, an affiliate of Merrill Lynch & Co., as forward purchaser, under which, at our request, Merrill Lynch International borrowed 1,500,000 shares of our common stock from stock lenders and sold such borrowed shares at a price of $21.8694 per share to certain underwriters pursuant to a purchase agreement.

We may elect to settle the forward sale by means of a physical stock, cash or net stock settlement. The forward sale will settle in twelve months, or earlier at our option. At any time during that period (up to a maximum of four settlement dates in total), we have the option to settle the forward sale in whole or in part. We may physically settle the forward sale by delivering all or a portion of the shares to Merrill Lynch International for cash proceeds approximately equal to the product of the applicable number of shares and our share price as of the date of the forward sale, plus an imputed interest rate of the Federal Funds Rate minus 1.0%. The actual proceeds to be received by us will vary depending upon the settlement date, the portion of the shares designated by us for settlement on that settlement date and the method of settlement.

If we elect to physically settle all of the 1,500,000 shares subject to the forward sale with stock, based on an initial forward price of $21.8694, which is the public offering price less the underwriting discount, we will receive aggregate proceeds of approximately $32.8 million. The forward sale agreement provides that the initial forward sale price will be subject to increase based on a floating interest factor equal to the Federal Funds Rate, less a spread of 1.0%. However, because the spread may be greater than the Federal Funds Rate for at least part of the term of the forward sale agreement, the actual forward sale price received at settlement may be less than the initial forward sale price. In no event are we required to deliver more than 1,500,000 shares under the forward sale agreement.

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

If we elect cash or net stock settlement, Merrill Lynch International or one of its affiliates will purchase shares of our common stock in secondary market transactions over a period of time for delivery to Merrill Lynch International’s stock lenders in order to unwind its hedge. In connection with a cash or net stock settlement election by us, if the price paid by Merrill Lynch International or its affiliates in secondary market transactions to unwind its hedge exceeds the price that Merrill Lynch International would have been obligated to pay us had we instead elected a physical stock settlement under the forward sale agreement with respect to such shares, then we would pay Merrill Lynch International an amount in cash equal to such difference in the case of a cash settlement or would deliver a number of shares of our common stock having a market value equal to such difference in the case of a net stock settlement. On the other hand, if Merrill Lynch International or one of its affiliates is able to unwind its hedge by purchasing shares in secondary market transactions for an amount less than the price that Merrill Lynch International would have been obligated to pay us in connection with a physical stock settlement, Merrill Lynch International would pay us such difference in cash in the case of a cash settlement or in shares of our common stock having a market value equal to such difference in the case of a net stock settlement.

Prior to settlement, Merrill Lynch International will utilize the aggregate net proceeds from the sale of the borrowed shares as cash collateral for the borrowing of shares described above. We have not received any proceeds from the sale of the borrowed shares and will not do so until settlement of all or a portion of the forward sale.

Under limited circumstances related to our default or certain other extraordinary or otherwise unanticipated events, Merrill Lynch International also will have the ability to require us to settle the forward sale prior to the maturity date.

NOTE 10—GUARANTOR SUBSIDIARIES

We have two wholly owned subsidiaries, R. & H. Maxxon, Inc. and Kangaroo, Inc., collectively referred to as the Guarantor Subsidiaries, which are guarantors of our senior credit facility and our senior subordinated notes. The guarantees are joint and several in addition to full and unconditional. The Guarantor Subsidiaries do not conduct any operations and do not have any significant assets. The Guarantor Subsidiaries comprise all of our direct and indirect subsidiaries. Combined financial information for the Guarantor Subsidiaries is as follows:

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Balance Sheets

December 30, 2004

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries			Eliminations			Total
ASSETS
Current Assets:
Cash and cash equivalents	$	112,109		$	—		$	—		$	112,109
Receivables, net		38,852			—			—			38,852
Inventories		94,645			—			—			94,645
Prepaid expenses		12,927			2			—			12,929
Property held for sale		5,592			—			—			5,592
Deferred income taxes		9,549			—			—			9,549

Total current assets		273,674			2			—			273,676

Investments in subsidiaries		40,723			—			(40,723	)		—

Property and equipment, net		406,337			—			—			406,337

Other assets:
Goodwill		341,652			—			—			341,652
Intercompany notes receivable		(23,477	)		43,872			(20,395	)		—
Other		35,631			57			—			35,688

Total other assets		353,806			43,929			(20,395	)		377,340

Total assets	$	1,074,540		$	43,931		$	(61,118	)	$	1,057,353

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	16,029		$	—		$	—		$	16,029
Current maturities of capital lease obligations		1,197			—			—			1,197
Accounts payable		102,369			—			—			102,369
Accrued interest		8,725			—			—			8,725
Accrued compensation and related taxes		12,293			—			—			12,293
Income and other accrued taxes		15,676			—			—			15,676
Accrued insurance		18,674			—			—			18,674
Other accrued liabilities		11,521			—			(65	)		11,456

Total current liabilities		186,484			—			(65	)		186,419

Long-term debt		551,003			—			—			551,003

Other liabilities:
Deferred income taxes		66,488			—			—			66,488
Deferred revenue		34,963			—			—			34,963
Capital lease obligations		14,275			—			—			14,275
Intercompany notes payable		17,124			3,208			(20,332	)		—
Other noncurrent liabilities		37,059			2			—			37,061

Total other liabilities		169,909			3,210			(20,332	)		152,787

Shareholders’ equity:
Common stock		203			523			(523	)		203
Additional paid-in-capital		135,232			40,551			(40,551	)		135,232
Accumulated other comprehensive income, net		660			—			—			660
Accumulated earnings (deficit)		31,049			(353	)		353			31,049

Total shareholders’ equity		167,144			40,721			(40,721	)		167,144

Total liabilities and shareholders’ equity	$	1,074,540		$	43,931		$	(61,118	)	$	1,057,353

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Balance Sheets

September 30, 2004

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries			Eliminations			Total
ASSETS
Current Assets:
Cash and cash equivalents	$	108,048		$	—		$	—		$	108,048
Receivables, net		43,664			—			—			43,664
Inventories		95,228			—			—			95,228
Prepaid expenses		13,444			2			—			13,446
Property held for sale		5,939			—			—			5,939
Deferred income taxes		7,507			—			—			7,507

Total current assets		273,830			2			—			273,832

Investments in subsidiaries		40,723			—			(40,723	)		—

Property and equipment, net		411,501			—			—			411,501

Other assets:
Goodwill		341,652			—			—			341,652
Intercompany notes receivable		(23,477	)		43,872			(20,395	)		—
Other		35,098			57			—			35,155

Total other assets		353,273			43,929			(20,395	)		376,807

Total assets	$	1,079,327		$	43,931		$	(61,118	)	$	1,062,140

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	16,029		$	—		$	—		$	16,029
Current maturities of capital lease obligations		1,197			—			—			1,197
Accounts payable		121,151			—			—			121,151
Accrued interest		2,742			—			—			2,742
Accrued compensation and related taxes		14,369			—			—			14,369
Income and other accrued taxes		18,849			—			—			18,849
Accrued insurance		17,228			—			—			17,228
Other accrued liabilities		19,458			—			(65	)		19,393

Total current liabilities		211,023			—			(65	)		210,958

Long-term debt		551,010			—			—			551,010

Other liabilities:
Deferred income taxes		63,257			—			—			63,257
Deferred revenue		35,051			—			—			35,051
Capital lease obligations		14,582			—			—			14,582
Intercompany notes payable		17,124			3,208			(20,332	)		—
Other noncurrent liabilities		35,094			2			—			35,096

Total other liabilities		165,108			3,210			(20,332	)		147,986

Shareholders’ equity:
Common stock		204			523			(523	)		204
Additional paid-in-capital		132,879			40,551			(40,551	)		132,879
Accumulated other comprehensive income, net		206			—			—			206
Accumulated earnings (deficit)		18,897			(353	)		353			18,897

Total shareholders’ equity		152,186			40,721			(40,721	)		152,186

Total liabilities and shareholders’ equity	$	1,079,327		$	43,931		$	(61,118	)	$	1,062,140

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Statement of Operations

Three Months Ended December 30, 2004

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries		Eliminations		Total
Revenues:
Merchandise	$	287,067		$	—	$	—	$	287,067
Gasoline		654,476			—		—		654,476

Total revenues		941,543			—		—		941,543

Cost of sales:
Merchandise		182,975			—		—		182,975
Gasoline		604,589			—		—		604,589

Total cost of sales		787,564			—		—		787,564

Gross profit		153,979			—		—		153,979
Operating expenses:
Operating, general and administrative expenses		111,270			—		—		111,270
Depreciation and amortization		14,386			—		—		14,386

Total operating expenses		125,656			—		—		125,656

Income from operations		28,323			—		—		28,323

Other income (expense):
Interest expense		(8,986	)		—		—		(8,986	)
Miscellaneous		422			—		—		422

Total other expense		(8,564	)		—		—		(8,564	)

Income before income taxes		19,759			—		—		19,759
Income tax expense		(7,607	)		—		—		(7,607	)

Net Income	$	12,152		$	—	$	—	$	12,152

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Statement of Operations

Three Months Ended December 25, 2003

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries		Eliminations		Total
Revenues:
Merchandise	$	270,149		$		$		$	270,149
Gasoline		474,292			—		—		474,292

Total revenues		744,441			—		—		744,441

Cost of sales:
Merchandise		170,975			—		—		170,975
Gasoline		433,356			—		—		433,356

Total cost of sales		604,331			—		—		604,331

Gross profit		140,110			—		—		140,110
Operating expenses:
Operating, general and administrative expenses		105,126			—		—		105,126
Depreciation and amortization		14,075			—		—		14,075

Total operating expenses		119,201			—		—		119,201

Income from operations		20,909			—		—		20,909

Other income (expense):
Interest expense		(13,141	)		—		—		(13,141	)
Miscellaneous		261			—		—		261

Total other expense		(12,880	)		—		—		(12,880	)

Income before income taxes		8,029			—		—		8,029
Income tax expense		(3,092	)		—		—		(3,092	)

Net Income	$	4,937		$		$		$	4,937

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Statement of Cash Flows

Three Months Ended December 30, 2004

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries		Eliminations		Total
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,152		$	—	$	—	$	12,152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,386			—		—		14,386
Provision for deferred income taxes		3,231			—		—		3,231
Fair market value change in non-qualifying derivatives		(486	)		—		—		(486	)
Amortization of deferred loan costs		258			—		—		258
Other		(73	)		—		—		(73	)
Changes in operating assets and liabilities:
Receivables		2,034			—		—		2,034
Inventories		583			—		—		583
Prepaid expenses		518			—		—		518
Other noncurrent assets		(294	)		—		—		(294	)
Accounts payable		(18,782	)		—		—		(18,782	)
Other current liabilities and accrued expenses		42			—		—		42
Other noncurrent liabilities		2,572			—		—		2,572

Net cash provided by operating activities		16,141			—		—		16,141

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property held for sale		(147	)		—		—		(147	)
Additions to property and equipment		(15,065	)		—		—		(15,065	)
Proceeds from sale of land, building and equipment		4,567			—		—		4,567
Acquisitions of related businesses, net of cash acquired		(1,431	)		—		—		(1,431	)

Net cash used in investing activities		(12,076	)		—		—		(12,076	)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments under capital leases		(307	)		—		—		(307	)
Principal repayments of long-term debt		(7	)		—		—		(7	)
Proceeds from exercise of stock options		310			—		—		310

Net cash used in financing activities		(4	)		—		—		(4	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		4,061			—		—		4,061
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		108,048			—		—		108,048

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	112,109		$	—	$	—	$	112,109

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

THE PANTRY, INC. AND SUBSIDIARIES

Supplemental Combining Statement of Cash Flows

Three Months Ended December 25, 2003

(Dollars in thousands)


	The Pantry (Issuer)			Guarantor Subsidiaries		Eliminations		Total
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,937		$	—	$	—	$	4,937
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,075			—		—		14,075
Provision for deferred income taxes		3,092			—		—		3,092
Fair market value change in non-qualifying derivatives		(755	)		—		—		(755	)
Amortization of deferred loan costs		853			—		—		853
Amortization of long-term debt discount		288			—		—		288
Other		505			—		—		505
Changes in operating assets and liabilities (net of effects of acquisitions):
Receivables		(555	)		—		—		(555	)
Inventories		(820	)		—		—		(820	)
Prepaid expenses		780			—		—		780
Other noncurrent assets		(58	)		—		—		(58	)
Accounts payable		(4,047	)		—		—		(4,047	)
Other current liabilities and accrued expenses		(13,938	)		—		—		(13,938	)
Other noncurrent liabilities		(3,155	)		—		—		(3,155	)

Net cash provided by operating activities		1,202			—		—		1,202

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property held for sale		(513	)		—		—		(513	)
Additions to property and equipment		(9,336	)		—		—		(9,336	)
Proceeds from sale of land, building and equipment		97,721			—		—		97,721
Acquisitions of related businesses, net of cash acquired		(184,849	)		—		—		(184,849	)

Net cash used in investing activities		(96,977	)		—		—		(96,977	)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments under capital leases		(337	)		—		—		(337	)
Principal repayments of long-term debt		(2,517	)		—		—		(2,517	)
Proceeds from issuance of long-term borrowings		80,000			—		—		80,000
Proceeds from exercise of stock options, net of repurchases		205							205
Repayments of shareholder loans		104			—		—		104
Other financing costs		(2,581	)		—		—		(2,581	)

Net cash provided by financing activities		74,874			—		—		74,874

NET DECREASE IN CASH AND CASH EQUIVALENTS		(20,901	)		—		—		(20,901	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		72,901			—		—		72,901

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	52,000		$	—	$	—	$	52,000

Item 2.

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

The following 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 Consolidated Financial Statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our company is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

This report, including without limitation, statements under our discussion and analysis of our financial condition and results of operations, contains statements that we believe are “forward-looking statements” under the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by 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, anticipated capital expenditures, costs and burdens of environmental remediation, capital expenditures, anticipated gasoline suppliers and percentages of our requirements to be supplied by particular companies, anticipated store banners and percentages of our stores that we believe will operate under particular banners, expected cost savings and benefits and anticipated synergies from the Golden Gallon^® acquisition, anticipated costs of re-branding our stores, anticipated sharing of costs of conversion with our gasoline suppliers, and expectations regarding re-modeling, re-branding, 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;

•

Changes in economic conditions generally and in the markets we serve;

•

Unfavorable weather conditions;

•

Political conditions in crude oil producing regions, including South America, Russia and the Middle East;

•

Volatility in crude oil and wholesale petroleum costs;

•

Wholesale cost increases of tobacco products;

•

Consumer behavior, travel and tourism trends;

•

Changes in state and federal environmental and other regulations;

•

Dependence on one principal supplier for merchandise and two principal suppliers for gasoline;

•

Financial leverage and debt covenants;

•

Changes in the credit ratings assigned to our debt securities, credit facilities and trade credit;

•

Inability to identify, acquire and integrate new stores;

•

The interests of our largest stockholder;

•

Dependence on senior management;

•

Acts of war and terrorism; and

•

Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to “Risk Factors” below. 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 February 2, 2005. 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 in the future.

Executive Overview

We are the leading independently operated convenience store chain in the southeastern United States and the third largest independently operated convenience store chain in the country based on store count with 1,353 stores in ten states as of December 30, 2004. Our stores offer a broad selection of merchandise, gasoline and 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 by generating profitable growth through merchandising initiatives, sophisticated management of our gasoline business, upgrading our stores, leveraging our geographic economies of scale, benefiting from the favorable demographics of our markets and continuing to selectively pursue opportunistic acquisitions.

Our results of operations for the first fiscal quarter of 2005 included results from all 138 stores acquired in the Golden Gallon^® acquisition for the full 13-week period, whereas our results of operations for the first fiscal quarter of 2004 included results from such stores in only 10 of the 13 total weeks during the period. Since these stores were not owned throughout the comparable period of 2004, they are not included in comparable store calculations for the first fiscal quarter of 2005.

We had favorable results for our first quarter of fiscal 2005 with net income of $12.2 million compared to $4.9 million in the first quarter of fiscal 2004. During the quarter, our comparable store merchandise revenue increased 5.2%, our largest gain in 10 quarters, while comparable store gasoline gallons increased 3.4%. We believe this performance was driven by several factors, including the following:

Our re-imaging and re-branding initiative – During the first quarter of fiscal 2005, we completed the brand conversion or image upgrades at an additional 159 stores, bringing the total as of December 30, 2004 to 734 locations. Almost all of these stores have also been converted to Kangaroo Express^SM branding for their merchandise operations. We believe this combined initiative allows us to leverage the cost of a complete facelift to most of our facilities, provides us with increased brand identity, and helps us in our efforts to optimize our gasoline gallon growth and gross profit dollars.

Our merchandise programs – During the first quarter of fiscal 2005 we continued to upgrade and fine tune our merchandise mix to maximize sales and profitability and upgraded our food service offerings across our store base. Our merchandise enhancements are ongoing as we plan to introduce additional private label products in the second quarter of fiscal 2005 with the introduction of Celeste^® sports drink and Celeste Stars^™ candy. Our quick service restaurant revenue increased 9.6% in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, and our Bean Street Coffee Company^® program with upgraded coffee and cappuccino, is now available in approximately 600 of our stores. We also continue to develop relationships with national food service franchisors and plan to open our first Quizno’s Sub^® location in March 2005.

Favorable wholesale gasoline environment – During the first quarter of fiscal 2005, we benefited from declining wholesale crude costs. Wholesale crude costs peaked at $55 per barrel in late October 2004 and then declined to $41 per barrel in late December 2004. We believe this declining cost environment, coupled with our sophisticated gasoline pricing systems, allowed us to achieve a gasoline margin per gallon of 14.6 cents in the first quarter of fiscal 2005 compared to 12.6 cents in the first quarter of fiscal 2004.

Throughout the remainder of fiscal 2005, we plan to remain focused on maximizing the benefits of our merchandise and gasoline initiatives as well as upgrading our network of stores. We will continue to selectively review acquisition opportunities to reinforce our market position. Since 1996, we have successfully completed more than 40 acquisitions, growing our store base from 379 to 1,353 stores. We believe there are significant acquisition opportunities to strengthen our position in existing markets and expand into other markets. We believe our advantageous supply agreements and operating expertise make acquisitions an attractive way to grow our business.

Market and Industry Trends

During the first quarter of fiscal 2005, we experienced a volatile wholesale gasoline cost environment as domestic crude oil prices peaked at approximately $55 per barrel in October 2004 and hit a low of approximately $41 per barrel in December 2004. 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, and the timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience tighter gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs. Since 1995, our gasoline margin per gallon has remained relatively stable and averaged more than 12 cents per gallon on an annual basis.

Increases in wholesale cigarette costs during 2004, as well as national and local campaigns to discourage smoking in the United States, have had an adverse effect on unit demand for cigarettes domestically. We have attempted to pass along cost increases to our customers and have not generally experienced a deterioration in cigarette gross margin or in average cartons sold per store week.

Results of Operations

The following table presents, for the periods indicated, selected items in the consolidated statements of operations as a percentage of our total revenue:


	Three Months Ended
	December 30, 2004		December 25, 2003
Total revenue	100.0	%	100.0	%
Gasoline revenue	69.5	%	63.7	%
Merchandise revenue	30.5	%	36.3	%
Cost of sales	83.6	%	81.2	%

Gross profit	16.4	%	18.8	%
Gasoline gross profit	5.3	%	5.5	%
Merchandise gross profit	11.1	%	13.3	%
Operating, general and administrative expenses	11.8	%	14.1	%
Depreciation and amortization	1.6	%	1.9	%

Income from operations	3.0	%	2.8	%
Interest and miscellaneous expense	(0.9	)%	(1.7	)%

Income before income taxes	2.1	%	1.1	%
Income tax expense	(0.8	)%	(0.4	)%

Net income	1.3	%	0.7	%

The table below provides a summary of our selected financial data for our three months ended December 30, 2004 and December 25, 2003.


	Three Months Ended
	December 30, 2004			December 25, 2003
Merchandise margin		36.3	%		36.7	%
Gasoline gallons (millions)		340.6			325.6
Gasoline margin per gallon	$	0.1464		$	0.1257
Gasoline retail per gallon	$	1.92		$	1.46

Comparable store data:
Merchandise sales %		5.2	%		2.4	%
Gasoline gallons %		3.4	%		3.4	%

Number of stores:
End of period		1,353			1,385
Weighted-average store count		1,355			1,360

Three Months Ended December 30, 2004 Compared to the Three Months Ended December 25, 2003

Merchandise Revenue. Merchandise revenue for the first quarter of fiscal 2005 was $287.1 million compared to $270.1 million during the first quarter of fiscal 2004, an increase of $16.9 million, or 6.3%. The increase is primarily

attributable to a 5.2%, or $12.7 million, increase in comparable store merchandise revenue compared to the first quarter of fiscal 2004 and a $7.4 million increase in revenues from the stores acquired in the Golden Gallon^® acquisition. This increase was partially offset by lost revenue from closed stores of approximately $3.9 million.

Gasoline Revenue and Gallons. Gasoline revenue for the first quarter of fiscal 2005 was $654.5 million compared to $474.3 million during the first quarter of fiscal 2004, an increase of $180.2 million, or 38.0%. The increase in gasoline revenue is primarily attributable to an increase in comparable store gallons of 9.5 million, or 3.4%, an increase in gallons sold by stores acquired in the Golden Gallon^® acquisition of 10.8 million, and the 46 cent per gallon increase in the average gasoline retail price per gallon. The increase in the average gasoline retail price per gallon is a result of our passing along to customers the increases in wholesale fuel costs experienced in the first quarter of fiscal 2005. These increases were partially offset by lost revenue from closed stores of approximately $5.1 million.

In the first quarter of fiscal 2005, gasoline gallons sold were 340.6 million compared to 325.6 million during the first quarter of fiscal 2004, an increase of 15.1 million gallons, or 4.6%. The increase is primarily attributable to the gasoline gallon increase discussed above, partially offset by lost gallon volume from closed stores of approximately 3.6 million gallons.

Merchandise Gross Profit and Margin. Merchandise gross profit was $104.1 million for the first quarter of fiscal 2005 compared to $99.2 million for the first quarter of fiscal 2004, an increase of $4.9 million, or 5.0%. This increase is primarily attributable to the increased merchandise revenue discussed above, partially offset by a 40 basis point decline in merchandise margin to 36.3% for the first quarter of fiscal 2005 compared to 36.7% for the first quarter of fiscal 2004. This decline in gross margin was primarily the result of lower vendor supported cigarette promotions.

Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $49.9 million for the first quarter of fiscal 2005 compared to $40.9 million for the first quarter of fiscal 2004, an increase of $9.0 million, or 21.9%. The increase is primarily attributable to an increase in our gross profit per gallon to 14.6 cents for the first quarter of fiscal 2005 from 12.6 cents in the first quarter of fiscal 2004. During the first quarter of fiscal 2005, our gasoline gross profit per gallon benefited from declining wholesale crude cost. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees and costs totaled 3.4 cents per gallon and 2.4 cents per gallon for the three months ended December 30, 2004 and December 25, 2003, respectively. The increase in these fees and costs was primarily due to higher credit card fees as a result of a 32% increase in retail gasoline prices.

Operating, General and Administrative Expenses. Operating, general and administrative expenses for the first quarter of fiscal 2005 totaled $111.3 million compared to $105.1 million for the first quarter of fiscal 2004, an increase of $6.1 million, or 5.8%. This increase is primarily due to comparable store increases in labor and other variable expenses. As a percentage of total revenue, operating, general and administrative expenses were 11.8% in the first quarter of fiscal 2005, and adjusted for the impact of gasoline inflation were 11.8% in the first quarter of fiscal 2004.

Income from Operations. Income from operations totaled $28.3 million for the first quarter of fiscal 2005 compared to $20.9 million for the first quarter of fiscal 2004, an increase of $7.4 million, or 35.5%. The increase is primarily attributable to the increases in gasoline and merchandise gross profit discussed above, partially offset by the increase in operating, general and administrative expenses also discussed above.

EBITDA. EBITDA is defined by us as net income before interest expense, income taxes, and depreciation and amortization. EBITDA for the first quarter of fiscal 2005 totaled $43.1 million compared to EBITDA of $35.2 million during the first quarter of fiscal 2004, an increase of $7.9 million, or 22.4%. The increase is attributable to the increase in income from operations discussed above.

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

reflects the resources available for strategic opportunities including, among others, to invest in the business, make strategic acquisitions and to service debt. EBITDA as defined by us may not be comparable to similarly titled measures reported by other companies.

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


	Three Months Ended
	December 30, 2004			December 25, 2003
EBITDA	$	43,131		$	35,245
Interest expense		(8,986	)		(13,141	)
Adjustments to reconcile net income to net cash provided by operating activities (other than depreciation and amortization, and provision for deferred income taxes)		(301	)		891
Changes in operating assets and liabilities, net:
Assets		2,841			(653	)
Liabilities (excluding change in income tax payable)		(20,544	)		(21,140	)

Net cash provided by operating activities	$	16,141		$	1,202
Net cash used in investing activities	$	(12,076	)	$	(96,977	)
Net cash provided by (used in) financing activities	$	(4	)	$	74,874

Interest Expense. Interest expense is primarily comprised of interest on borrowings under our senior credit facility and senior subordinated notes. Interest expense for the first quarter of fiscal 2005 was $9.0 million compared to $13.1 million for the first quarter of fiscal 2004. The decrease of $4.2 million is primarily the result of the benefits of our refinancing which was completed in March, 2004, which reduced our effective borrowing rate by approximately 250 basis points. Additionally, on September 30, 2004, we reduced the effective LIBOR spread on our senior credit facility by an additional 50 basis points.

Net Income. Net income for the first quarter of fiscal 2005 was $12.2 million compared to net income of $4.9 million for the first quarter of fiscal 2004. The increase is primarily attributable to the reduced interest expense and increased income from operations discussed above.

Liquidity and Capital Resources

Cash Flows from Operations. Due to the nature of our business, substantially all sales are for cash and cash provided by operations is our primary source of liquidity. We rely primarily upon cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility, sale-leaseback transactions, and asset dispositions to finance our operations, pay interest and principal payments and fund capital expenditures. Cash provided by operating activities increased to $16.1 million for the first three months of fiscal 2005 compared to $1.2 million for the first three months of fiscal 2004. The increase in cash flow from operations is primarily attributable to our improved operating results as income from operations increased $7.4 million and cash paid for interest declined by $10.9 million, partially offset by other changes in working capital. Cash paid for interest declined as a result of the reduction of our effective borrowing rate subsequent to our debt refinancings in February and March 2004 and a change in the due date for our semiannual interest payment on our senior subordinated notes from October to February. We had $112.1 million of cash and cash equivalents on hand at December 30, 2004.

Capital Expenditures. Gross capital expenditures (excluding all acquisitions) for the first three months of fiscal 2005 were $15.2 million. Our capital expenditures are primarily expenditures for store re-imaging and improvements, store equipment, new store development, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. We finance substantially all capital expenditures and new store development through cash flow from operations, proceeds from sale-leaseback transactions and asset dispositions and vendor reimbursements.

In the first three months of fiscal 2005, we received approximately $6.3 million in proceeds, including asset dispositions ($3.7 million), vendor reimbursements ($1.7 million) and sale-leaseback transactions ($0.9 million). As a

result, our net capital expenditures, excluding all acquisitions, for the first three months of fiscal 2005 were $8.9 million. We anticipate that net capital expenditures for fiscal 2005 will be approximately $55.0 million.

Cash Flows from Financing Activities. For the first three months of fiscal 2005, net cash used in financing activities was $4 thousand. At December 30, 2004, our long-term debt consisted primarily of $317.0 million in loans under our senior credit facility and $250.0 million of our 7.75% senior subordinated notes.

Senior Credit Facility. On March 12, 2004, we entered into an Amended and Restated Credit Agreement, which consists of a $345.0 million term loan that matures in March, 2011 and a $70.0 million revolving credit facility, which expires in March, 2010. As of December 30, 2004, our outstanding term loan balance was $317.0 million.

Our $70.0 million revolving credit facility is available to fund working capital, finance general corporate purposes and support the issuance of standby letters of credit. Borrowings under the revolving credit facility are limited by our outstanding letters of credit of approximately $34.8 million. Furthermore, the revolving credit facility limits our total outstanding letters of credit to $50.0 million. As of December 30, 2004, we had no borrowings outstanding under the revolving credit facility, we had approximately $35.2 million in available borrowing capacity and $34.8 million of standby letters of credit were issued under the facility.

Senior Subordinated Notes. On February 19, 2004, we completed the sale of $250.0 million of 7.75% senior subordinated notes due February 19, 2014. Interest on the senior subordinated notes is due on February 19 and August 19 of each year.

Shareholders’ Equity. As of December 30, 2004, our shareholders’ equity totaled $167.1 million. The $15.0 million increase from September 30, 2004 is attributable to the net income for the period of $12.2 million and an increase in additional paid in capital as a result of option exercises, including tax benefits, of $2.4 million.

Long Term Liquidity. We believe that anticipated cash flows from operations and funds available from our existing revolving credit facility, and funds available under the forward sale agreement (see “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 9—Forward Sale of Equity”), together with cash on hand and vendor reimbursements, will provide sufficient funds to finance our operations and fund our contractual commitments at least for the next 12 months. As of December 30, 2004, we had $35.2 million available under our revolving credit facility. Additionally, if we elect to physically settle the forward sale agreement, we would receive aggregate proceeds of $32.8 million. As a normal part of our business, depending on market conditions, we from time to time consider opportunities to refinance our existing indebtedness, and although we may refinance all or part of our existing indebtedness in the future, there can be no assurances that we will do so. 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.

Recently Issued Accounting Standards

On December 16, 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This new standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires such transactions be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. This new standard is effective for awards that are granted, modified or settled in cash in interim and annual periods beginning after June 15, 2005. In addition, this new standard will apply to unvested options granted prior to the effective date. We will adopt this new standard effective for the fourth fiscal quarter of 2005, and have not yet determined what impact this standard will have on our financial position or results of operations.

Risk Factors

You should carefully consider the risks described below 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 of 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 industry is highly competitive and impacted by new entrants.

The industry and 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 other convenience store chains, gasoline stations, supermarkets, drugstores, discount stores, club stores and mass merchants. In recent years, several non-traditional retailers, such as supermarkets, club stores and mass merchants, have impacted the convenience store industry by entering the gasoline retail business. These non-traditional gasoline retailers have obtained a significant share of the motor fuels market and their market share is expected to grow. 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 consumers demand at competitive prices. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our stores. Major competitive factors include, among others, location, ease of access, gasoline brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety.

Volatility of wholesale petroleum costs could impact our operating results.

Over the past three fiscal years, our gasoline revenue averaged approximately 63.4% of total revenues and our gasoline gross profit averaged approximately 27.4% of total gross profit. Crude oil and domestic wholesale petroleum markets are marked by significant volatility. General political conditions, acts of war or terrorism, and instability in oil producing regions, particularly in the Middle East, Russia 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 could result in significant increases in the retail price of petroleum products and in lower gasoline gross margin per gallon. Increases in the retail price of petroleum products could impact consumer demand for gasoline. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. These factors could materially impact our gasoline gallon volume, gasoline gross profit and overall customer traffic, which in turn would impact our merchandise sales.

Wholesale cost increases of tobacco products could impact our operating results.

Sales of tobacco products have averaged approximately 10.7% of our total revenue over the past three fiscal years and our tobacco gross profit accounted for approximately 16.3% 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 unit demand for cigarettes domestically. 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. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic.

Changes in 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 truck traffic and trends in travel, tourism and weather. Changes in economic conditions generally or in the Southeast specifically could adversely impact consumer spending patterns and travel and tourism in our markets. Approximately 40% 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. If visitors to resort or tourist locations decline due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline.

Risks Related to Our Business

Unfavorable weather conditions or other trends or developments in the Southeast could adversely affect our business.

Substantially all of our stores are located in the southeast region of the United States. Although the Southeast 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 experienced in fiscal 2004. Inclement weather conditions as well as severe storms in the Southeast could damage our facilities or could have a significant impact on consumer behavior, travel and convenience store traffic patterns as well as our ability to operate our locations. 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 would also be impacted by regional occurrences in the Southeast 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 ability to grow 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, such as our acquisition of 138 convenience stores operating under the Golden Gallon^® banner on October 16, 2003. From April 1997 through December 2004, we acquired 1,305 convenience stores in 21 major and numerous smaller transactions. We expect to continue to selectively review acquisition opportunities as an element of our growth strategy.

Acquisitions involve risks that could cause our actual growth or operating results to differ adversely compared to 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.

•

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 systems, financial controls, information systems, management resources and human resources will need to grow to support significant growth.

Our substantial indebtedness and capital lease obligations could adversely affect our financial health.

We have a significant amount of indebtedness. As of December 30, 2004, we had consolidated debt, including capital lease obligations, of approximately $582.5 million. As of December 30, 2004, our availability under our senior credit facility for borrowing or issuing additional letters of credit was approximately $35.2 million, with availability to issue letters of credit up to $50.0 million.

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

Our substantial indebtedness could have important consequences to you. 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 and lease 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.

If we are unable to meet our debt and lease 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 indenture governing our senior subordinated notes and our senior credit facility, which includes a term loan and a revolving credit facility, contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those 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 and our subsidiaries are still 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. In addition, our senior credit facility, as amended, permits us to potentially borrow up to an additional $75.0 million for permitted acquisitions (assuming certain financial conditions are met at the time) beyond the $70.0 million we can borrow under our revolving credit facility. If we and our subsidiaries incur additional indebtedness, the related risks that we and they now face could intensify.

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 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.

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. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

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

Our senior credit facility and our indenture governing our senior subordinated notes require us to comply with certain covenants. In particular, our senior credit facility 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. In addition, our senior credit facility limits our ability to make capital expenditures. Further, our senior credit facility restricts our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends, or make investments. Other restrictive covenants require that we meet fixed charge coverage and leverage tests, and also maximum capital expenditure limits as defined in the senior credit facility agreement. A violation of any of these covenants could cause an event of default under the senior credit facility. If we default under that facility 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 senior credit facility or our indenture governing our senior subordinated notes likely would have a material adverse effect on us.

We are subject to state and federal environmental and other regulations.

Our business is 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 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 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, which could materially adversely affect our 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 locations or locations that we may acquire. 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 operating results and financial condition.

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. 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. While we are not aware of any alcoholic beverage manufacturers or wholesalers having a prohibited relationship with our company, an investment fund related to our largest stockholder recently acquired an interest in a wine wholesaler. Although we do not believe this relationship is prohibited by the laws of any state in which we operate, if a regulatory authority were to take a contrary view and revoke our retail alcohol license, it could have a material adverse effect on our business and results of operations. In addition, our ability to expand into certain states, should we desire to do so, may be adversely affected if the laws of any such state prohibit the type of relationship which exists among our largest stockholder, the investment fund affiliated with it, the wine wholesaler in which the fund invested, and us.

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

From time to time, regulations are proposed which, if adopted, could also have an adverse effect on our business, financial condition or results of operations.

We depend on one principal supplier for the majority of our merchandise.

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 until October 2008, but we may not be able to renew the contract upon expiration. A change of suppliers, a disruption in supply or a significant change in our relationship with our principal suppliers could have a material adverse effect on our business, cost of goods, financial condition and results of operations.

We depend on two principal suppliers for the majority of our gasoline.

During February of 2003, we signed new gasoline supply agreements with BP^® and Citgo^®. We expect that BP^® and Citgo^® will supply approximately 90% of our future gasoline purchases, after an approximately 27 to 33 month conversion process that began in March 2003. We have contracts with Citgo^® until 2008 and BP^® until 2009, 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 have a material adverse effect on our business, cost of goods, financial condition and results of operations.

We expect to generate approximately $10 to $12 million of annualized cost savings and other benefits from our gasoline supplier and brand consolidation initiatives. While we believe our estimates of these cost savings and benefits to be reasonable, they are estimates which are difficult to predict and are necessarily speculative in nature. In addition, we cannot assure you that unforeseen factors will not offset the estimated cost savings and other benefits from these initiatives. As a result, our actual cost savings and other anticipated benefits could differ or be delayed, compared to our estimates and to the other information contained or incorporated by reference in this report.

We may not achieve the full expected cost savings and other benefits of our acquisition of Golden Gallon^®.

We expect to achieve $8 to $10 million of cost savings and benefits within the 12 to 24 months following the acquisition of Golden Gallon^®. These cost savings and benefits include, among others, savings associated with the elimination of duplicate overhead and infrastructure, benefits received by Golden Gallon^® under our merchandise and gas supply agreements and the expansion of quick service restaurants in selected stores. While we believe our estimates of these cost savings and benefits to be reasonable, they are estimates, which are difficult to predict and are necessarily speculative in nature. There can be no assurance that we will be able to replicate the results that we achieved with our previously acquired stores with the Golden Gallon^® stores. In addition, we cannot assure you that unforeseen factors will not offset the estimated cost savings and other benefits from the acquisition. As a result, our actual cost savings and other anticipated benefits could differ or be delayed, compared to our estimates and to the other information contained or incorporated by reference in this report.

Because we depend on our senior management’s experience and knowledge of our industry, we would be adversely affected if senior management left The Pantry.

We are dependent on the continued efforts of our senior management team, including our President and Chief Executive Officer, Peter J. Sodini. Mr. Sodini’s employment contract terminates in September 2006. If, for any reason, our senior executives do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. We cannot assure you that we will be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees. We also rely on our ability to recruit store managers, regional managers and other store personnel. If we fail to continue to attract these individuals, our operating results may be adversely affected.

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 upon settlement of the forward sale agreement recently entered into by us, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of February 2, 2005, there are 20,322,242 shares of our common stock outstanding, of these shares, 17,130,389 shares are freely tradable (unless held by one of our affiliates) and 3,884,369 shares are held by affiliate investment funds of Freeman Spogli & Co, or Freeman Spogli. Pursuant to Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, during any three-month period our affiliates can resell up to the greater of (a) 1% of our aggregate outstanding common stock or (b) the average weekly trading volume for the four weeks prior to the sale. In addition, the Freeman Spogli investment funds have registration rights allowing them to require us to register the resale of their shares. 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 registration statements with the Securities and Exchange Commission that cover up to 5,100,000 shares issuable pursuant to the exercise of stock options granted and to be granted under our stock option plans. Shares registered on a registration statement may be sold freely at any time after issuance.

The interests of our largest stockholder may conflict with our interests and the interests of our other stockholders.

As of February 2, 2005, Freeman Spogli owns 3,884,369 shares of our common stock and its beneficial ownership of our common stock is approximately 19.1%. In addition, three of the nine members of our board of directors are representatives of, or have consulting arrangements with, Freeman Spogli. As a result of its stock ownership and board representation, Freeman Spogli is in a position to affect our corporate actions such as mergers or takeover attempts of us or may take action on its own in a manner that could conflict with our interests or the interests of our other stockholders. In the past, from time to time, we have considered strategic alternatives, including a sale of The Pantry, at

the request of Freeman Spogli and with the consent of our board of directors. Although we are not currently considering any strategic alternatives, we may do so in the future.

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. We may also, either mandatorily or at our option, issue shares upon settlement of the forward sale agreement recently entered into by us. We may elect to settle the forward sale by means of a physical stock, cash or net stock settlement. If we elect to physically settle the forward sale agreement in total, we would be required to issue 1,500,000 shares of our common stock. In no event are we required to deliver more than 1,500,000 shares under the forward sale agreement.

Raising funds by issuing securities will dilute 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:

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

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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 the company, 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 be expected to 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 “Risk Factors” beginning on page 26 and throughout “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.

Our charter includes provisions that may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.

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

Other provisions of our certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to acquire us or hinder a change in management even if doing so would be beneficial to our stockholders. For example, our certificate of incorporation makes us subject to the anti-takeover provisions of Section 203 of the General Corporation Law of the State of Delaware. In general, Section 203 prohibits publicly-held Delaware corporations to which it applies from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. This provision could discourage others from bidding for our shares and could, as a result, reduce the likelihood of an increase in our stock price that would otherwise occur if a bidder sought to buy our stock.

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

There have been no other significant changes in our exposure to market risk from the information provided in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on our Annual Report on Form 10K for the year ended September 30, 2004.

Item 4.

Controls and Procedures

As required by paragraph (b) of Rule 13a-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 conclude that, as of the end of the period covered by this report, our disclosure controls and procedures are effective, in that they provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the United States Securities and Exchange Commission’s rules and forms. From time to time, we make changes to our internal controls over financial reporting that are intended to enhance their 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. 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 our fiscal quarter ended December 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

THE PANTRY, INC.

PART II-OTHER INFORMATION.

Item 1.

Legal Proceedings

As reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004, there is pending in the Superior Court for Forsyth County, State of North Carolina a suit (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 vs. 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 have filed an Answer denying any wrongdoing or liability to plaintiffs in any regard. On August 17, 2004, we filed a Notice of Removal, removing the case to the United States District Court for the Middle District of North Carolina. The Plaintiffs have filed a motion to remand the case to the Superior Court for Forsyth County, which is presently pending before the federal district court. We believe our employment policies and procedures comply with applicable law and intend to vigorously defend this litigation. We are presently in the preliminary stages of this matter and cannot at this time predict the outcome or provide a reasonable estimate of the potential liability, if any, that might arise.

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, we believe that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition or prospects.

Item 6.

Exhibits


Exhibit Number		Description of Document
10.1		Purchase Agreement dated October 13, 2004 among the The Pantry, the persons listed in Schedule B-2 thereto, Merrill Lynch International and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., William Blair & Company, L.L.C., Jefferies & Company, Inc., and Morgan Keegan & Company, Inc., as Representatives of the several underwriters (incorporated herein by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K dated October 14, 2004).

10.2		Confirmation of Forward Stock Sale Transaction dated October 13, 2004 between The Pantry, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated herein by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K dated October 14, 2004).

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification 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 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.]

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/ DANIEL J. KELLY
		Daniel J. Kelly Vice President, Chief Financial Officer and Assistant Secretary (Authorized Officer and Principal Financial Officer)

Date: February 8, 2005

EXHIBIT INDEX


Exhibit Number		Description of Document

10.1		Purchase Agreement dated October 13, 2004 among the The Pantry, the persons listed in Schedule B-2 thereto, Merrill Lynch International and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., William Blair & Company, L.L.C., Jefferies & Company, Inc., and Morgan Keegan & Company, Inc., as Representatives of the several underwriters (incorporated herein by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K dated October 14, 2004).

10.2		Confirmation of Forward Stock Sale Transaction dated October 13, 2004 between The Pantry, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated herein by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K dated October 14, 2004).

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification 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 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.]

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