PANTRY INC, 10-K405, 1997-12-23

PANTRY INC
10-K405, 1997-12-23
CONVENIENCE STORES

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1997

COMMISSION FILE NUMBER 33-72574

THE PANTRY, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>

P.O. BOX 1410
1801 DOUGLAS DRIVE
SANFORD, NC
27331-1410
(Address of principal executive offices)

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

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SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE

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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

As of December 15, 1997, there were issued and outstanding 186,029 shares
of the registrant's Common Stock. The registrant's Common Stock is not traded in
a public market.

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THE PANTRY, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

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PAGE
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PART I
Item 1: Business................................................................................................... 1
Item 2: Properties................................................................................................. 7
Item 3: Legal Proceedings.......................................................................................... 7
Item 4: Submission of Matters to a Vote of Security Holders........................................................ 7

PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.................................. 8
Item 6: Selected Financial Data.................................................................................... 9
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 11
Item 8: Consolidated Financial Statements and Supplementary Data................................................... 20
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 52

PART III
Item 10: Directors and Executive Officers of the Registrant......................................................... 52
Item 11: Executive Compensation..................................................................................... 54
Item 12: Security Ownership of Certain Beneficial Owners and Management............................................. 56
Item 13: Certain Relationships and Related Transactions............................................................. 57

PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................ 58
Signatures............................................................................................................ 60
</TABLE>

<PAGE>
PART I

This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in such forward-looking statements and are subject to risks
including, but not limited to, those identified in the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on
December 19, 1997 and Form S-1 filed with the Securities and Exchange Commission
on February 11, 1994.

ITEM 1. BUSINESS

GENERAL

The Pantry, Inc. (the "Company" or "The Pantry"), a privately held company,
is a leading operator of convenience stores in the Southeast and the largest
operator of traditional convenience stores in North and South Carolina. As of
September 25, 1997, the Company operated 390 convenience stores under the name
"The Pantry" primarily in smaller towns and suburban areas throughout North and
South Carolina, western Kentucky, Tennessee and southern Indiana. The Company's
stores offer a broad selection of merchandise and services designed to appeal to
the convenience needs of its customers, including tobacco products, beer, soft
drinks, self-service fast food and beverages, publications, dairy products,
groceries, health and beauty aids, video games and money orders. In its Kentucky
and Indiana stores, the Company also sells lottery products. In addition,
self-service gasoline is sold at 364 Pantry stores, 314 of which sell gasoline
under brand names including Amoco, British Petroleum ("BP"), Exxon, Shell and
Texaco. Since fiscal 1994, merchandise sales (including commissions from
services) and gasoline sales have each averaged approximately 50% of total
revenues.

Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to effect the
1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged
into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets or
operations other than its investment in The Pantry.

On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP
III") and FS Equity Partners International, L.P., a Delaware limited partnership
("FSEP International," collectively with FSEP III, "the FS Group") acquired a
39.9% interest in the Company and Chase Manhattan Capital Corporation ("Chase")
acquired a 12.0% interest in the Company through a series of transactions which
included the purchase of common stock from certain shareholders and the purchase
of newly issued common and preferred stock. The FS Group and Chase subsequently
acquired the remaining interests of approximately 37.0% and 11.1%, respectively,
on August 19, 1996 through the purchase of common and preferred stock from
certain shareholders. On December 30, 1996, the Company issued and the FS Group
purchased additional preferred stock. As of September 25, 1997, the Company was
owned 83.6% and 16.4% by the FS Group and Chase, respectively.

SUBSEQUENT EVENTS

On October 23, 1997, The Pantry acquired all of the outstanding common
stock of Lil' Champ Food Stores, Inc. ("Lil' Champ") from Docks U.S.A., Inc. for
$132.7 million in cash and repaid $10.7 million in outstanding indebtedness of
Lil' Champ (the "Lil' Champ Acquisition"). The combination of The Pantry and
Lil' Champ has created one of the largest independent convenience stores in the
United States (based on number of stores) with 878 stores primarily located in
the Southeast. The acquisition was funded by a combination of the proceeds of
the sale of Senior Subordinated Notes (as defined herein), cash on hand and an
equity investment of $32.4 million by the FS Group, Chase and a member of
management.

In connection with the issuance and sale of the Senior Subordinated Notes,
the Company and the Initial Purchasers entered into a registration rights
agreement pursuant to which the Company agreed to use its best efforts to cause
a registration statement to become effective within 150 days of the date of
issuance of the Senior Subordinated Notes

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with respect to an offer to exchange its 10 1/4% Senior Subordinated Notes due
October 15, 2007 which would be registered under the Securities Act of 1933, as
amended (the "Exchange Notes"), for the outstanding Senior Subordinated Notes.
The form and terms of the Exchange Notes are the same as the form and terms of
the Senior Subordinated Notes in all material respects. On December 19, 1997,
the Company filed a registration statement on Form S-4 to register the Exchange
Notes. In addition, the Company entered into a New Credit Facility (as defined
herein) which consists of a $45.0 million revolving credit facility and a $30.0
million acquisition facility. The New Credit Facility replaces the credit
facility and is available for (i) working capital financing and general
corporate purposes of the Company, (ii) issuing commercial and standby letters
of credit and (iii) acquisitions.

For further discussion of the ownership change, the Company's acquisition
of Lil' Champ and related transactions see "Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters," "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Item 8. Consolidated Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- Note 15. Subsequent
Events" and "Item 12. Security Ownership of Certain Beneficial Owners and
Management." For a further discussion of the business and results of operations
of Lil' Champ see the Company's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on December 19, 1997.

OPERATIONS

For a discussion of fiscal year 1997 operating results see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and for a discussion of certain business and operating results for
Lil' Champ see the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on December 19, 1997.

In February 1996, The Pantry recruited a new management team led by Peter
J. Sodini. Specific strategies implemented by The Pantry's new senior management
team included improving merchandising and supplier relationships, increasing
expense controls, repositioning and rebranding gasoline operations, implementing
a "tuck in" acquisition program, upgrading store facilities and increasing
management depth to facilitate the Company's growth plans.

MERCHANDISE SALES. For the year ended September 25, 1997, The Pantry's
merchandise sales (including commissions from services) were 48.5% of total
revenues. The Pantry's gross margins on merchandise sales after purchase
rebates, mark-downs, inventory spoilage and inventory shrink increased to 34.4%
for this period from 33.0% in the same period of the prior year. Merchandise
sales per store for the year ended September 25, 1997 increased by 9.6% from the
comparable period for the previous year.

The following table highlights certain information with respect to The
Pantry merchandise sales for the last two fiscal years:

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FISCAL YEAR
ENDED
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1996 1997
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Merchandise sales (in millions).................................................... $188.1 $202.4
Average merchandise sales per store (in thousands)................................. $479.8 $525.8
Merchandise gross margins (after purchase rebates, mark-downs, inventory spoilage
and inventory shrink)............................................................ 33.0% 34.4%
Average number of stores........................................................... 392 385
</TABLE>

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The Pantry's stores generally carry approximately 4,200 stock keeping units
and offer a full line of convenience products, including tobacco products, beer,
soft drinks, self-service fast foods and beverages (including fountain beverages
and coffee), candy, newspapers and magazines, snack foods, dairy products,
canned goods and groceries, health and beauty aids and other immediate
consumables. The Pantry has also developed an in-house food service program
featuring breakfast biscuits, fried chicken, deli and other hot food offerings.
The following table describes The Pantry's merchandise sales mix for the last
two fiscal years:

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FISCAL YEAR
ENDED
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1996 1997
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Tobacco products..................................................................... 25.2% 27.8%
Beer................................................................................. 14.5 15.1
Soft drinks.......................................................................... 13.8 13.7
Self-service fast foods and beverages................................................ 7.4 6.9
General Merchandise.................................................................. 6.0 6.4
Candy................................................................................ 5.0 4.8
Newspapers and magazines............................................................. 5.7 5.0
Snack foods.......................................................................... 4.5 4.6
Dairy products....................................................................... 2.8 2.8
Bread/Cake........................................................................... 2.3 2.1
Grocery and Other.................................................................... 12.8 10.8
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Total................................................................................ 100% 100%
---- ----
---- ----
</TABLE>

The Pantry purchases over 50% of its general merchandise (including most
tobacco products, candy, paper products, pet food and food service items) and
groceries from a single wholesale grocer, McLane Company, Inc. ("McLane"). In
addition, McLane supplies health and beauty aids, cigars, smokeless tobacco,
toys, and seasonal items to all stores. However, there are adequate alternative
sources available to purchase this merchandise should a change from the current
wholesaler become necessary or desirable. The Pantry purchases the balance of
its merchandise from a variety of other distributors.

GASOLINE OPERATIONS. For the year ended September 25, 1997, The Pantry's
revenues from sales of gasoline were 51.5% of total revenues, and the number of
gallons sold on a company-wide and per store basis each increased by 11.7% in
fiscal 1997 when compared to fiscal 1996. Since the beginning of fiscal 1997,
both the total gallons sold and the average volume per store increased due to
(i) more competitive pricing; (ii) the acquisition or opening of 36 stores,
which had in the aggregate higher than average gasoline volumes and (iii) the
upgrading of many locations with automated gasoline dispensing or payment
equipment such as the installation of multi-product dispensers ("MPDs") or
credit card readers ("CRINDs"). MPDs and CRINDs increase gasoline volume and the
percentage of premium grade gasoline sold, which typically has higher margins
than lower grade gasoline. To upgrade a location with CRINDs, The Pantry can
either retro-fit existing MPDs with CRINDs or install new MPDs with CRINDs. The
Pantry installed a total of 64 CRINDs at existing stores in fiscal 1996 and
fiscal 1997. In addition, each of the new stores opened since fiscal 1994 sells
gasoline and has MPDs and CRINDs.

The following table highlights certain information regarding The Pantry's
gasoline operations for the last two fiscal years:

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FISCAL YEAR
ENDED
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1996 1997
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Operating data:
Gasoline sales ($ in millions)................................................... $192.7 $220.2
Gasoline gallons sold (in millions).............................................. 160.7 179.4
Average gallons sold per store (in thousands).................................... 448.8 501.2
Average retail price per gallon.................................................. $ 1.20 $ 1.23
Average gross profit per gallon (in cents)....................................... $0.156 $0.128

Locations selling gasoline....................................................... 352 364
Number of company-owned branded locations........................................ 285 300
Number of company-owned unbranded locations...................................... 6 35
Number of third-party locations (branded & unbranded)............................ 61 29
</TABLE>

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The decrease in gross profit per gallon in fiscal 1997 was due to The
Pantry's more competitive gasoline pricing strategy, general gasoline market
conditions and increased price competition from other gasoline marketers in
certain markets.

Of the 364 Pantry stores that sold gasoline as of September 25, 1997, 314
(including third-party locations selling under these brands) or 86% were branded
under the Amoco, Ashland, British Petroleum (BP), Chevron, Citgo, Exxon, Shell
or Texaco brand names. The Pantry has continually sought to increase the number
of its branded locations by opening new branded locations and by converting
unbranded locations to branded locations.

As of September 25, 1997, The Pantry owned the gasoline operations at 335
locations and at 29 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, The Pantry owns the
gasoline storage tanks, pumping equipment and canopies, and retains 100% of the
gross profit received from gasoline sales. In fiscal 1997, these locations
accounted for approximately 90% of total gallons sold. Under third-party
arrangements, an independent gasoline distributor owns and maintains the
gasoline storage tanks and pumping equipment at the site, prices the gasoline
and pays The Pantry approximately 50% of the gross profit. In fiscal 1997,
third-party locations accounted for approximately 10% of the total gallons sold
by The Pantry. In the fourth quarter of fiscal 1997, The Pantry purchased 23
third-party locations and anticipates further reduction of third-party
arrangements in the future. The Pantry has been phasing out third-party
arrangements because its owned operations are more profitable.

The Pantry purchases its gasoline from major oil companies and independent
refiners. There are 18 gasoline terminals in The Pantry's operating areas,
enabling The Pantry to choose from more than one distribution point for most of
its stores. The Pantry's inventories of gasoline (both branded and unbranded)
turn approximately every seven days.

STORE LOCATIONS. As of September 25, 1997, The Pantry operated 390
convenience stores located primarily in smaller towns and suburban areas in five
states. Substantially all of The Pantry's stores are free standing structures
averaging approximately 2,400 square feet and provide ample customer parking.
The following table shows the geographic distribution by state of The Pantry's
stores at September 25, 1997:

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<CAPTION>
NUMBER OF PERCENT OF
STATE STORES TOTAL STORES
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<S> <C> <C>
North Carolina............................................................... 155 40.0%
South Carolina............................................................... 134 35.0
Kentucky..................................................................... 56 14.0
Tennessee.................................................................... 24 6.0
Indiana...................................................................... 21 5.0
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Total................................................................... 390 100.0%
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</TABLE>

Since fiscal 1994, The Pantry has opened a limited number of new stores and
closed or sold a substantial number of underperforming stores. Beginning in
1997, The Pantry turned its attention from closing underperforming stores, which
management believes has largely been accomplished, to commencing its "tuck in"
acquisition program. The following table summarizes these activities:

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FISCAL YEAR ENDED
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1994 1995 1996 1997
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<S> <C> <C> <C> <C>
Number of stores at beginning of period................................... 415 406 403 379
Opened or acquired........................................................ 1 10 4 36
Closed or sold............................................................ (10 ) (13 ) (28 ) (25 )
---- ---- ---- ----
Number of stores at end of period......................................... 406 403 379 390
---- ---- ---- ----
---- ---- ---- ----
</TABLE>

The Pantry continually evaluates the performance of each of its stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an underperforming
store, The Pantry considers such factors as store location, gasoline volumes and
margins, merchandise sales and gross profits, lease term, rental rate and other
obligations and the store's contribution to corporate overhead. Although closing
or selling underperforming stores reduces revenues, The Pantry's operating
results typically improve since these stores were generally unprofitable.

SITE SELECTION. Most of The Pantry's stores are located in smaller towns
and suburban areas of medium size cities in its market areas. In opening new
stores in recent years, The Pantry has focused on selecting store sites on
highly traveled thoroughfares in coastal resort areas and suburban markets of
larger cities or near exit and entrance ramps of highly traveled highways that
provide convenient access to the store location. The Pantry's cost of opening
new stores in these high-traffic

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areas has been higher than it has incurred in connection with its prior store
development activities. In selecting sites for new stores, The Pantry uses an
evaluation process designed to enhance its return on investment by focusing on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. The Pantry also
reviews the location of competitive stores and customer activity at those
stores. In fiscal 1996 and fiscal 1997, The Pantry opened an aggregate of five
stores at an average cost of approximately $1.5 million per store.

"TUCK IN" ACQUISITIONS. In five separate transactions since April 1, 1997,
The Pantry has acquired 35 operating convenience stores in North Carolina and
South Carolina with aggregate annual revenues of $45.0 million. Nineteen stores
are located in or around Charleston and Hilton Head, South Carolina, increasing
The Pantry's total number of stores in this area to over 50 and solidifying The
Pantry as the largest operator in this growing market. The remaining 16 acquired
stores are located in eastern North Carolina in markets where The Pantry was
previously under-represented or operated only a few locations. These "tuck in"
acquisitions strengthen The Pantry's market share and name recognition.

UPGRADING OF STORE FACILITIES AND EQUIPMENT. During fiscal 1996 and fiscal
1997, The Pantry upgraded the facilities and equipment at many of its store
locations, including gasoline equipment upgrades, at a cost of approximately
$6.1 million and $9.2 million, respectively. The Pantry's store renovation
program is an integral part of The Pantry's operating strategy. The Pantry
continually evaluates the performance of individual stores and periodically
upgrades store facilities and equipment based on sales volumes, the lease term
for leased locations and management's assessment of the potential return on
investment. Typical upgrades for many stores include improvements to interior
fixtures and equipment for self-service food and beverages, interior lighting,
in-store restrooms for customers and exterior lighting and signage. The
upgrading program for The Pantry's gasoline operations includes the addition of
automated gasoline dispensing and payment systems, such as MPDs and CRINDs, to
enhance customer convenience and service and the installation of UST(as defined
herein) leak detection and other equipment in accordance with applicable EPA
environmental regulations. For further discussion of EPA and other environmental
regulations see "Item 1. Government Regulation and Environmental Matters" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

STORE OPERATIONS. Each store is staffed with a manager, an assistant
manager and sales associates, and most stores are open 24 hours, seven days a
week. The Pantry's field operations organization is comprised of a network of
regional and district managers who, with The Pantry's corporate management,
evaluate store operations on a weekly basis. The Pantry also monitors store
conditions, maintenance and customer service through a regular store visitation
program by district and regional management.

COMPETITION

The convenience store and retail gasoline industries are highly
competitive. The performance of individual stores can be affected by changes in
traffic patterns and the type, number and location of competing stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, factors such as inflation,
increased labor and benefit costs and the availability of experienced management
and hourly employees may adversely affect the convenience store industry in
general and the Company's stores in particular.

The Company competes with numerous other convenience store chains,
franchisees of other convenience stores chains, local owner-operated convenience
stores and grocery stores, and convenience stores owned and operated by major
oil companies. In addition, the Company's stores offering self-service gasoline
compete with gasoline service stations, including service stations operated by
major oil companies. The Company's stores also compete to some extent with
supermarket chains, drug stores, fast food operations and other similar retail
outlets. In some of the Company's markets, certain competitors, particularly
major oil companies, have been in existence longer and have substantially
greater financial, marketing and other resources than the Company.

TRADE NAMES, SERVICE MARKS AND TRADEMARKS

The Company has registered or applied for registration of a variety of
trade names, service marks and trademarks for use in its business, including The
Pantry(tm), Worth(tm), Bean Street Coffee Company(tm), Bean Street Market(tm),
Big Chill(Register mark), Lil' Chill(Register mark) and others, which the
Company regards as having significant value and as being important factors in
the marketing of the Company and its convenience stores. In connection with the
Lil' Champ Acquisition, the Company acquired the Lil' Champ Food Stores(tm) and
Knock Out(tm) trademarks.

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GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

Many aspects of the Company's operations are subject to regulation under
federal, state and local laws. The most significant of such laws are summarized
below.

STORAGE AND SALE OF GASOLINE. The Company is subject to various federal,
state and local environmental laws. Federal, state, and local regulatory
agencies have adopted regulations governing USTs that require the Company to
make certain expenditures for compliance. 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 USTs.

In addition to the technical standards, the Company is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with the applicable
requirements, The Pantry maintains a letter of credit in the aggregate amount of
$2.1 million issued by a commercial bank in favor of state environmental
agencies in the states of North Carolina, South Carolina, Tennessee, Kentucky
and Indiana and relies upon the reimbursement provisions of applicable state
trust funds.

Regulations enacted by the EPA in 1988 established requirements for (i)
installing UST systems; (ii) upgrading UST systems; (iii) taking corrective
action in response to releases; (iv) closing UST systems; (v) keeping
appropriate records; and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. These regulations permit states to
develop, administer and enforce their own regulatory programs, incorporating
requirements which are at least as stringent as the federal standards. The
following is an overview of the requirements imposed by these regulations:

LEAK DETECTION. The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply with
leak detection requirements by December 22, 1993. The Pantry utilizes two
approved leak detection methods for all Pantry-owned UST systems. Daily and
monthly inventory reconciliations are completed at the store level and at the
corporate support center. The daily and monthly reconciliation data is also
analyzed using statistical inventory reconciliation which compares the reported
volume of gasoline purchased and sold with the capacity of each UST system and
highlights discrepancies. The Pantry also performs annual leak detection tests.
The Company believes it is in full or substantial compliance with the leak
detection requirements applicable to its USTs.

CORROSION PROTECTION. The 1988 EPA regulations require that all UST systems
have corrosion protection by December 22, 1998. The Company began installing
non-corrosive fiberglass tanks and piping in 1982. The Company has a
comprehensive plan to upgrade all of its steel tank UST systems to 1998
standards by December 22, 1998 through internal tank lining and cathodic
protection. Approximately 81% of Pantry stores' have been protected from
corrosion either through the installation of fiberglass tanks or upgrading steel
USTs with interior fiberglass lining or the installation of cathodic protection.

OVERFILL/SPILL PREVENTION. The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. The Company will
systematically install these devices on all Company-owned UST systems to meet
the regulations. Spill/overfill equipment has been installed for approximately
81% of Pantry store USTs.

The Company anticipates that it will meet the 1998 deadline for installing
corrosion protection and spill/overfill equipment for all of its USTs and has
budgeted approximately $1.0 million of capital expenditures for these purposes
in fiscal 1998.

STATE TRUST FUNDS. All states in which the Company will operate UST systems
have established trust funds for the sharing, recovering and reimbursing of
certain cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for the
cleanup of environmental damages caused by the operation of UST systems, are
funded by a UST registration fee and a tax on the wholesale purchase of motor
fuels within each state. The Company has paid UST registration fees and gasoline
taxes to each state where it operates to participate in these trust programs and
the Company has filed claims and received reimbursement in North Carolina, South
Carolina and Tennessee. The coverage afforded by each state fund varies but
generally provides from $150,000 to $1.0 million per site for the cleanup of
environmental contamination, and most provide coverage for third-party
liabilities. Costs for which the Company does not receive reimbursement include
but are not limited to: (i) the per-site deductible; (ii) costs incurred in
connection with releases occurring or reported to trust funds prior to their
inception; (iii) removal and disposal of UST systems; and (iv) costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require the Company to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its UST
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Company estimates that its expenditures for
remediation over the next five years will be approximately $4.5 million. In
addition, a substantial amount will be expended for remediation on behalf of the
Company by state trust funds established in

<PAGE>
the Company's operating areas or other responsible third parties (including
insurers). To the extent such third parties do not pay for remediation as
anticipated by the Company, the Company will be obligated to make such payments,
which could materially adversely affect the Company's financial condition and
results of operations. Reimbursements from state trust funds will be dependent
upon the continued maintenance and solvency of the various funds.

SALE OF ALCOHOLIC BEVERAGES. In certain areas where stores are located,
state or local laws limit the hours of operation for the sale of certain
products, the most significant of which limit or govern the sale of alcoholic
beverages. State and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for and renewals of permits and licenses
relating to the sale of alcoholic beverages and to impose various restrictions
and sanctions. In many states, retailers of alcoholic beverages have been held
responsible for damages caused by intoxicated individuals who purchased
alcoholic beverages from them. While the potential exposure to the Company for
damage claims as a seller of alcoholic beverages is substantial, the Company has
adopted procedures intended to minimize such exposure. In addition, the Company
maintains general liability insurance which may mitigate the cost of any
liability.

STORE OPERATIONS. The Company's stores are subject to regulation by federal
agencies and to licensing and regulations by state and local health, sanitation,
safety, fire and other departments relating to the development and operation of
convenience stores, including regulations relating to zoning and building
requirements and the preparation and sale of food. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent the
development of a new store in a particular area.

The Company's operations are also subject to federal and state laws
governing such matters as wage rates, overtime, working conditions and
citizenship requirements. At the federal level, there are proposals under
consideration from time to time to increase minimum wage rates and to introduce
a system of mandated health insurance which could affect the Company's results
of operations.

EMPLOYEES

As of September 25, 1997, The Pantry employed approximately 2,161 full-time
and 312 part-time employees. Fewer part-time employees are employed during the
winter months than during the peak spring and summer seasons. Of The Pantry's
employees, approximately 2,370 are employed in The Pantry's stores and 103 are
corporate and field management personnel. None of The Pantry's employees are
represented by unions. The Company considers its employee relations to be good.

ITEM 2. PROPERTIES

The Pantry owns the real property at 126 Pantry stores and leases the real
property at 264 Pantry stores. Management believes that none of these leases is
individually material to the Company. Most of the Company's leases are net
leases requiring the Company to pay taxes, insurance and maintenance costs.
Although the Company's leases expire at various times, approximately 80% of such
leases have terms, including renewal options, extending beyond the end of fiscal
2002. Of the Company's leases that expire prior to the end of fiscal 2002,
management anticipates that it will be able to negotiate acceptable extensions
of the leases for those locations that it intends to continue operating. When
appropriate, the Company has chosen to sell and then lease-back properties.
Factors leading to this decision include alternative desires for use of cash,
beneficial taxation, and minimization of the risks associated with owning the
property (especially changes in valuation due to population shifts,
urbanization, and/or proximity to high volume streets) and the economic terms of
such sale-leaseback transactions.

The Pantry owns its corporate headquarters, a three-story, 51,000 square
foot office building in Sanford, North Carolina. Management believes that The
Pantry's headquarters are adequate for its present and foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are routine in nature and incidental to
the operation of its business. While the outcome of such actions cannot be
predicted with certainty, the Company believes that the ultimate resolution of
these matters will not have a material adverse impact on the business, financial
condition or prospects of the Company. The Company makes routine applications to
state trust funds for the sharing, recovering and reimbursement of certain
cleanup costs and liabilities incurred as a result of releases from UST systems.
See "Item 1. Business -- Government Regulation and Environmental Matters."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

<TABLE>
<S> <C>
(a) Market Information -- There is no market for the Common Stock.

(b) Principal Shareholders -- As of December 15, 1997, there were five
holders of record of the Company's Common Stock.

(c) Dividends -- During the last two fiscal years, the Company has not
paid any cash dividends on the Common Stock. The Company intends to
retain earnings to support operations and to finance expansion and
does not intend to pay cash dividends on the Common Stock for the
foreseeable future. The payment of cash dividends in the future will
depend upon such factors as the Company's earnings, operations,
capital requirements, financial condition and other factors deemed
relevant by the Board of Directors. The payment of any cash dividends
is prohibited under restrictions contained in (i) the indentures
relating to each of the Company's 12% Series B Senior Notes Due 2000
and the Company's 10 1/4% Senior Subordinated Notes due October 15,
2007, (ii) the Certificate of Designation of Preferences of the
Series B Preferred Stock of the Company and (iii) is further
restricted pursuant to the Company's senior credit facility.

(d) On December 30, 1996, the Company sold 17,500 shares of Series B
Preferred Stock to the FS Group for an aggregate purchase price of
$17.5 million which sale of securities was not registered under the
Securities Act of 1933, as amended. The Series B Preferred Stock has
a liquidation preference of $1,000 per share and accrues cumulative
dividends at the rate of 13% per annum. Each share of Series B
Preferred Stock is entitled to ten votes on all matters on which
holders of the Common Stock vote.

Subsequent to fiscal year end 1997, the Company entered into certain
transactions related to the acquisition of Lil' Champ Food Stores,
Inc., part of which included the sale of securities by the Company
which were not registered under the Securities Act of 1933, as
amended. On October 23, 1997, the Company sold 72,000 shares of
Common Stock to the FS Group, Chase and Peter J. Sodini for an
aggregate purchase price of $32.4 million. No underwriter was engaged
in connection with the foregoing sales of equity securities.

On October 23, 1997, the Company issued and sold 10 1/4% Senior
Subordinated Notes due October 15, 2007 in the aggregate principal
amount of $200.0 million (the "Senior Subordinated Notes"). The
Senior Subordinated Notes were sold to CIBC Wood Gundy Securities
Corp. and First Union Capital Markets Corp. (the "Initial
Purchasers") in a private placement. The Initial Purchasers
subsequently resold the Senior Subordinated Notes to (i) "qualified
institutional buyers" (in reliance on Rule 144A under the Securities
Act of 1933, as amended) and (ii) non-U.S. persons outside the United
States (in reliance on Regulation S under the Securities Act of 1933,
as amended). In connection with the issuance and sale of the Senior
Subordinated Notes, the Company and the Initial Purchasers entered
into the Exchange Offer Registration Rights Agreement pursuant to
which the Company agreed to use its best efforts to cause a
registration statement to become effective within 150 days of the
date of issuance of the Senior Subordinated Notes with respect to an
offer to exchange its 10 1/4% Senior Subordinated Notes due October
15, 2007 which would be registered under the Securities Act of 1933,
as amended (the "Exchange Notes"), for the outstanding Senior
Subordinated Notes. The form and terms of the Exchange Notes are the
same as the form and terms of the Senior Subordinated Notes in all
material respects. On December 19, 1997, the Company filed a
registration statement on Form S-4 to register the Exchange Notes.

Sales of the securities to the above parties were made in reliance
upon Section 4(2) of the Securities Act of 1933, as amended, as
transactions not involving any public offering. Each of the above
parties who purchased securities from the Company were accredited
investors as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended.

</TABLE>

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth historical consolidated financial data and
store operating data for the periods indicated. The selected historical annual
consolidated financial data is derived from, and is qualified in its entirety
by, the Company's annual Consolidated Financial Statements, including those
contained elsewhere in this report. The information should be read in
conjunction with "Item 1. Business," "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and related notes thereto included elsewhere in this
report. (Dollars are in millions except per store and per gallon data.)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26,
1993 1994 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Merchandise Sales.............................. $ 191.9 $ 189.2 $ 187.4 $ 188.1
Gasoline sales................................. 175.7 175.1 187.2 192.7
Commissions.................................... 4.4 4.5 4.5 4.0
------------- ------------- ------------- -------------
Total Revenues................................... 372.0 368.8 379.1 384.8
Cost of Sales:
Merchandise.................................... 126.4 123.1 122.0 126.0
Gasoline....................................... 154.6 153.5 161.2 167.6
------------- ------------- ------------- -------------
Gross Profit..................................... 91.0 92.2 95.9 91.2
Store operating expense.......................... 54.1 53.2 56.1 57.8
General and administrative expenses.............. 16.9 17.9 18.2 17.1
Restructuring charges............................ -- -- -- 2.2(d)
Impairment of long-lived assets.................. -- -- -- 3.0(d)
Depreciation and amortization.................... 9.8 10.2 11.5 9.2
------------- ------------- ------------- -------------
Income from operations........................... 10.2 10.9 10.1 1.9
Interest expense................................. (7.4) (12.0) (13.2) (12.0)
Due diligence costs.............................. -- -- (1.2)(b) --
Income (loss) before income taxes and other
items.......................................... 3.3 (0.2) (3.6) (10.8)
Income tax benefit (expense)..................... (0.7) 0.4 0.4 2.7
Cumulative effect of change in accounting
principal...................................... -- -- (1.0)(c) --
Extraordinary loss............................... -- (0.7)(a) -- --
Net income(loss)................................. $ 2.6 $ (0.5) $ (4.2) $ (8.1)
OTHER FINANCIAL DATA:
EBITDA (e)....................................... $ 20.6 $ 22.0 $ 22.3 $ 15.6
Net cash provided by (used in):
Operating activities........................... $ 14.4 $ (4.1) $ 11.9 $ 5.4
Investing activities........................... (9.7) (10.6) (15.3) (7.2)
Financing activities........................... (2.3) 26.0 (1.0) (3.9)
Capital expenditures (f)......................... 11.2 9.9 16.7 7.1
Ratio of earnings to fixed charges (g)........... 1.3x -- -- --
OPERATING DATA:
Merchandise gross margin......................... 34.2% 34.9% 34.9% 33.0%
Gasoline gallons sold (in millions).............. 156.9 158.5 160.3 160.7
Average retail gasoline price per gallon......... $ 1.12 $ 1.10 $ 1.17 $ 1.20
Average gasoline gross profit per gallon
(in cents)..................................... 13.43c 13.63c 16.21c 15.64c
STORE OPERATING DATA:
Number of stores (end of period)................. 415 406 403 379
Average sales per store (in thousands)
Merchandise sales.............................. $ 451.5 $ 460.4 $ 462.7 $ 479.8
Gasoline gallons............................... 398.1 423.7 440.3 448.8
Comparable store sales growth (h):
Merchandise.................................... 4.3% 3.3% (0.8)% 2.8%
Gasoline gallons............................... 5.7% 5.2% 0.2% (4.3)%
BALANCE SHEET DATA (END OF PERIOD):
Working Capital.................................. $ 0.5 $ 6.7 $ (0.8) $ (6.5)
Total assets..................................... 105.7 124.0 127.7 120.9
Total debt (i)................................... 63.5 102.4 101.8 101.4
Shareholders' Deficit............................ (11.6) (12.1) (16.3) (27.5)

<CAPTION>
SEPTEMBER 25,
1997
-------------
<S> <C>
(52 WEEKS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Merchandise Sales.............................. $ 202.4
Gasoline sales................................. 220.2
Commissions.................................... 4.8
-------------
Total Revenues................................... 427.4
Cost of Sales:
Merchandise.................................... 132.8
Gasoline....................................... 197.3
-------------
Gross Profit..................................... 97.3
Store operating expense.......................... 60.2
General and administrative expenses.............. 16.8
Restructuring charges............................ --
Impairment of long-lived assets.................. --
Depreciation and amortization.................... 9.5
-------------
Income from operations........................... 10.8
Interest expense................................. (13.0)
Due diligence costs.............................. --
Income (loss) before income taxes and other
items.......................................... (1.0)
Income tax benefit (expense)..................... --
Cumulative effect of change in accounting
principal...................................... --
Extraordinary loss............................... --
Net income(loss)................................. $ (1.0)
OTHER FINANCIAL DATA:
EBITDA (e)....................................... $ 21.6
Net cash provided by (used in):
Operating activities........................... $ 7.3
Investing activities........................... (25.1)
Financing activities........................... 15.8
Capital expenditures (f)......................... 14.7
Ratio of earnings to fixed charges (g)........... --
OPERATING DATA:
Merchandise gross margin......................... 34.4%
Gasoline gallons sold (in millions).............. 179.4
Average retail gasoline price per gallon......... $ 1.23
Average gasoline gross profit per gallon
(in cents)..................................... 12.76c
STORE OPERATING DATA:
Number of stores (end of period)................. 390
Average sales per store (in thousands)
Merchandise sales.............................. $ 525.8
Gasoline gallons............................... 501.2
Comparable store sales growth (h):
Merchandise.................................... 8.5%
Gasoline gallons............................... 7.2%
BALANCE SHEET DATA (END OF PERIOD):
Working Capital.................................. $ (8.2)
Total assets..................................... 142.8
Total debt (i)................................... 101.3
Shareholders' Deficit............................ (17.9)
</TABLE>

<PAGE>
NOTES TO SELECTED FINANCIAL DATA

(a) In fiscal 1994, The Pantry recorded an extraordinary loss of $671,000,
net of a taxes, related to the early extinguishment of debt.

(b) During fiscal 1995, The Pantry expended $1,181,000 in due diligence
costs related to the evaluation of the potential purchase of a regional
convenience store company. The proposed transaction was abandoned and, as a
result, the costs incurred in connection with the prospective acquisition were
charged to earnings in fiscal 1995.

(c) In fiscal 1995, The Pantry adopted, SFAS No. 112, "Employer's
Accounting for Post Retirement Benefits," and as a result, recorded a cumulative
effect for a change in accounting principle of $(960,000), net of taxes.

(d) During 1996, The Pantry recorded restructuring charges of $2,184,000
pursuant to a formal plan to restructure its corporate offices. The costs
include: $1,484,000 for employee severance; $350,000 for employee moving costs;
and $350,000 for charges associated with the investment by FS&Co. and CMC.
Substantially all of these amounts were expended during fiscal 1996. Also during
fiscal 1996, The Pantry early-adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Pursuant to SFAS No. 121, The Pantry evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Based on this evaluation, The Pantry determined that certain
long-lived assets were impaired and recorded an impairment loss based on the
difference between the carrying value and the fair value of property and
equipment and goodwill of $415,000 and $2,619,000 respectively.

(e) "EBITDA" represents income (loss) before depreciation and amortization,
interest expense, income tax expense (benefit), restructuring charges,
impairment of long-lived assets, extraordinary item, cumulative effect of change
in accounting principle and the write-off of due diligence costs incurred in
connection with a potential purchase of a regional convenience store company
that was abandoned in 1995. EBITDA is not a measure of performance under
generally accepted accounting principles, and should not be considered as a
substitute for net income, cash flows from operating activities and other income
or cash flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity. The Pantry
has included information concerning EBITDA as one measure of an issuer's
historical ability to service debt. EBITDA should not be considered as an
alternative to, or more meaningful than, income from operations or cash flow as
an indication of The Pantry's operating performance.

(f) For the fiscal year ended 1993, capital expenditures included the
purchase by The Pantry of its corporate office building in April 1993 for $3.9
million and the purchase by The Pantry of four previously leased stores in
August 1993 for $3.2 million. Purchases of assets to be held for sale are
excluded from these amounts.

(g) For purposes of determining the ratio of earnings to fixed charges: (i)
earnings consist of income (loss) before income tax benefit (expense) and
extraordinary item plus fixed charges and (ii) fixed charges consist of interest
expense, amortization of deferred financing costs, preferred stock dividends and
the portion of rental expense representative of interest (deemed to be one-third
of rental expense). The Pantry's earnings were inadequate to cover fixed charges
by $0.2 million, $3.6 million, $10.8 million and $1.0 million for fiscal years
1994, 1995, 1996 and 1997, respectively.

(h) The stores included in calculating same store sales growth are stores
that were in operation for both fiscal years of the comparable period. The same
store sales results for fiscal 1993, which was a 53-week year, has been adjusted
to reflect a 52-week year.

(i) Total debt includes capital lease obligations.

<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's discussion and analysis should be read in conjunction with the
financial statements and notes thereto and the Company's Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on December 19,
1997.

INTRODUCTION

In fiscal year 1996, the FS Group and Chase acquired all of the outstanding
Common Stock of The Pantry. Beginning in the second quarter of fiscal 1996, the
Company strengthened its senior management team. Peter J. Sodini, an experienced
retail executive, was hired in February 1996 and was appointed President and
Chief Executive Officer in June 1996. Concurrently, several key executive
positions were filled including: Senior Vice President of Administration and
Gasoline Marketing, Senior Vice President of Operations and Vice President of
Marketing. In January 1997, a new Senior Vice President of Finance joined the
Company. In addition, several other new employees were hired to fill other key
positions. These individuals all have strong experience in retail operations.

The management team reorganized the Company's management structure and
reporting relationships to improve organizational effectiveness, reduce
operating costs and increase profitability. These cost saving measures and the
resulting improvement in operating results has enabled the Company to implement
a number of initiatives designed to enhance the performance of existing
locations and facilitate long-term growth. In fiscal 1997, specific strategies
implemented by The Pantry's new senior management team include: improving
merchandising and supplier relationships, increasing expense controls,
repositioning and rebranding gasoline operations, implementing a "tuck in"
acquisition program, upgrading store facilities and increasing management depth
to facilitate the Company's growth plans.

On December 30, 1996, the FS Group invested additional equity in The
Pantry, providing funds which were subsequently used to (i) acquire a total of
35 convenience stores located in North Carolina and South Carolina in five
separate transactions, (ii) purchase the gasoline operations and equipment at 23
existing Pantry stores from a third-party operator and (iii) upgrade existing
store facilities in several major markets. This marks a significant shift in
management's focus from enhancing financial performance by maintaining high
merchandise and gasoline margins relative to its primary competition to focusing
on existing operations and same store sales while supplementing internal growth
with a new "tuck in" acquisition program.

As a result of these activities, the fiscal performance of The Pantry
improved significantly in the year ended September 25, 1997 when compared to the
prior year. Despite a decrease in average store count in fiscal 1997 compared to
fiscal 1996, total revenues increased 11% and same store merchandise revenues
and gasoline gallon sales increased 8.5% and 7.2%, respectively. Despite the
lower average store count and decreasing gasoline margins, the Company's
operating income improved from $1.9 million in fiscal 1996 to $10.8 million in
fiscal 1997 and resulting EBITDA was $21.6 million in fiscal 1997 compared to an
EBITDA of $15.6 million in fiscal 1996.

Subsequent to fiscal year end 1997, on October 23, 1997, the Company
acquired all of the outstanding common stock of Lil' Champ from Docks U.S.A.,
Inc. and consummated certain other related transactions. Lil' Champ is a leading
operator of convenience stores in Florida and the largest convenience store
operator in northern Florida. Lil' Champ's 488 stores are located primarily in
northern Florida and Georgia, with 151 stores concentrated in the Jacksonville,
Florida area. Like The Pantry, Lil' Champ stores offer a broad selection of
affordable, high quality merchandise and services. Self-service gasoline is sold
at 434 Lil' Champ stores, 202 of which sell gasoline under brand names including
BP, Chevron, Fina, and Texaco. In addition, Lil' Champ has developed a food
service operation which includes 49 in-store quick service restaurants offering
national brands such as Taco Bell, A&W Root Beer, Long John Silver's and Pizza
Hut. Since fiscal 1994, Lil' Champ's merchandise sales (including commissions
from services) and gasoline sales have averaged approximately 46% and 54% of
total revenues, respectively.

The Lil' Champ Acquisition, the refinancing of existing Lil' Champ debt,
the purchase of $51.0 million of outstanding 12% Senior Notes and the fees and
expenses of the Lil' Champ Acquisition were financed with the proceeds from the
offering of $200.0 million principal amount of 10 1/4% Senior Subordinated Notes
due 2007, cash on hand and the proceeds from the purchase by existing
stockholders and management of the Company of an additional $32.4 million of the
Company's Common Stock. In addition, on October 23, 1997, The Pantry entered
into the New Credit Facility (as defined herein) consisting of a $45.0 million
revolving credit facility and a $30.0 million acquisition facility which is
available for (i) working capital financing and general corporate purposes of
the Company, (ii) issuing commercial and standby letters of credit and (iii)
acquisitions. For further discussion of the Lil' Champ Acquisition see "Item 1.
Business -- Ownership Change and

<PAGE>
Subsequent Events," "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters," "Item 8. Consolidated Financial Statements and
Supplementary Data -- Notes to Consolidated Financial Statements -- Note 15.
Subsequent Events" and "Liquidity and Capital Resources."

The Lil' Champ Acquisition is consistent with management's strategic goal
to continue to capitalize on and enhance the Company's position as a leading
convenience store retailer in the Southeast. Management believes acquiring the
largest convenience store operator in northern Florida, with its established
market position, extensive network of locations in Florida and Georgia, and
attractive customer image, will provide the Company with a significant
competitive advantage in generating operating efficiencies and pursuing "tuck
in" acquisitions. Management intends to continue utilizing operating strategies
that have been successfully employed at The Pantry. For a more detailed
discussion of Lil' Champ's operations and its impact on The Pantry, refer to
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on December 19, 1997.

RESULTS OF OPERATIONS

The Pantry's operations for fiscal years 1995, 1996 and 1997 each contained
52 weeks. The following table sets forth certain of The Pantry's results as a
percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Merchandise sales.......................................................... 49.4% 48.9% 47.4%
Gasoline sales............................................................. 49.4 50.1 51.5
Commissions................................................................ 1.2 1.0 1.1
----- ----- -----
Total revenues.......................................................... 100.0 100.0 100.0
Gross profit............................................................... 25.3 23.7 22.8
Operating, general and administrative expenses............................... 20.1 20.8 18.0
Depreciation and amortization................................................ 2.5 2.4 2.2
Income from operations....................................................... 2.7 0.5 2.5
</TABLE>

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUES. Total revenues increased 11.1% in fiscal 1997 from fiscal 1996.
This increase is attributable to significant revenue increases in merchandise,
gasoline and commissions despite a reduction in average store count compared to
the prior year.

Merchandise revenues increased 7.6% in fiscal 1997 from fiscal 1996 due to
increased volume in major categories, a general increase in the price of
cigarettes and growth in new merchandising programs and categories. Same store
merchandise sales increased 8.5% over fiscal 1996 and average merchandise sales
per store increased as the Company closed or sold 25 lower volume stores while
acquiring or opening 36 new stores.

Gasoline sales increased 14.2% in fiscal 1997 from fiscal 1996 primarily
due to the Company's competitive pricing strategy, the closing of
underperforming stores and acquiring or opening 36 new stores with average
gasoline volume greater than the Company's overall average. Additionally, the
average retail price per gallon in fiscal 1997 was $1.23 versus an average
retail price per gallon in fiscal 1996 of $1.20. This average retail price is
indicative of the Company's more competitive gasoline pricing strategy, general
gasoline market conditions and increased price competition from other gasoline
marketers in certain markets. The Company's same store gasoline volume increase
of 7.2% in fiscal 1997 can be attributed to more competitive pricing and a
relatively mild 1996-1997 winter season compared to the prior year.

Commission revenues increased 20.3% in fiscal 1997 from fiscal 1996 due to
the expansion and enhancement of existing commission related programs and the
introduction of new programs in selected markets.

GROSS PROFIT. Gross profit for fiscal 1997 increased 6.6% or $6.1 million
from fiscal 1996 as a result of the increases in merchandise, gasoline and
commission revenues discussed above and an increase in merchandise gross profit
margin from 33.0% in fiscal 1996 to 34.4% in fiscal 1997. Overall gross profit
margin declined from 23.7% in fiscal 1996 to 22.8% in fiscal 1997 due to the
decrease in gasoline margin per gallon from $0.156 in 1996 to $0.128 in 1997.
The decrease in gasoline gross profit margin is attributable to a shift in the
Company's pricing practices and less favorable conditions in the wholesale and
retail gasoline markets.

<PAGE>
STORE OPERATING EXPENSES. Store operating expenses increased in fiscal 1997
over fiscal 1996 in terms of total dollars, but decreased as a percentage of
merchandise sales. Store expenses increased due to increases in store personnel
related expenses of $1.0 million, real estate lease expense of $0.9 million and
equipment rental expense of $0.5 million. The increase in store personnel
related expenses is attributable to increased customer traffic and transaction
volume. The increase in real estate leases is attributable to the consummation
of several sale/leaseback transactions. The increase in equipment rental expense
is primarily attributable to the Company roll-out of a frozen drink program to a
majority of stores.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for fiscal 1997 decreased 1.9% from fiscal 1996. The decrease in both total
dollar terms and as a percentage of merchandise sales is attributable to
improved fiscal management of major expense categories.

INCOME FROM OPERATIONS. Income from operations increased from $1.9 million
in fiscal 1996 to $10.8 million in fiscal 1997. The increase is attributable to
the items discussed above, as well as nonrecurring restructuring charges and
charges for impairment of long-lived assets of $2.2 million and $3.0 million,
respectively, in fiscal 1996 which were not present in fiscal 1997.

INTEREST EXPENSE. Interest expense for fiscal 1997 increased $1 million
from 1996 due to (i) a temporary interest rate increase on the Company's Senior
Notes from 12% to 12 1/2% (see "Liquidity and Capital Resources -- Long-Term
Debt" and "Item 8. Consolidated Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- Note 4. Long-Term Debt")
and (ii) a nonrecurring decrease of $0.6 million related to an interest accrual
that was reversed in fiscal 1996 and did not occur in fiscal 1997. The accrual
had been recorded related to a potential income tax issue that was resolved in
The Pantry's favor in fiscal 1996.

INCOME TAX BENEFIT (EXPENSE). The Company's income tax benefit decreased in
fiscal 1997 due to a $9.8 million decrease in pre-tax loss compared to the prior
year and the computation of the Company's tax liability for fiscal 1997.
Additionally, no income tax benefit was recorded in fiscal 1997, which was
principally attributable to an increase in the valuation allowance for state
deferred income tax assets of approximately $325,000.

FISCAL 1996 COMPARED TO FISCAL 1995

REVENUES. Total revenues increased 1.5% in fiscal 1996 from fiscal 1995 and
the increase was attributable to significant improvements in same store
merchandise sales in the third and fourth quarters.

Merchandise sales increased 0.4% in fiscal 1996 from fiscal 1995 due to an
increase in same store sales which was partially offset by a reduction in the
total number of stores. The increase in same store sales came from increased
sales of cigarettes and improved and new merchandising programs. At the
beginning of fiscal 1996, in response to same store merchandise decreases in
fiscal 1995, The Pantry lowered retail prices in several major categories and
late in fiscal 1996 began to introduce new merchandising and marketing programs
in selected markets. These programs included the addition of off-shelf
merchandise displays to its stores, new products and the modification of certain
of its ongoing merchandise programs such as its novelty and fresh food programs.
During the year, especially in the third and fourth quarters, The Pantry
experienced significant increases in the volume sold of cigarettes and other
major categories over fiscal 1995. Together, along with other changes including
the change in wholesale grocer supplier to McLane Company, Inc., same store
sales increased 2.8% over fiscal 1995. Average merchandise sales per store
increased as The Pantry shut down or sold 28 lower volume stores while opening
up four new stores.

Gasoline sales increased 3.0% in fiscal 1996 from fiscal 1995 due to an
increase in retail price per gallon and a slight increase in total volume sold
which offset a decrease in same store sales volume. The average retail price per
gallon in fiscal 1996 was $1.20 versus an average retail price per gallon in
fiscal 1995 of $1.17. The Pantry raised its retail prices in response to higher
costs charged by its suppliers. Total gasoline volume increased, despite the
same store volume decrease of 4.3%, as The Pantry benefited from a full year's
operation at the ten high volume stores opened in fiscal 1995 and from the
operations at the four high volume stores opened in fiscal 1996.

GROSS PROFIT. Gross profit for fiscal 1996 decreased from fiscal 1995 as
The Pantry experienced lower margins on its merchandise sales and a lower gross
profit per gallon on its gasoline volume. These lower margins offset the
increase in sales.

<PAGE>
The gross margin on merchandise sales was 33.0% in fiscal 1996 compared to 34.9%
in fiscal 1995. The primary reason for the decrease in merchandise gross margin
was the decrease in cigarette margins resulting from The Pantry lowering its
retail prices to become more competitive. The Pantry includes purchase rebates,
mark-downs, inventory spoilage and shrink in its merchandise gross profit
computation. Gasoline gross profit decreased 3.3% in fiscal 1996 from fiscal
1995 as the gross profit per gallon in fiscal 1996 decreased to $0.1564 per
gallon from $0.1621 per gallon in fiscal 1995.

STORE OPERATING EXPENSES. Store operating expenses increased in fiscal 1996
over fiscal 1995 both in terms of total dollars and as a percentage of
merchandise sales. Store expenses increased due to an increase in rent expense
associated with the new stores opened in fiscal 1995 and fiscal 1996 and
non-recurring advertising expenses related to the first quarter introduction of
Bean Street Coffee Company(tm) coffee. In addition, fiscal 1995 store operating
expense benefited from the one time positive effect totaling $750,000 which
resulted from the qualification of a contaminated site for reimbursement under a
state tank fund. Fiscal 1996 store expenses were 30.8% of merchandise sales, up
from 30.0% of merchandise sales in fiscal 1995.

GENERAL AND ADMINISTRATIVE EXPENSES. Fiscal 1996 general and administrative
expenses, exclusive of restructuring charges, were down 5.7%. The decrease in
general and administrative expenses was due to lower workers' compensation
expense resulting from improved management control in this area, lower incentive
compensation expense (bonuses) due to lower fiscal 1996 operating results and
lower recruiting expenses, which were partially offset by an increase in medical
benefit costs and management development costs resulting from The Pantry's
November 1995 convention.

RESTRUCTURING CHARGES. During fiscal 1996, after disappointing operating
results, management changes were made, including the hiring of new senior
managers. The Pantry also released certain personnel, including certain former
officers. The Pantry accrued for all liabilities due under employment contracts
due to these former officers and paid severance compensation to others in
accordance with a pre-existing severance plan. Additionally, concurrent with the
investment by the FS Group and Chase in The Pantry, The Pantry bought out the
contract of its former CEO for $0.8 million. Additional expenses included in
this line item consist of moving expenses to move new employees and additional
charges associated with the investment by the FS Group and Chase in The Pantry.

INCOME FROM OPERATIONS. Income from operations decreased as a result of the
items discussed above as well as the fiscal 1996 $3.0 million write-down of
certain long-lived assets in accordance with The Pantry's adoption of Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."

INTEREST EXPENSE. Interest expense for fiscal 1996 decreased as a $0.6
million interest accrual that was recorded in fiscal 1995 was reversed in fiscal
1996. The accrual had been recorded related to a potential income tax issue that
was resolved in The Pantry's favor in fiscal 1996.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE. During the fourth quarter of fiscal
1995, The Pantry adopted, retroactive to September 30, 1994, Statement of
Financial Accounting Standards No. 112 (SFAS No. 112), "Employer's Accounting
for Postemployment Benefits" and restated its first quarter results to reflect
the adoption. SFAS No. 112 requires that employers expense the costs of
postemployment benefits over the service lives of employees if certain
conditions are met. The cumulative effect of adopting SFAS No. 112 as of
September 30, 1994 was an after-tax charge of $1.0 million.

ACQUISITION DUE DILIGENCE COSTS. During fiscal 1995, The Pantry spent
approximately $1.2 million in due diligence costs related to the evaluation of
the potential purchase of a regional convenience store company. The proposed
transaction was abandoned and as a result, the costs incurred in connection with
the prospective acquisition were charged to earnings in fiscal 1995.

INCOME TAX BENEFIT. Income tax benefit increased in fiscal 1996 as a result
of the increase in The Pantry's pre-tax loss. The increase in benefit was
partially offset by the non-deductible write-off of goodwill associated with the
adoption of SFAS No. 121.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
represents income (loss) before depreciation and amortization, interest expense,
income tax (expense) benefit, restructuring charges, impairment of long-lived
assets, extraordinary item and write-off of acquisition due diligence costs.
Exclusive of the impact of SFAS No. 121, EBITDA decreased for fiscal 1996 due to
a combination of the decrease in gross profit discussed above and the increases
in store operating and general and administrative expenses previously discussed.
The resulting EBITDA/interest expense coverage for fiscal 1996 was 1.3 to 1.

<PAGE>
SEASONALITY

The Pantry has historically generated approximately 54% of its revenues
during its third (April, May, June) and fourth (July, August and September)
fiscal quarters due to increased consumer spending activity in its market areas
resulting from the warmer weather and increased consumer travel in the spring
and summer, particularly in coastal resort locations. This seasonality effect is
partially offset by Thanksgiving and Christmas holiday travel and shopping
periods, as well as stores in non-seasonal locations, such as urban and military
base markets, and contra-seasonal locations, such as college towns where
revenues are typically higher in the winter months. Additionally, The Pantry
experiences seasonal fluctuations in its merchandise gross margin and gross
profit per gallon. Due to this seasonality and the high portion of its costs
that are fixed, The Pantry typically generates approximately 65% of its
operating income and EBITDA during its third and fourth quarters. The Pantry
seeks to mitigate seasonal fluctuations in cash flows by reducing inventory and
labor hours and using its line of credit to provide cash and working capital in
its first and second fiscal quarters.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FROM OPERATIONS. Due to the nature of The Pantry's business,
substantially all sales are for cash, and cash provided by operations is The
Pantry's primary source of liquidity. Capital expenditures, acquisitions and
interest expense represent the primary uses of funds. The Pantry has relied
primarily upon cash provided by operating activities, supplemented as necessary
from time to time by borrowings under its working capital line, sale-leaseback
transactions, asset dispositions and equity investments, to finance its
operations, pay interest and fund capital expenditures and acquisitions. Cash
provided by operating activities in fiscal 1995, fiscal 1996 and fiscal 1997
totaled $11.9 million, $5.4 million and $7.3 million, respectively. The Pantry
also had $3.3 million of cash and cash equivalents on hand at September 25,
1997.

LINE AND LETTER OF CREDIT FACILITY. As of September 25, 1997, to supplement
cash on hand and cash provided by operating activities, the Company had a $25
million credit facility consisting of a $10 million working capital line of
credit and a $15 million line of credit for issuance of standby letters of
credit to vendors, insurance companies, federal and state regulatory agencies
for self insurance of workers compensation and for other letter of credit needs.
As of September 25, 1997, there were no borrowings outstanding under the working
capital line of credit and approximately $8.6 million of letters of credit were
issued under the standby letter of credit facility.

On October 23, 1997, the Company entered into a new bank credit facility
(the "New Credit Facility") consisting of a $45.0 million revolving credit
facility and a $30.0 million acquisition facility. The New Credit Facility
replaces the credit facility discussed above and is available for (i) working
capital financing and general corporate purposes of the Company, (ii) issuing
commercial and standby letters of credit and (iii) acquisitions. The New Credit
Facility is secured by substantially all of the assets of the Company and the
Guarantors (as defined herein) and is guaranteed by the Guarantors. The New
Credit Facility contains covenants restricting the ability of the Company and
any of its subsidiaries to, among others: (i) incur additional debt; (ii)
declare dividends or redeem or repurchase capital stock; (iii) prepay, redeem or
purchase debt; (iv) incur liens; (v) make loans and investments; (vi) make
capital expenditures; (vii) engage in mergers, acquisitions and asset sales; and
(viii) engage in transactions with affiliates. The Company is also required to
comply with financial covenants with respect to (a) a minimum coverage ratio,
(b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d)
a maximum capital expenditure allowance.

Principal and interest payments under the New Credit Facility and interest
payments on the Senior Subordinated Notes, the Exchange Notes and the Senior
Notes represent significant liquidity requirements for the Company. The interest
rate under the New Credit Facility is based, at the option of the Company, upon
either a eurodollar rate plus 2.50% per annum or a base rate plus 1.00% per
annum. If the Company achieves a leverage ratio (as defined) of less than 4:0 to
1, after the first anniversary of the closing, the margins will be reduced by 25
basis points each. A commitment fee of 0.50% per annum will be charged on the
unused portion of the New Credit Facility.

CAPITAL EXPENDITURES. Capital expenditures in fiscal 1995, fiscal 1996 and
fiscal 1997 were $16.7 million, $7.1 million and $14.7 million, respectively.
Capital expenditures are primarily expenditures for existing store improvements,
store equipment, new store development and expenditures to comply with
regulatory statutes, including those related to the environment. The Pantry
finances substantially all new store development and acquisition activity
through cash flow from operations and a sale-leaseback program or similar lease
activity and asset dispositions. The Pantry spent $12.3 million related to its
"tuck-in" acquisition program for the year ended September 25, 1997. Estimated
capital expenditures for the Company are approximately $30.0 for 1998.

<PAGE>
SITE DEVELOPMENT AND "IN HOUSE" STORE EXPANSION. In fiscal 1997, the
Company opened one new store. The Company intends to open approximately five
stores in fiscal 1998. The Company intends to finance the real estate through
either a sale/leaseback or build-to-suit agreement. The equipment purchases are
expected to be financed through operating cash flow.

"TUCK IN" ACQUISITIONS. In five separate transactions since April 1, 1997,
The Pantry has acquired 35 operating convenience stores in North Carolina and
South Carolina with aggregate annual revenues of $45.0 million. These "tuck in"
acquisitions strengthen The Pantry's market share and name recognition. The
acquisitions were funded with a combination of operating cash flow and proceeds
from the sale of Series B Preferred Stock on December 30, 1996.

The Company will consider for acquisition selected groups of convenience
stores from other operators. Based on the Company's experience, the cost of
acquiring stores and converting them to conform to the Company's operating
practices varies depending on whether the Company acquires one or a group of
stores from a single operator, the location of each store, whether it is leased
or owned and the costs associated with branding the location (if it was
previously unbranded), installing gasoline and store equipment upgrades and
upgrading the store interior.

The Company does not currently have any agreements, arrangements or
understandings for the acquisition of any particular stores, and there can be no
assurance that any such acquisitions will be consummated. "Tuck in" acquisitions
are expected to be financed through a combination of operating cash flow and
funding under the Company's New Credit Facility (see "Line and Letter of Credit
Facility").

For further discussion of store expansion and acquisitions see
"Introduction," "Acquisitions," "Item 1. Business -- General," "Item 1.
Business -- Operations -- 'Tuck In' Acquisitions" and "Item 8. Consolidated
Notes to Financial Statements and Supplementary Data -- Notes to Consolidated
Financial Statements -- Note 15. Subsequent Events."

LONG-TERM DEBT. At September 25, 1997 and September 26, 1996, The Company's
long-term debt consists primarily of $100 million of the Company's 12% Senior
Notes due 2000 (the "Senior Notes"). The interest payments on the Senior Notes
are due May 15 and November 15.

In connection with the transactions involving the FS Group and Chase (see
"Items 1. Business -- Ownership Change and Subsequent Events" and "Item 12.
Security Ownership of Certain Beneficial Owners and Management"), a Supplemental
Indenture was executed on December 4, 1995 (the "Supplemental Indenture") by the
Company and IBJ Schroder Bank & Trust Company, as Trustee under the Indenture.
The Supplemental Indenture makes certain changes in the Indenture, including the
following: (i) permitted borrowings under Section 4.10(b) of the Indenture are
increased from $25.0 million to $35.0 million and the purposes for which such
borrowings can be used is expanded; (ii) borrowings permitted under Section
4.10(d) of the Indenture are increased from $5.0 million to $10.0 million, the
purposes for which such borrowings can be used are expanded to include capital
expenditures generally (rather than furniture, fixtures and equipment) and the
restriction that all such borrowings be non-recourse to the Company is removed;
(iii) the time period in which proceeds of Asset Sales (as defined in the
Indenture) can be reinvested is increased and the amount of Asset Sales for
which no prepayment of the Notes is required under Section 4.13 of the Indenture
is increased to facilitate potential sale/leaseback transactions; (iv) the
limitations on Restricted Payments (as defined in the Indenture) are modified to
allow the Company to make loans to employees to purchase Company stock and to
allow the Company to repurchase stock from employees when their employment with
the Company terminates; (v) the Company is required to own a minimum of 112
convenience store properties at all times; and (vi) the interest rate payable on
the Senior Notes will increase if a specified Consolidated Fixed Charge Coverage
Ratio (as defined in the Indenture) is not maintained until the required
Consolidated Fixed Charge Coverage Ratio is achieved.

On December 30, 1996, the Supplemental Indenture became operative with the
sale of an additional $17.5 million in Qualified Capital Stock (as defined in
the Indenture) to the FS Group (see "Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters"). The Company's Consolidated Fixed
Charge Coverage Ratio for the Measurement Period for the twelve months ending
December 26, 1996 was .93 to 1, resulting in an increase in the interest rate on
the Notes from 12% to 12 1/2% for the period beginning December 27, 1996 and
ending June 26, 1997. On the second Measurement Date, June 26, 1997, the
Coverage Ratio was not equal to or greater than 1.63 to 1 and, therefore, the
interest rate on the Senior Notes continues to be 12 1/2% through December 25,
1997 at which time the Coverage Ratio will again be calculated. If the Coverage
Ratio at that time is equal to or exceeds 1.63 to 1, the interest rate on the
Notes will revert to 12%; if not, the interest rate will continue to be 12 1/2%
through June 1998.

On October 23, 1997 and in connection with the acquisition of Lil' Champ,
the Company purchased $51.0 million in principal amount of the Senior Notes at a
purchase price of 110% of the aggregate principal amount of each tendered Senior
Note plus accrued and unpaid interest up to, but not including, the date of
purchase (the "Tender Offer"). The Company obtained consents (the "Consent
Solicitation") from the holders of the Senior Notes to amendments and waivers to
certain of

<PAGE>
the covenants contained in the indenture governing the Senior Notes (the "Senior
Notes Indenture"). The Senior Notes Indenture contains covenants including the
restrictions on the Company's ability to incur additional indebtedness and make
acquisitions. The Company obtained consents to, among other things, permit the
offering of $200.0 million Senior Subordinated Notes (as defined herein), the
Lil Champ Acquisition and the New Credit Facility. The consideration paid in
respect of validly delivered consents was 1 3/4% of the principal amount of the
Senior Notes for which consents have been validly delivered and not revoked. The
Company recognized an extraordinary loss, net of taxes, of approximately $6.0
million in connection with the Tender Offer and Consent Solicitation.

On October 23, 1997 and in connection with the acquisition of Lil' Champ,
the Company completed the private offering of $200.0 million, 10 1/4% senior
subordinated notes due 2007 (the "Senior Subordinated Notes"). The proceeds of
the Senior Subordinated Notes, along with cash on hand and an equity investment
by existing shareholders and management were used to finance the purchase price
of Lil' Champ, the refinancing of existing Lil' Champ debt, the tender and
purchase of $51.0 million in outstanding Senior Notes and the fees and expenses
of the Lil' Champ Acquisition.

The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (Sandhills, Inc. and Lil' Champ, wholly-owned
subsidiaries of the Company) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain covenants
that, among other things, restrict the ability of the Company and any restricted
subsidiary to: (i) incur additional indebtedness; (ii) pay dividends or make
distributions; (iii) issue stock of subsidiaries; (iv) make certain investments;
(v) repurchase stock; (vi) create liens; (vii) enter into transaction with
affiliates; (viii) enter into sale-leaseback transactions; (ix) merge or
consolidate the Company or any of its subsidiaries; and (x) transfer and sell
assets.

CASH FLOWS FROM FINANCING ACTIVITIES. On December 30, 1996, the Company
sold 17,500 shares of Series B Preferred Stock and received net proceeds of
$16.0 million. The proceeds were used to finance acquisitions and the Company's
remodeling programs.

Subsequent to fiscal year end 1997 and in connection with the acquisition
of Lil' Champ Food Stores, Inc., the Company sold 72,000 shares of Common Stock
for an aggregate purchase price of $32.4 million (see "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters").

ENVIRONMENTAL CONSIDERATIONS. The Company is subject to various federal,
state and local environmental laws and regulations governing underground
petroleum storage tanks ("USTs") that require The Pantry to make certain
expenditures for compliance. 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 USTs. Regulations enacted by the EPA in 1988 established requirements
for (i) installing UST systems; (ii) upgrading UST systems; (iii) taking
corrective action in response to releases; (iv) closing UST systems; (v) keeping
appropriate records; and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. These regulations permit states to
develop, administer and enforce their own regulatory programs, incorporating
requirements which are at least as stringent as the federal standards. The
following is an overview of the requirements imposed by these regulations:

(Bullet) Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to
comply with leak detection requirements by December 22, 1993. The
Company utilizes two approved leak detection methods for all
Company-owned UST systems. Daily and monthly inventory reconciliations
are completed at the store level and at the corporate support center.
The daily and monthly reconciliation data is also analyzed using
Statistical Inventory Reconciliation ("SIR") which compares the
reported volume of gasoline purchased and sold with the capacity of
each UST system and highlights discrepancies. The Company also performs
annual leak detection tests.

(Bullet) Corrosion Protection: The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. The Company
began installing non-corrosive fiberglass tanks and piping in 1982. The
Company has a comprehensive plan to upgrade all its steel tank UST
systems to 1998 standards by December 22, 1998 through internal tank
lining and cathodic protection. As of September 25, 1997, approximately
81% of the Company's USTs have been protected from corrosion either
through the installation of fiberglass tanks or upgrading steel USTs
with interior fiberglass lining and the installation of cathodic
protection.

(Bullet) Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Pantry is systematically installing devices on all Company-owned UST
systems to meet these regulations. The Pantry has installed
spill/overfill equipment for approximately 81% of its USTs.

<PAGE>
The Pantry anticipates that it will meet the 1998 deadline for installing
corrosion protection and spill/overfill equipment for all of its USTs and has
budgeted approximately $1.0 million of capital expenditures for these purposes
in fiscal 1998. In addition to the technical standards, The Pantry is required
by federal and state regulations to maintain evidence of financial
responsibility for taking corrective action and compensating third parties in
the event of a release from its UST systems. In order to comply with this
requirement, The Pantry maintains a letter of credit in the aggregate amount of
$2.1 million issued by a commercial bank in favor of state environmental
enforcement agencies in the states of North Carolina, South Carolina, Tennessee,
Indiana and Kentucky and relies on reimbursements from applicable state trust
funds.

All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST systems.
These trust funds, which essentially provide insurance coverage for the cleanup
of environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and a tax on the wholesale purchase of motor fuels within
each state. The Company has paid UST registration fees and gasoline taxes to
each state where it operates to participate in these programs and has filed
claims and received reimbursement in North Carolina, South Carolina, and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site for the cleanup of environmental
contamination, and most provide coverage for third party liabilities. Costs for
which the Company does not receive reimbursement include but are not limited to:
(i) the per-site deductible; (ii) costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; (iii) removal and
disposal of UST systems; and (iv) costs incurred in connection with sites
otherwise ineligible for reimbursement from the trust funds. The trust funds
require the Company to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of its UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Company estimates that its expenditures for remediation over the
next five years will be approximately $4.5 million. In addition, a substantial
amount will be expended for remediation on behalf of the Company by state trust
funds established in the Company's operating areas or other responsible third
parties (including insurers). To the extent such third parties do not pay for
remediation as anticipated by the Company, the Company will be obligated to make
such payments, which could materially adversely affect the Company's financial
condition and results of operations. Reimbursement from state trust funds will
be dependent upon the maintenance and continued solvency of the various funds.

As of September 25, 1997, the Company is responsible for the remediation of
contamination at 56 sites. Other third parties are responsible for remediation
of contamination at another 13 sites. The Pantry has accrued $7,806,000 for
estimated total future remediation costs at the sites for which it is
responsible. The Pantry anticipates that approximately $1,295,000 of these
future remediation costs will not be reimbursed by state trust funds or covered
by private insurance. Of the remaining $6,511,000, The Pantry believes that (i)
approximately $6,341,000 will be reimbursed from state funds based on prior
acceptance of sites for reimbursement under these programs or anticipated
acceptance based on date of discovery of contamination and program regulations
and (ii) approximately $170,000 will be covered by insurance based on prior
acceptance of sites for such coverage. Reimbursements from state trust funds
will be dependent upon the continued solvency of the various funds. These
estimates are based on consultants' and management's estimates of the cost of
remediation, tank removal, and litigation associated with all known contaminated
sites as a result of releases (e.g. overfills, spills and UST system leaks).
Although the Company is not aware of releases or contamination at other
locations where it currently operates or has operated stores, any such releases
or contamination could require substantial remediation costs, some or all of
which may not be eligible for reimbursement from state trust funds.

Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean up
matters. Additionally, The Pantry is awaiting closure notices on several other
locations which will release the Company from responsibility related to known
contamination at those sites.

CASH REQUIREMENTS. The Company believes that cash on hand, together with
cash flow anticipated to be generated from operations, new equity issued and
sold on October 23, 1997 in connection with the acquisition of Lil' Champ and
related transactions (see "Item 8. Consolidated Financial Statements and
Supplementary Data -- Notes to Consolidated Financial Statements -- Note 15.
Subsequent Events"), short-term borrowing for seasonal working capital,
permitted borrowings under the Company's acquisition facility and permitted
borrowings by its Unrestricted Subsidiary will be sufficient to enable the
Company to satisfy anticipated cash requirements for operating, investing and
financing activities, including debt service through fiscal 1998 and any
potential liability associated with various State tax assessments (see "Item 8.
Consolidated Financial Statements and Supplementary Data -- Notes to
Consolidated Financial Statements -- Note 6. Income Taxes"). To the extent that
earnings and cash flow are less than management's estimates, the Company will
curtail its proposed acquisition activities, and, if necessary, its expenditures
for stores it currently plans to build in fiscal 1998.

<PAGE>
LIL' CHAMP RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES

A discussion of the results of operations of Lil' Champ for the fiscal
years 1995, 1996 and the nine month periods ended September 27, 1997 and
September 28, 1996 and a discussion of the liquidity and capital resources of
Lil' Champ is contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Lil' Champ" contained in the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on December 19, 1997.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED

In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 contains
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The provisions of SOP 96-1 are effective for fiscal years beginning
after December 15, 1996 (the Company's 1998 fiscal year). The Company does not
believe the adoption of SOP 96-1 will have a material effect on its consolidated
financial statements.

INFLATION

General inflation has not had a significant impact on the Company over the
past three years. Management expects the cost of tobacco products to increase
over the next several years and, as a result, expects merchandise revenues to
increase and merchandise gross margin percentage to decline. Management believes
it can pass along these and other cost increases to its customers over the
long-term and, therefore, does not expect inflation to have a significant impact
on the results of operations or financial condition in the foreseeable future.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Financial Statements: PAGE
-------------
<S> <C>
Report of Independent Auditors............................................................................... 21
Report of Independent Accountants............................................................................ 22
Consolidated Balance Sheet as of September 26, 1996 and September 25, 1997................................... 23
Consolidated Statement of Operations for the years ended September 28, 1995, September 26, 1996, and
September 25, 1997........................................................................................ 25
Consolidated Statement of Changes in Shareholders' Deficit for the years ended September 28, 1995, September
26, 1996, and September 25, 1997.......................................................................... 26
Consolidated Statement of Cash Flows for the years ended September 28, 1995, September 26, 1996, and
September 25, 1997........................................................................................ 27
Notes to Consolidated Financial Statements................................................................... 29

Financial Statement Exhibit:
Exhibit 12.1 -- Computation of Ratio of Earnings to Fixed Charges............................................ Exhibit 12.1

Financial Statement Schedule
Schedule I -- Valuation and Qualifying Accounts and Reserves................................................. S-1
</TABLE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE PANTRY, INC.
Sanford, North Carolina

We have audited the accompanying consolidated balance sheets of The Pantry,
Inc. and subsidiaries as of September 26, 1996 and September 25, 1997 and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the years then ended. Our audits also included the financial statement
schedule for the years ended September 26, 1996 and September 25, 1997 listed in
the Index at Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 26, 1996 and September 25, 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule for the years ended September 26, 1996 and
September 25, 1997, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in fiscal
1996 the Company adopted Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF.

DELOITTE & TOUCHE LLP

Raleigh, North Carolina
December 5, 1997

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF
The Pantry, Inc.

In our opinion, the consolidated statements of operations, of cash flows
and of changes in shareholders' deficit listed in the accompanying index for the
year ended September 28, 1995 appearing in this Form 10-K Annual Report present
fairly, in all material respects, the results of operations and cash flows of
The Pantry, Inc. and its subsidiaries for the year ended September 28, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of The Pantry,
Inc. for any period subsequent to September 28, 1995.

As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 112 (SFAS 112), Employers'
Accounting for Postemployment Benefits, during fiscal 1995.

PRICE WATERHOUSE LLP

Raleigh, North Carolina
November 30, 1995

<PAGE>
THE PANTRY, INC.

CONSOLIDATED BALANCE SHEET

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 26, SEPTEMBER 25,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash.......................................................................................... $ 5,338 $ 3,347
Receivables (net of allowance for doubtful accounts of $150 at 1996 and
$150 at 1997).............................................................................. 2,860 2,101
Inventories (Note 2).......................................................................... 13,223 17,161
Prepaid expenses.............................................................................. 775 1,204
Income taxes receivable....................................................................... 63 --
Property held for sale........................................................................ 2,816 3,323
Deferred income taxes (Note 6)................................................................ 879 1,142
------------- -------------
Total Current Assets....................................................................... 25,954 28,278
------------- -------------
Property and Equipment, Net (Notes 3, 4, 7, 8 and 11)........................................... 65,455 77,986
------------- -------------
Other Assets:
Goodwill (net of accumulated amortization of $9,705 at 1996 and
$10,396 at 1997) (Note 11)................................................................. 16,852 20,318
Deferred lease cost (net of accumulated amortization of $8,911 at 1996 and
$8,956 at 1997)............................................................................ 359 314
Deferred financing cost (net of accumulated amortization of $2,884 at 1996 and
$4,345 at 1997)............................................................................ 5,940 4,578
Environmental receivables (Note 9)............................................................ 5,162 6,511
Deferred income taxes (Note 6)................................................................ 790 156
Escrow for Lil' Champ acquisition (Note 15)................................................... -- 4,049
Other......................................................................................... 368 609
------------- -------------
Total other assets......................................................................... 29,471 36,535
------------- -------------
Total Assets.................................................................................... $ 120,880 $ 142,799
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>
THE PANTRY, INC.

CONSOLIDATED BALANCE SHEET

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 26, SEPTEMBER 25,
1996 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt (Note 4)................................................. $ 16 $ 33
Current maturities of capital lease obligations (Note 7)...................................... 285 285
Accounts payable:
Trade...................................................................................... 15,666 16,035
Money orders............................................................................... 2,788 3,022
Accrued interest (Note 4)..................................................................... 4,416 4,592
Accrued compensation and related taxes........................................................ 2,338 3,323
Income taxes payable (Note 6)................................................................. -- 296
Other accrued taxes........................................................................... 2,135 2,194
Accrued insurance............................................................................. 3,629 3,887
Other accrued liabilities..................................................................... 1,194 2,856
------------- -------------
Total Current Liabilities.................................................................. 32,467 36,523
------------- -------------
Long-Term Debt (Note 4)......................................................................... 100,148 100,305
------------- -------------
Other Noncurrent Liabilities:
Environmental costs (Note 9).................................................................. 6,232 7,806
Capital lease obligations (Note 7)............................................................ 982 679
Employment obligations (Note 8)............................................................... 2,039 1,341
Accrued dividends on preferred stock (Note 13)................................................ 2,654 7,958
Other......................................................................................... 3,905 6,060
------------- -------------
Total Other Noncurrent Liabilities......................................................... 15,812 23,844
------------- -------------
Shareholders' Deficit:
Preferred stock, $.01 par value, 150,000 shares authorized; 25,999 issued and
outstanding at September 26, 1996 and 43,499 issued and outstanding at
September 25, 1997 (Note 13)............................................................... -- --
Common stock, $.01 par value, 300,000 shares authorized; 100,000 issued and
outstanding at September 26, 1996 and 114,029 issued and outstanding
at September 25, 1997...................................................................... 1 1
Additional paid-in capital.................................................................... (10,557) 5,396
Accumulated deficit........................................................................... (16,991) (23,270)
------------- -------------
Total Shareholders' Deficit................................................................ (27,547) (17,873)
------------- -------------
Commitments and contingencies (Notes 5, 7 and 9)................................................ -- --
------------- -------------
Total Liabilities and Shareholders' Deficit..................................................... $ 120,880 $ 142,799
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>
THE PANTRY, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
(52 WEEKS) (52 WEEKS) (52 WEEKS)
Revenues:
Merchandise sales............................................................. $ 187,380 $ 188,091 $ 202,440
Gasoline sales................................................................ 187,165 192,737 220,166
Commissions................................................................... 4,516 3,979 4,787
------------- ------------- -------------
Total revenues............................................................. 379,061 384,807 427,393
------------- ------------- -------------
Cost of sales:
Merchandise................................................................... 121,976 125,979 132,846
Gasoline...................................................................... 161,179 167,610 197,268
------------- ------------- -------------
Total cost of sales........................................................ 283,155 293,589 330,114
------------- ------------- -------------
Gross Profit.................................................................... 95,906 91,218 97,279
------------- ------------- -------------
Operating Expenses:
Store expenses................................................................ 55,122 56,567 58,928
Store expenses -- related parties (Note 8).................................... 1,084 1,274 1,280
General and administrative expenses........................................... 18,159 17,127 16,796
Restructuring charges (Note 12)............................................... -- 2,184 --
Impairment of long-lived assets (Note 11)..................................... -- 3,034 --
Depreciation and amortization................................................. 9,505 9,158 9,504
Amortization of non-compete agreement......................................... 1,965 -- --
------------- ------------- -------------
Total operating expenses................................................... 85,835 89,344 86,508
------------- ------------- -------------
Income from operations.......................................................... 10,071 1,874 10,771
------------- ------------- -------------
Other Income (Expense):
Interest...................................................................... (12,974) (11,807) (12,889)
Interest -- related parties (Note 8).......................................... (266) (185) (150)
Miscellaneous................................................................. 711 (660) 1,293
Due diligence costs........................................................... (1,181) -- --
------------- ------------- -------------
Total other expense........................................................ (13,710) (12,652) (11,746)
------------- ------------- -------------
Loss before income taxes and cumulative effect of accounting change............. (3,639) (10,778) (975)
Income tax benefits (Note 6).................................................... 354 2,664 --
------------- ------------- -------------
Loss before cumulative effect of accounting change.............................. (3,285) (8,114) (975)
Cumulative effect of change in accounting for post-employment benefits
(net of income tax benefit of $640)........................................... (960) -- --
------------- ------------- -------------
Net loss........................................................................ $ (4,245) $ (8,114) $ (975)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>
THE PANTRY, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT

(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK
---------------- ----------------- ADDITIONAL
PAR PAR PAID IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL OTHER (1) TOTAL DEFICIT
------ ------- ------- ------- ---------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 29, 1994............... -- $ -- $100,000 $ 1 $ 6,999 $ (17,109) $(10,109) $(1,978)
Net loss.................................. -- -- -- -- -- -- -- (4,245)
------ ------- ------- ------- ---------- --------- ------- -----------
Balance, September 28, 1995............... -- -- 100,000 1 6,999 (17,109) (10,109) (6,223)
Net loss.................................. -- -- -- -- -- -- -- (8,114)
Net proceeds from stock issue............. 25,999 -- 14,029 -- (447) -- (447) --
Dividends on preferred stock.............. -- -- -- -- -- -- -- (2,654)
------ ------- ------- ------- ---------- --------- ------- -----------
Balance, September 26, 1996............... 25,999 -- 114,029 1 6,552 (17,109) (10,556) (16,991)
Net loss.................................. -- -- -- -- -- -- -- (975)
Net proceeds from stock issue............. 17,500 -- -- -- 15,953 -- 15,953 --
Dividends on preferred stock.............. -- -- -- -- -- -- -- (5,304)
------ ------- ------- ------- ---------- --------- ------- -----------
Balance, September 25, 1997............... 43,499 $ -- 114,029 $ 1 $ 22,505 $ (17,109) $ 5,397 $ (23,270)
------ ------- ------- ------- ---------- --------- ------- -----------
------ ------- ------- ------- ---------- --------- ------- -----------

TOTAL
--------
<S> <C>
Balance, September 29, 1994............... $ (12,087)
Net loss.................................. (4,245)
--------
Balance, September 28, 1995............... (16,332)
Net loss.................................. (8,114)
Net proceeds from stock issue............. (447)
Dividends on preferred stock.............. (2,654)
--------
Balance, September 26, 1996............... (27,547)
Net loss.................................. (975)
Net proceeds from stock issue............. 15,953
Dividends on preferred stock.............. (5,304)
--------
Balance, September 25, 1997............... $(17,873)
--------
--------
</TABLE>

- ---------------

(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders (Note 1).

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>
THE PANTRY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
(52 WEEKS) (52 WEEKS) (52 WEEKS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (4,245) $(8,114) $ (975)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of change in accounting for post-employment benefits..... 1,600 -- --
Impairment of long-lived assets............................................ -- 3,034 --
Depreciation and amortization.............................................. 11,470 9,158 9,504
Provision (benefit) for deferred income taxes.............................. (2,451) (1,558) 371
(Gain) loss on sale of property and equipment.............................. 2 470 (1,054)
Provision (benefit) for environmental expenses............................. (418) 512 1,574
Provision for closed stores................................................ 292 673 (11)
Write-off of property held for sale........................................ -- 168 --
Changes in operating assets and liabilities, net:
Receivables................................................................ 394 (539) (527)
Inventories................................................................ 1,694 (937) (2,273)
Prepaid expenses........................................................... 119 20 (429)
Other non-current assets................................................... (279) 432 (4,295)
Accounts payable........................................................... 2,294 2,104 603
Other current liabilities and accrued expenses............................. (37) (639) 3,393
Employment obligations..................................................... (140) (255) (698)
Other noncurrent liabilities............................................... 1,608 886 2,155
------------- ------------- -------------
Net cash provided by operating activities....................................... 11,903 5,415 7,338
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale (Note 7).................................. (18,600) (4,050) (1,828)
Additions to property and equipment........................................... (16,650) (7,084) (14,749)
Proceeds from sale of property held for sale (Note 7)......................... 19,436 2,462 1,345
Proceeds from sale of property and equipment.................................. 533 1,468 2,315
Acquisitions of related businesses............................................ -- -- (12,162)
------------- ------------- -------------
Net cash used in investing activities........................................... (15,281) (7,204) (25,079)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases..................................... (413) (347) (303)
Principal repayments of long-term debt........................................ (7,281) (20) (26)
Net proceeds from issuance of long-term debt.................................. 7,267 -- 200
Net proceeds from equity issue................................................ -- (447) 15,953
Other financing costs......................................................... (523) (3,058) (74)
------------- ------------- -------------
Net cash provided by (used in) financing activities............................. (950) (3,872) 15,750
------------- ------------- -------------
Net decrease in cash............................................................ (4,328) (5,661) (1,991)
CASH AT BEGINNING OF YEAR....................................................... 15,327 10,999 5,338
------------- ------------- -------------
CASH AT END OF YEAR............................................................. $ 10,999 $ 5,338 $ 3,347
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid (refunded) during the year:
Interest...................................................................... $12,650 $12,719 $12,863
------------- ------------- -------------
------------- ------------- -------------
Taxes......................................................................... $ 1,197 $ (403) $ (917)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES

During fiscal 1997, the Company acquired 35 stores, acquired the gasoline
operations at 23 third-party locations and disposed of 21 stores. The net assets
acquired and liabilities assumed are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25,
1997
-------------
<S> <C>
Inventories................................................................ $ 1,665
Property and equipment..................................................... 6,374
Other noncurrent assets.................................................... 9
Accrued expenses........................................................... (43)
-------------
8,005
Goodwill................................................................... 4,157
-------------
Acquisitions of related business........................................... $12,162
-------------
-------------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

The consolidated financial statements include the accounts of The Pantry,
Inc. ("The Pantry" or the "Company") and its wholly-owned subsidiaries,
Sandhills, Inc. and PH Holding Corporation ("PH") and PH's wholly-owned
subsidiaries, TC Capital Management, Inc. and Pantry Properties, Inc. All
intercompany transactions and balances have been eliminated in consolidation.
The Pantry owns and operates approximately 390 convenience stores in North
Carolina, South Carolina, Tennessee, Kentucky, and Indiana.

Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to affect the
1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged
into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets or
operations other than its investment in The Pantry.

On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ Food Stores, Inc. ("Lil' Champ") from Docks U.S.A., Inc.
(the "Lil' Champ Acquisition"). The combination of The Pantry and Lil' Champ has
created one of the largest independent convenience stores in the United States
(based on number of stores) with 878 stores primarily located in the Southeast.
The acquisition was funded by a combination of Senior Subordinated Notes and an
additional equity investment by the FS Group, Chase and a member of managment
(see "Note 15 -- Subsequent Events").

ACQUISITION ACCOUNTING

MPAC acquired all of The Pantry's common stock in a leveraged buy-out as of
August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of accounting was established as a
result of the acquisition to the extent of the "new" equity interests (partial
step-up). The original basis of accounting was retained for those shareholders
that retained an equity interest in MPAC after the acquisition. To the extent of
ownership change, the excess amount paid over The Pantry's net book value was
allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values. To the extent that certain
individuals and entities maintained their equity interests, the excess amount
paid over net book value was recorded as a debit in shareholders' deficit
($17,109,000). Had there not been a partial step-up, this amount would have been
allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values.

LONG-LIVED ASSETS

In 1996, the Company early-adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If an evaluation is required, the projected future undiscounted
cash flows attributable to each store would be compared to the carrying value of
the long-lived assets (including an allocation of goodwill, if appropriate) of
that store to determine if a write-down to fair value is required (see Note
11 -- Impairment of Long-Lived Assets).

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
GOODWILL

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. The Company assesses the recoverability of this
intangible asset by determining whether amortization of the goodwill balance
over its remaining life can be recovered through estimated undiscounted future
operating results. Estimated future results are based on a trend of historical
results for the trailing three fiscal years and management's estimate of future
results which indicate that the goodwill balances will be recovered over the
various periods remaining to be benefited.

Goodwill of $24,946,000 with accumulated amortization of $8,790,000 as of
September 25, 1997 related to the 1987 leveraged buy-out is being amortized on a
straight-line basis over 40 years. Goodwill of $5,768,000 with accumulated
amortization of $1,606,000 as of September 25, 1997 related to acquisitions of
stores is being amortized on a straight-line basis over 20 years.

DEFERRED LEASE COST

Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.

PROPERTY HELD FOR SALE

Certain property is classified as current assets when management's intent
is to sell these assets in the ensuing fiscal year, and is recorded at the lower
of cost or fair value less cost to sale.

DEFERRED FINANCING COST

Deferred financing cost represents expenses related to issuing the
Company's long-term debt (see Note 4 -- Long-Term Debt and Note 15 -- Subsequent
Events), obtaining its lines of credit (see Note 5 -- Lines of Credit), and
obtaining lease financing (see Note 7 -- Leases). Such amounts are being
amortized over the remaining term of the respective financing.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for financial
statement purposes and by accelerated methods for income tax purposes.

Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13 are
recorded at the lesser of fair value or the discounted present value of future
lease payments at the inception of the leases. Amounts capitalized are amortized
over the estimated useful lives of the assets or terms of the leases (generally
5 to 20 years) using the straight-line method.

INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method.

NON-COMPETE AGREEMENT

Effective with the July 11, 1994, termination of a former officer of The
Pantry, the non-compete portion of a fiscal 1993 contract between the Company
and the former officer, which restricted the former officer and his affiliated
companies from operating convenience stores in competition with The Pantry,
became the principal source of value. On June 30, 1995, the terms of this
contract were amended, including a change in the expiration of the non-compete
period from December 2001 to December 1996. Due to the significance of the
reduction of the non-compete period, the unamortized balance of the non-compete
asset was written off in fiscal 1995.

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
INCOME TAXES

All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting for
Income Taxes, The Pantry recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between financial
statement carrying amounts and the related tax bases.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

ACCOUNTING PERIOD

The Pantry operates on a 52-53 week fiscal year ending on the last Thursday
in September. For 1995, 1996 and 1997, each of the Company's fiscal years
contained 52 weeks.

RECLASSIFICATIONS

Certain amounts in the fiscal 1995 and 1996 consolidated financial
statements have been reclassified to conform to the current year presentation.

ACCOUNTING CHANGE

During the fourth quarter of fiscal 1995, the Company adopted, retroactive
to September 30, 1994, SFAS No. 112, "Employer's Accounting for Postemployment
Benefits" and restated its first quarter results to reflect the adoption. SFAS
No. 112 requires that employers expense the costs of postemployment benefits
over the service lives of employees if certain conditions are met. The
cumulative effect of adopting SFAS No. 112 as of September 30, 1994 was an after
tax charge of $960,000.

NOTE 2 -- INVENTORIES:

At September 26, 1996 and September 25, 1997, inventories consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise................................................................... $13,841 $16,877
Gasoline...................................................................... 4,013 4,969
------- -------
17,854 21,846
Less adjustment to LIFO cost:
Merchandise................................................................... (4,012) (4,203)
Gasoline...................................................................... (619) (482)
------- -------
Inventories at LIFO cost........................................................ $13,223 $17,161
------- -------
------- -------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 2 -- INVENTORIES: (Continued)
The positive effect on cost of sales of LIFO inventory liquidations was
$957,000, $68,000 and $4,141 for fiscal years 1995, 1996 and 1997, respectively.

NOTE 3 -- PROPERTY AND EQUIPMENT:

At September 26, 1996 and September 25, 1997, property and equipment
consisted of the following (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land........................................................................... $ 16,116 $ 16,109
Buildings...................................................................... 28,731 29,928
Gasoline equipment............................................................. 39,670 50,362
Other equipment, furniture and fixtures........................................ 24,020 26,657
Leasehold improvements......................................................... 8,403 10,743
Automobiles.................................................................... 123 134
Construction in progress....................................................... 110 1,471
-------- --------
117,173 135,404
Less -- accumulated depreciation and amortization.............................. (51,718) (57,418)
-------- --------
$ 65,455 $ 77,986
-------- --------
-------- --------
</TABLE>

NOTE 4 -- LONG-TERM DEBT:

At September 26, 1996 and September 25, 1997, long-term debt consisted of
the following (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Notes payable ("Senior Notes"); due November 15, 2000; interest payable
semi-annually at 12.5%...................................................... $ 99,995 $ 99,995
Note payable; secured by certain property; due monthly through 2004; interest
at 10%...................................................................... 169 137
Note payable; secured by certain property; due monthly through 2005; interest
at 8%....................................................................... -- 206
-------- --------
100,164 100,338
Less -- current maturities.................................................... (16) (33)
-------- --------
$100,148 $100,305
-------- --------
-------- --------
</TABLE>

While the Senior Notes are unsecured, the terms of the Senior Notes contain
certain covenants restricting (i) the use of proceeds from the offering; (ii)
the placing of liens on properties; (iii) certain "restricted payments" as
defined in the agreement; (iv) the incurrance of additional debt; (v) the sale
of assets; (vi) any merger, (vii) consolidation or change in control; (viii)
lines of business and (ix) transactions with affiliates. In addition, the
Indenture requires certain positive covenants including the maintenance of a
"Consolidated Fixed Charge Ratio" (the "Coverage Ratio") of greater than 1.69 to
1.0. On December 26, 1997 (the first "Measurement Date" in fiscal year 1997),
the Company's Coverage Ratio was less than 1.69 to 1.0 and, therefore, the
interest rate on the Senior Notes was temporarily increased to 12 1/2% and
remains at this rate as of December 5, 1997. The next Measurement Date is
December 25, 1997.

On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of $200 million of 10 1/4% Senior Subordinated
Notes due 2007 and, in a related transaction, completed a tender offer and
consent solicitation with respect to the $100 million of 12% Senior Notes due
2000. The tender offer resulted in the Company's purchase of $51 million in
principal amount of the Senior Notes at a purchase price of 110% of the
aggregate principal amount plus accrued and unpaid interest and other related
fees (see Note 15 -- Subsequent Events).

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 5 -- LINES OF CREDIT:

As of September 25, 1997, The Pantry had two bank lines of credit with
borrowing capacity limits of $10 million and $15 million, respectively. The $10
million line of credit bears interest at prime (8.50% at September 25, 1997)
plus 0.5%. As of September 25, 1997, there were no balances outstanding under
the $10 million line of credit. The $15 million line of credit secures the
Company's outstanding letters of credit of $8,563,000 at September 25, 1997.
During fiscal 1997 and as of September 25, 1997, there were no draws against the
letters of credit.

On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company entered into a new bank credit facility (the "New Credit Facility")
replacing the $10 million and $15 million bank lines discussed above. The New
Credit Facility consists of a $45 million revolving credit facility and a $30
million acquisition facility. The New Credit Facility has availability for
letter of credit usage, is secured by substantially all of the assets of the
Company and the Guarantors (as defined herein) and is guaranteed by the
Guarantors (see Note 15 -- Subsequent Events).

NOTE 6 -- INCOME TAXES:

The components of income tax expense (benefit) are summarized below (in
thousands):

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -----
<S> <C> <C> <C>
Current:
Federal............................................................... $ 1,033 $(1,111) $ 163
State................................................................. 424 5 (534)
------- ------- -----
1,457 (1,106) (371)
------- ------- -----
Deferred:
Federal............................................................... (1,839) (1,074) 371
State................................................................. (612) (484) --
------- ------- -----
(2,451) (1,558) 371
------- ------- -----
$ (994) $(2,664) $ --
------- ------- -----
------- ------- -----
</TABLE>

As of September 26, 1996 and September 25, 1997, deferred tax liabilities
(assets) are comprised of the following (in thousands):

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Depreciation..................................................................... $ 5,523 $ 6,513
Deferred lease cost.............................................................. 16 27
Inventory........................................................................ 994 940
Other............................................................................ 491 469
------- -------
Gross deferred tax liabilities................................................... 7,024 7,949
------- -------
Capital lease obligations........................................................ (205) (321)
Allowance for doubtful accounts.................................................. (57) (58)
Environmental expenses........................................................... (410) (500)
Accrued insurance reserves....................................................... (1,391) (1,607)
Accrued compensation............................................................. (932) (667)
Other............................................................................ (478) (616)
------- -------
Gross deferred tax assets........................................................ (3,473) (3,769)
------- -------
Net operating loss carryforwards................................................. (2,921) (2,622)
General business credits......................................................... (1,695) (1,846)
AMT Credits...................................................................... (2,386) (2,696)
Deferred tax assets valuation allowance.......................................... 1,782 1,686
------- -------
$(1,669) $(1,298)
------- -------
------- -------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 6 -- INCOME TAXES: (Continued)
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -----
<S> <C> <C> <C>
Tax benefit at Federal statutory rate........................................................... $(1,783) $(3,665) $(332)
Tax benefit at state rate, net of Federal income tax benefit.................................... (779) (316) (325)
Permanent differences:
Amortization of goodwill...................................................................... 237 1,127 235
Other......................................................................................... 75 14 248
Tax benefit from creation of general business credits........................................... (175) -- (151)
Interperiod tax allocation...................................................................... 920 -- --
Valuation allowance............................................................................. 511 176 325
------- ------- -----
Net income tax benefit.......................................................................... $ (994) $(2,664) $ --
------- ------- -----
------- ------- -----
</TABLE>

As of September 27, 1997 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of a
valuation allowance, as a reduction in the Company's net deferred tax asset.
Loss carryforwards as of September 25, 1997 have the following expiration dates
(in thousands):

<TABLE>
<CAPTION>
FEDERAL STATE
------- -------
<S> <C> <C>
1998.............................................................................. $ -- $ 3,478
1999.............................................................................. -- 5,526
2000.............................................................................. -- 5,532
2001.............................................................................. -- 10,034
2002.............................................................................. -- 7,639
2012.............................................................................. 371 --
------- -------
Total loss carryforwards..................................................... $ 371 $32,209
------- -------
------- -------
</TABLE>

The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
respectively, to provide for state net economic loss carryforwards. The
valuation allowance decreased $421,000 in 1997, which was primarily attributable
to the expiration of net operating loss carryforwards.

The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of the Company, with additional taxes plus
penalties and accrued interest totaling approximately $5.0 million, for the
periods February 1, 1992 to September 26, 1996, respectively. The Company is
contesting these tax assessments and believes that it has meritorious defenses
to the proposed adjustments. Additionally, the Company believes that, in the
event of a mutual settlement, the assessment amount and related penalties would
be substantially reduced. Based on this, the Company believes the outcome of the
audits will not have a material adverse effect on the Company's financial
condition or results of operations.

NOTE 7 -- LEASES:

The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 26, 1996 and September 25, 1997, are as follows (in
thousands):

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Buildings........................................................................ $ 2,196 $ 2,196
Less -- accumulated amortization................................................. (1,464) (1,649)
------- -------
$ 732 $ 547
------- -------
------- -------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 7 -- LEASES: (Continued)
Amortization expense related to capitalized leased assets was $269,000,
$261,000, and $185,000 for fiscal 1995, 1996 and 1997, respectively.

Future minimum lease payments as of September 25, 1997, for capital leases
and operating leases that have initial or remaining terms in excess of one year
are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL CAPITAL OPERATING
YEAR LEASES LEASES
- ------ ------- ---------
<S> <C> <C>
1998............................................................................. $ 381 $ 8,447
1999............................................................................. 308 7,947
2000............................................................................. 193 7,146
2001............................................................................. 106 5,681
2002............................................................................. 103 4,961
Thereafter....................................................................... 287 53,342
------- ---------
Net minimum lease payments....................................................... 1,378 $ 87,524
---------
---------
Amount representing interest (8% to 20%)......................................... 414
-------
Present value of net minimum lease payments...................................... 964
Less -- current maturities....................................................... 285
-------
$ 679
-------
-------
</TABLE>

The above amounts do not include total future minimum sublease rentals of
approximately $85,250 related to capital and operating leases. Rental expense
for operating leases was approximately $6,759,000, $8,126,000 and $9,618,000 for
fiscal years 1995, 1996 and 1997, respectively.

NOTE 8 -- RELATED PARTIES:

Certain of the above leases are with partnerships and corporations
controlled by former shareholders, former officers and current and former
directors of The Pantry. Rents under these leases were approximately $1,079,000,
$1,274,000, and $1,280,000 for fiscal years 1995, 1996, and 1997, respectively.
Such leases expire at various intervals over the next twenty years.

During fiscal 1995, the Company sold certain convenience stores to an
entity controlled by former officers and current and former directors of the
Company for approximately $3,300,000, which approximated the Company's
investment in these properties. These stores are currently being leased back
from this entity (rental amounts are included above).

Under the terms of a contract with a former officer, the Company is
obligated to pay the former officer certain amounts through September 30, 2000.
The Company has recorded a liability equal to the net present value of the
payments due under the contract and has classified the resulting annual interest
expense as related party interest.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES:

As of September 25, 1997, The Pantry was contingently liable for
outstanding letters of credit in the amount of $8,563,000 related primarily to
several areas in which The Pantry is self-insured. The letters of credit are not
to be drawn against unless The Pantry defaults on the timely payment of related
liabilities.

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

ENVIRONMENTAL LIABILITIES AND CONTINGENCIES

The Company is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks ("USTs") that
require The Pantry to make certain expenditures for compliance. In particular,
at the

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 9 -- COMMITMENTS AND CONTINGENCIES: (Continued)
federal level, the Resource Conservation and Recovery Act, as amended, requires
the EPA to establish a comprehensive regulatory program for the detection,
prevention, and cleanup of leaking USTs. Regulations enacted by the EPA in 1988
established requirements for (i) installing UST systems; (ii) upgrading UST
systems; (iii) taking corrective action in response to releases; (iv) closing
UST systems; (v) keeping appropriate records; and (vi) maintaining evidence of
financial responsibility for taking corrective action and compensating third
parties for bodily injury and property damage resulting from releases. These
regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as stringent
as the federal standards. The following is an overview of the requirements
imposed by these regulations:

(Bullet) Corrosion Protection: The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. The Company
began installing non-corrosive fiberglass tanks and piping in 1982. The
Company has a comprehensive plan to upgrade all its steel tank UST
systems to 1998 standards by 1998 through internal tank lining and
cathodic protection. As of September 25, 1997, approximately 81% of the
Company's USTs have been protected from corrosion either through the
installation of fiberglass tanks or upgrading steel USTs with interior
fiberglass lining and the installation of cathodic protection.

The Pantry anticipates that it will meet the 1998 deadline for installing
corrosion protection and spill/overfill equipment for all of its USTs and has
budgeted approximately $1.0 million of capital expenditures for these purposes
in fiscal 1998. In addition to the technical standards, The Pantry is required
by federal and state regulations to maintain evidence of financial
responsibility for taking corrective action and compensating third parties in
the event of a release from its UST systems. In order to comply with this
requirement, The Pantry maintains a letter of credit in the aggregate amount of
$2.1 million issued by a commercial bank in favor of state environmental
enforcement agencies in the states of North Carolina, South Carolina, Tennessee,
Indiana and Kentucky and relies on reimbursements from applicable state trust
funds.

All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST systems.
These trust funds, which essentially provide insurance coverage for the cleanup
of environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and a tax on the wholesale purchase of motor fuels within
each state. The Company has paid UST registration fees and gasoline taxes to
each state where it operates to participate in these programs and has filed
claims and received reimbursement in North Carolina, South Carolina, and
Tennessee. The coverage afforded by each state fund varies but generally
provides up to $1.0 million per site for the cleanup of environmental
contamination, and most provide coverage for third party liabilities. Costs for
which the Company does not receive reimbursement include but are not limited to:
(i) the per-site deductible; (ii) costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; (iii) removal and
disposal of UST systems; and (iv) costs incurred in connection with sites
otherwise ineligible for reimbursement from the trust funds. The trust funds
require the Company to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of its UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Company estimates that its expenditures for remediation over the
next five years will be approximately $4.5 million. In addition, a substantial
amount will be expended for remediation on behalf of the Company by state trust
funds established in the Company's operating areas or other responsible third
parties (including insurers). To the extent such third parties do not pay for
remediation as anticipated by the Company, the Company will be obligated to make
such payments, which could materially adversely affect the Company's

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 9 -- COMMITMENTS AND CONTINGENCIES: (Continued)
financial condition and results of operations. Reimbursement from state trust
funds will be dependent upon the maintenance and continued solvency of the
various funds.

As of September 25, 1997, the Company is responsible for the remediation of
contamination at 56 sites. Other third parties are responsible for remediation
of contamination at another 13 sites. The Pantry has accrued $7,806,000 for
estimated total future remediation costs at the sites for which it is
responsible. The Pantry anticipates that approximately $1,295,000 of these
future remediation costs will not be reimbursed by state trust funds or covered
by private insurance. Of the remaining $6,511,000, The Pantry believes that (i)
approximately $6,341,000 will be reimbursed from state funds based on prior
acceptance of sites for reimbursement under these programs or anticipated
acceptance based on date of discovery of contamination and program regulations
and (ii) approximately $170,000 will be covered by insurance based on prior
acceptance of sites for such coverage. Reimbursements from state trust funds
will be dependent upon the continued solvency of the various funds. Remediation
cost estimates are based on consultants' and management's estimates of the cost
of remediation, tank removal, and litigation associated with all known
contaminated sites as a result of releases (e.g. overfills, spills and UST
system leaks). Although the Company is not aware of releases or contamination at
other locations where it currently operates or has operated stores, any such
releases or contamination could require substantial remediation costs, some or
all of which may not be eligible for reimbursement from state trust funds.

NOTE 10 -- BENEFIT PLANS:

The Pantry sponsors a 401(k) Employee Retirement Savings Plan for eligible
employees. Employees must be at least nineteen years of age and have one year of
service with at least 1,000 hours worked to be eligible to participate in the
plan. Employees may contribute up to 15% of their annual compensation, and
contributions are matched by The Pantry on the basis of 50% of the first 5%
contributed. Matching contribution expense was $346,000, $330,000, and $305,000
for fiscal years 1995, 1996 and 1997, respectively.

NOTE 11 -- IMPAIRMENT OF LONG-LIVED ASSETS:

In fiscal year 1996, the Company early-adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived and certain identifiable
intangibles to be disposed of.

Pursuant to SFAS No. 121, the Company evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Projected future cash flows for each store were estimated for a
period approximating the remaining lives of that store's long-lived assets,
based on earnings history, lease expiration dates and renewal periods, market
conditions and assumptions reflected in internal operating plans and strategies.
Based on this evaluation, the Company determined that certain long-lived assets
were impaired and recorded an impairment loss based on the difference between
the carrying value and the fair value of the assets. Fair value was determined
based on an evaluation of each property's value. The impairment consists of the
following assets (in thousands):

<TABLE>
<S> <C>
Property, plant and equipment........................................ $ 415
Goodwill............................................................. 2,619
------
Total........................................................... $3,034
------
------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 12 -- RESTRUCTURING CHARGES:

In fiscal year 1996, the Company recorded restructuring charges of
$2,184,000 pursuant to a formal plan to restructure its corporate offices. The
costs include $1,484,000 for employee severance; $350,000 for employee moving
costs; and $350,000 for legal costs related to the ownership litigation.
Substantially all of these amounts were expended during fiscal 1996.

NOTE 13 -- PREFERRED STOCK:

As of September 25, 1997, preferred stock consists of 150,000 authorized
shares. Issued and outstanding shares at September 25, 1997 include 25,999
shares which have been designated as Series A and 17,500 shares designated as
Series B, all of which is held by FS Group. The Company is limited from paying
dividends under the terms and conditions of the Senior Notes Indenture, Senior
Subordinated Notes Indenture and the Certificate of Designation of Preferences
of the Series B Preferred Stock of The Pantry, Inc.

In addition, the Certificate of Designation of Preferences of the Series B
Preferred Stock of The Pantry, Inc, without consent of the holders of a majority
of the outstanding shares of Series B Preferred Stock, voting separately as a
single class, restricts the following: (i) the issuance of any securities with
equal or superior rights with respect to dividends or liquidation preferences,
(ii) the repurchase of any shares of, making of any dividend or distribution to,
or any reclassification with respect to any of the Company's outstanding shares
of capital stock, (iii) amendment of modification of the Company's Article of
Incorporation or Bylaws so as to adversely affect the relative rights,
preferences, qualification, limitations or restrictions or the Series B
Preferred Stock and (iv) amendment of the related paragraph regarding
Restrictions and Limitations in the Certificate of Designation of Preferences of
the Series B Preferred Stock of The Pantry, Inc.

(A) SERIES A

Except as required by Delaware law, the holders of the Series A Preferred
Stock (i) shall be not be entitled to vote on any matter coming before the
stockholders of the Company and (ii) shall not be included in determining the
number of shares voting or entitled to vote on any such matters. The holders of
Series A Preferred Stock are entitled to cumulative dividends from the Company
on each share of Series A Preferred Stock at a semi-annual rate equal to $60.00
per share plus an amount determined by applying a twelve percent (12%) annual
rate compounded semi-annually to any accrued but unpaid dividend. Except as
limited by the Senior Note Indenture, Senior Subordinated Notes Indenture and
the Certificate of Designation of Preferences of the Series B Preferred Stock of
The Pantry, Inc, such dividends on the outstanding shares of Series A Preferred
Stock shall be payable at such intervals as the Board of Directors of the
Company may from time to time determine and may be paid in cash or by issuing
additional shares, including fractional shares of Series A Preferred Stock, at
the rate of one share for each $1,000 of dividends outstanding.

Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding shares of Series A
Preferred Stock, shall be entitled to be paid out of the assets of the Company
available for distribution to its Stockholders, whether such assets are capital,
surplus or earnings, before any payment or declaration and setting apart for
payment of any amount shall be made in respect of the outstanding shares of the
Company's Common Stock, but following the preferences of Series B Preferred
Stock as discussed herein, an amount equal to each $1,000 per share of Series A
Preferred Stock then outstanding, plus all accrued but unpaid dividends thereon
to the date fixed for liquidation (whether or not declared), and no more. If
upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the assets to be distributed after satisfaction of the
preferences of Series B Preferred Stock among the holders of outstanding shares
of Series A Preferred Stock shall be insufficient to permit the payment to such
stockholders of the full preferential amounts aforesaid, then the entire assets
of the Company to be distributed ratably among the holders of outstanding shares
of Series A Preferred Stock based on the full preferential amounts for the
number of outstanding shares of Series A Preferred Stock held by each holder.

(A) SERIES B

At all meetings of the stockholders of the Company and in the case of any
actions of stockholders in lieu of a meeting date, the holders of the Series B
Preferred Stock shall be entitled to ten (10) votes per share and, except as
required by

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 13 -- PREFERRED STOCK: (Continued)
Delaware law, shall vote together with the holders of Common Stock as a single
class. The holders of Series B Preferred Stock are entitled to cumulative
dividends from the Company on each share of Series B Preferred Stock at a
quarterly rate equal to $32.5 per share plus an amount determined by applying a
thirteen percent (13%) annual rate compounded quarterly to any accrued but
unpaid dividend. Except as limited by both the Senior Notes and Senior
Subordinated Notes Indentures, such dividends on the outstanding shares of
Series B Preferred Stock shall be payable at such intervals as the Board of
Directors of the Company may from time to time determine and may be paid in cash
or by issuing additional shares, including fractional shares of Series B
Preferred Stock, at the rate of one share for each $1,000 of dividends
outstanding.

Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding shares of Series B
Preferred Stock, shall be entitled to be paid out of the assets of the Company
available for distribution to its Stockholders, whether such assets are capital,
surplus or earnings, before any payment or declaration and setting apart for
payment of any amount shall be made in respect of the outstanding shares of any
other class or series of the Company's capital stock, including without
limitation, shares of Series A Preferred Stock and of Common Stock, an amount
equal to $1,000 per share of Series B Preferred Stock then outstanding, plus all
accrued but unpaid dividends thereon to the date fixed for liquidation (whether
or not declared), and no more. If upon the dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary, the assets to be
distributed among the holders of outstanding shares of Series B Preferred Stock
shall be insufficient to permit the payment to such stockholders of the full
preferential amounts aforesaid, then the entire assets of the Company to be
distributed ratably among the holders of outstanding shares of Series B
Preferred Stock based on the full preferential amounts for the number of
outstanding shares of Series B Preferred Stock held by each holder.

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION:

On October 23, 1997, the Company purchased all of the capital stock of Lil'
Champ Acquisition (see Note 15. Subsequent Events). Sandhills, Inc., Lil' Champ
Food Stores, Inc. ("Lil' Champ") and all future direct and indirect restricted
subsidiaries (together the "Guarantors"), jointly and severally, unconditionally
guaranteed, on an unsecured senior subordinated basis, the full and prompt
performance of The Pantry's obligations under its $200.0 million, 10 1/4% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") and the related
Indenture, the issuance of which occured on October 23, 1997 (see Note 15.
Subsequent Events). The Senior Subordinated Notes will be exchanged for new
notes (the "Exchange Notes") in an exchange offer upon the effectiveness of The
Pantry's pending Form S-4 Registration Statement. The form and terms of the
Exchange Notes are the same as the form and terms of the Senior Subordinated
Notes (which they replace) except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, and (ii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement by virtue of
consummation of the exchange offer.

The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (currently, Sandhills, Inc. and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain covenants
that, among other things, restrict the ability of The Pantry and any restricted
subsidiary to: (i) incur additional indebtedness; (ii) pay dividends or make
distributions; (iii) issue stock of subsidiaries; (iv) make certain investments;
(v) repurchase stock; (vi) create liens; (vii) enter into transaction with
affiliates; (viii) enter into sale-leaseback transactions; (ix) merge or
consolidate The Pantry or any of its subsidiaries; and (x) transfer and sell
assets.

Management has determined that separate, full financial statements of the
Guarantor (Sandhills, Inc. as of September 25, 1997) would not be material to
investors and therefore such financial statements are not provided. The
following supplemental combining financial statements present information
regarding the Guarantor and The Pantry.

The Pantry accounts for its wholly-owned subsidiaries on the equity basis.

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The principal
eliminating entries eliminate investments in subsidiaries and intercompany
balances.

THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED SEPTEMBER 28, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales........................................ $187,380 $ -- $ -- $ -- $187,380
Gasoline sales........................................... 187,165 -- -- -- 187,165
Commissions.............................................. 4,516 -- -- -- 4,516
---------- ---------- ------------- ------------ --------
Total revenues........................................ 379,061 -- -- -- 379,061
---------- ---------- ------------- ------------ --------
Cost of sales:
Merchandise.............................................. 121,976 -- -- -- 121,976
Gasoline................................................. 161,179 -- -- -- 161,179
---------- ---------- ------------- ------------ --------
Total cost of sales................................... 283,155 -- -- -- 283,155
---------- ---------- ------------- ------------ --------
Gross profit............................................... 95,906 -- -- -- 95,906
---------- ---------- ------------- ------------ --------
Operating expenses:
Store expenses........................................... 66,432 -- -- (11,310) 55,122
Store expenses -- related parties........................ 1,084 -- -- -- 1,084
General and administrative expenses...................... 18,089 45 25 -- 18,159
Depreciation and amortization............................ 9,494 5 6 -- 9,505
Amortization of non-compete agreement.................... 1,965 -- -- -- 1,965
---------- ---------- ------------- ------------ --------
Total operating expenses.............................. 97,064 50 31 (11,310) 85,835
---------- ---------- ------------- ------------ --------
Income from operations..................................... (1,158) (50) (31) 11,310 10,071
---------- ---------- ------------- ------------ --------
Equity in earnings of subsidiaries......................... 12,163 -- -- (12,163) --
---------- ---------- ------------- ------------ --------
Other income (expense):
Interest expense......................................... (14,449) -- (17) 1,492 (12,974)
Interest -- related parties.............................. (266) -- -- -- (266)
Miscellaneous............................................ 161 13,091 260 (12,801) 711
Due diligence costs...................................... (101) -- (1,080) -- (1,181)
---------- ---------- ------------- ------------ --------
Total other expense................................... (14,655) 13,091 (837) (11,309) (13,710)
---------- ---------- ------------- ------------ --------
Loss before income taxes................................... (3,650) 13,041 (868) (12,162) (3,639)
Income tax benefit (expense)............................... 365 (4,434) (120) 4,543 354
---------- ---------- ------------- ------------ --------
Loss before extraordinary item and cumulative
effect of accounting change.............................. (3,285) 8,607 (988) (7,619) (3,285)
Cumulative effect of change in accounting for
post-employment benefits (net of income
tax benefit of $640)..................................... (960) -- -- -- (960)
---------- ---------- ------------- ------------ --------
Net loss................................................... $ (4,245) $ 8,607 $ (988) $ (7,619) $ (4,245)
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 28, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)......................................... $ (4,245) $ 8,607 $ (987) $ (7,620) $(4,245)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting for
post-employment benefits............................. 1,600 -- -- -- 1,600
Depreciation and amortization.......................... 11,464 -- 6 -- 11,470
Provision for deferred income taxes.................... (2,451) -- -- -- (2,451)
Loss on sale of property and equipment................. 2 -- -- -- 2
Provision for environmental expenses................... (418) -- -- -- (418)
Provision for closed stores............................ 292 -- -- -- 292
Equity earnings of affiliates.......................... (7,620) -- -- 7,620 --
Changes in operating assets and liabilities, net:
Receivables............................................ (284) (1,392) (30) 2,100 394
Inventories............................................ 1,694 -- -- -- 1,694
Prepaid expenses....................................... 121 -- (2) -- 119
Other non-current assets............................... (322) (58) 101 -- (279)
Accounts payable....................................... 2,294 -- -- -- 2,294
Other current liabilities and accrued expenses......... (126) 447 198 (556) (37)
Employment obligations................................. (140) -- -- -- (140)
Other noncurrent liabilities........................... 2,871 281 -- (1,544) 1,608
---------- ---------- ------------- ------------ -------
Net cash provided by operating activities................... 4,732 7,885 (714) -- 11,903
---------- ---------- ------------- ------------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale....................... (7,853) -- (10,747) -- (18,600)
Additions to property and equipment....................... (16,543) -- (107) -- (16,650)
Proceeds from sale of property held for sale.............. 8,644 -- 10,792 -- 19,436
Proceeds from sale of property and equipment.............. 533 -- -- -- 533
Intercompany notes receivable (payable)................... 12,950 (12,950) -- -- --
Acquisition of related businesses......................... -- -- -- -- --
---------- ---------- ------------- ------------ -------
Net cash used in investing activities....................... (2,269) (12,950) (62) -- (15,281)
---------- ---------- ------------- ------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations...... (413) -- -- -- (413)
Principal repayments of long-term debt.................... -- -- (7,281) -- (7,281)
Proceeds from issuance of long-term debt.................. -- -- 7,267 -- 7,267
Other financing costs..................................... (523) -- -- -- (523)
---------- ---------- ------------- ------------ -------
---------- ---------- ------------- ------------ -------
Net cash provided by (used in) financing activities......... (936) -- (14) -- (950)
---------- ---------- ------------- ------------ -------
Net increase (decrease) in cash............................. 1,527 (5,065) (790) -- (4,328)
CASH AT BEGINNING OF YEAR................................... 1,720 8,649 4,958 -- 15,327
---------- ---------- ------------- ------------ -------
CASH AT END OF YEAR......................................... $ 3,247 $ 3,584 $ 4,168 $ -- $10,999
---------- ---------- ------------- ------------ -------
---------- ---------- ------------- ------------ -------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING BALANCE SHEETS

SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 1,512 $ 135 $ 3,690 $ -- $ 5,337
Receivables, net......................................... 4,411 3,898 30 (5,479) 2,860
Inventories.............................................. 13,223 -- -- -- 13,223
Prepaid expenses......................................... 770 3 3 -- 776
Income taxes receivable.................................. 55 -- 8 -- 63
Property held for sale................................... 2,068 -- 748 -- 2,816
Deferred income taxes.................................... 879 -- -- -- 879
---------- ---------- ------------- ------------ --------
Total current assets.................................. 22,918 4,036 4,479 (5,479) 25,954
---------- ---------- ------------- ------------ --------
Investment in subsidiaries................................. 36,267 -- -- (36,267) --
---------- ---------- ------------- ------------ --------
Property & Equipment, net.................................. 65,105 -- 350 -- 65,455
---------- ---------- ------------- ------------ --------
Other assets:
Goodwill, net............................................ 16,852 -- -- -- 16,852
Deferred lease cost, net................................. 359 -- -- -- 359
Deferred financing cost, net............................. 5,940 -- -- -- 5,940
Environmental receivables................................ 5,162 -- -- -- 5,162
Deferred income taxes.................................... 790 -- -- -- 790
Intercompany notes receivable............................ -- 29,452 -- (29,452) --
Other.................................................... 279 87 2 -- 368
---------- ---------- ------------- ------------ --------
Total other assets.................................... 29,382 29,539 2 (29,452) 29,471
---------- ---------- ------------- ------------ --------
Total Assets............................................... $153,672 $ 33,575 $ 4,831 $(71,198) $120,880
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING BALANCE SHEETS -- CONTINUED

SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt..................... $ -- $ -- $ 16 $ -- $ 16
Current maturities of capital lease obligations.......... 285 -- -- -- 285
Accounts payable:
Trade................................................. 15,666 -- -- -- 15,666
Money orders.......................................... 2,788 -- -- -- 2,788
Accrued interest......................................... 5,143 -- 1 (728) 4,416
Accrued compensation and related taxes................... 2,336 1 1 -- 2,338
Income taxes payable..................................... -- 1,331 98 (1,429) --
Other accrued taxes...................................... 2,135 -- -- -- 2,135
Accrued insurance........................................ 3,629 -- -- -- 3,629
Other Accrued Liabilities................................ 4,299 94 122 (3,321) 1,194
---------- ---------- ------------- ------------ --------
Total current liabilities............................. 36,281 1,426 238 (5,478) 32,467
---------- ---------- ------------- ------------ --------
Long-term debt............................................. 99,995 -- 153 -- 100,148
---------- ---------- ------------- ------------ --------
Other non-current liabilities:
Environmental expenses................................... 6,232 -- -- -- 6,232
Capital lease obligations................................ 982 -- -- -- 982
Employment obligations................................... 2,039 -- -- -- 2,039
Accrued dividends on preferred stock..................... 2,654 -- -- -- 2,654
Intercompany note payable................................ 29,452 -- -- (29,452) --
Other.................................................... 3,581 281 43 -- 3,905
---------- ---------- ------------- ------------ --------
Total other non-current liabilities................... 44,940 281 43 (29,452) 15,812
---------- ---------- ------------- ------------ --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock.......................................... -- -- -- -- --
Common stock............................................. 1 -- -- -- 1
Additional paid-in capital............................... (10,557) 25 5,001 (5,026) (10,557)
Retained earnings (deficit).............................. (16,991) 31,843 (602) (31,241) (16,991)
---------- ---------- ------------- ------------ --------
Total shareholders' equity (deficit).................. (27,547) 31,868 4,399 (36,267) (27,547)
---------- ---------- ------------- ------------ --------
Total Liabilities and Shareholders Deficit................. $153,669 $ 33,575 $ 4,833 $(71,197) $120,880
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales........................................ $188,091 $ -- $ -- $ -- $188,091
Gasoline sales........................................... 192,737 -- -- -- 192,737
Commissions.............................................. 3,979 -- -- -- 3,979
---------- ---------- ------------- ------------ --------
Total revenues........................................ 384,807 -- -- -- 384,807
---------- ---------- ------------- ------------ --------
Cost of sales:
Merchandise.............................................. 125,979 -- -- -- 125,979
Gasoline................................................. 167,610 -- -- -- 167,610
---------- ---------- ------------- ------------ --------
Total cost of sales................................... 293,589 -- -- -- 293,589
---------- ---------- ------------- ------------ --------
Gross profit............................................... 91,218 -- -- -- 91,218
---------- ---------- ------------- ------------ --------
Operating expenses:
Store expenses........................................... 68,331 -- (293) (11,471) 56,567
Store expenses -- related parties........................ 1,274 -- -- -- 1,274
General and administrative expenses...................... 17,024 80 23 -- 17,127
Restructuring charges.................................... 2,184 2,184
Impairment of long-lived assets.......................... 3,034 3,034
Depreciation and amortization............................ 9,138 14 6 -- 9,158
---------- ---------- ------------- ------------ --------
Total operating expenses.............................. 100,985 94 (264) (11,471) 89,344
---------- ---------- ------------- ------------ --------
Income from operations..................................... (9,767) (94) 264 11,471 1,874
---------- ---------- ------------- ------------ --------
Equity in earnings of subsidiaries......................... 14,597 -- -- (14,597) --
---------- ---------- ------------- ------------ --------
Other income (expense):
Interest expense......................................... (14,540) -- (14) 2,562 (11,992)
Miscellaneous............................................ (1,068) 14,243 198 (14,033) (660)
---------- ---------- ------------- ------------ --------
Total other expense................................... (15,608) 14,243 184 (11,471) (12,652)
---------- ---------- ------------- ------------ --------
Loss before income taxes................................... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit (expense)............................... 2,664 (4,811) (128) 4,939 2,664
---------- ---------- ------------- ------------ --------
Net loss................................................... $ (8,114) $ 9,338 $ 320 $ (9,658) $ (8,114)
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)......................................... $ (8,114) $ 9,339 $ 319 $ (9,658) $(8,114)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Impairment of long-lived assets........................ 3,034 -- -- -- 3,034
Depreciation and amortization.......................... 9,152 -- 6 -- 9,158
Provision for deferred income taxes.................... (1,558) -- -- -- (1,558)
Loss on sale of property and equipment................. 470 -- -- -- 470
Provision for environmental expenses................... 512 -- -- -- 512
Provision for closed stores............................ 673 -- -- -- 673
Write-off of property held for sale.................... 168 -- -- -- 168
Equity earnings of affiliates.......................... (9,658) -- -- 9,658 --
Changes in operating assets and liabilities, net:
Receivables............................................ (627) (392) (8) 488 (539)
Inventories............................................ (937) -- -- -- (937)
Prepaid expenses....................................... 19 (1) 2 -- 20
Other non-current assets............................... 448 (17) 1 -- 432
Accounts payable....................................... 2,104 -- -- -- 2,104
Other current liabilities and accrued expenses......... (641) 125 (27) (96) (639)
Employment obligations................................. (255) -- -- -- (255)
Other noncurrent liabilities........................... 1,279 -- (1) (392) 886
---------- ---------- ------------- ------------ -------
Net cash provided by operating activities................... (3,931) 9,054 292 -- 5,415
---------- ---------- ------------- ------------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale....................... (3,301) -- (799) 50 (4,050)
Additions to property and equipment....................... (7,070) -- (14) -- (7,084)
Proceeds from sale of property held for sale.............. 2,462 -- 50 (50) 2,462
Proceeds from sale of property and equipment.............. 1,458 -- 10 -- 1,468
Intercompany notes receivable (payable)................... 12,502 (12,502) -- --
Acquisition of related businesses......................... -- -- -- -- --
---------- ---------- ------------- ------------ -------
Net cash used in investing activities....................... 6,051 (12,502) (753) -- (7,204)
---------- ---------- ------------- ------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations...... (347) -- -- -- (347)
Principal repayments of long-term debt.................... (5) -- (15) -- (20)
Net proceeds from equity issue............................ (447) -- -- (447)
Other financing costs..................................... (3,058) -- -- -- (3,058)
---------- ---------- ------------- ------------ -------
---------- ---------- ------------- ------------ -------
Net cash provided by (used in) financing activities......... (3,857) -- (15) -- (3,872)
---------- ---------- ------------- ------------ -------
Net increase (decrease) in cash............................. (1,737) (3,448) (476) -- (5,661)
CASH AT BEGINNING OF YEAR................................... 3,247 3,584 4,168 -- 10,999
---------- ---------- ------------- ------------ -------
CASH AT END OF YEAR......................................... $ 1,510 $ 136 $ 3,692 $ -- $ 5,338
---------- ---------- ------------- ------------ -------
---------- ---------- ------------- ------------ -------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING BALANCE SHEETS

SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net......................................... 4,056 4,562 30 (6,547) 2,101
Inventories.............................................. 17,161 -- -- -- 17,161
Prepaid expenses......................................... 1,195 6 3 -- 1,204
Property held for sale................................... 3,323 -- -- -- 3,323
Deferred income taxes.................................... 1,142 -- -- -- 1,142
---------- ---------- ------------- ------------ --------
Total current assets.................................. 29,124 4,847 854 (6,547) 28,278
---------- ---------- ------------- ------------ --------
Investment in subsidiaries................................. 47,225 -- -- (47,225) --
---------- ---------- ------------- ------------ --------
Property & Equipment, net.................................. 77,641 -- 345 -- 77,986
---------- ---------- ------------- ------------ --------
Other assets:
Goodwill, net............................................ 20,318 -- -- -- 20,318
Deferred lease cost, net................................. 314 -- -- -- 314
Deferred financing cost, net............................. 4,578 -- -- -- 4,578
Environmental receivables................................ 6,511 -- -- -- 6,511
Deferred income taxes.................................... 156 -- -- -- 156
Escrow for Lil' Champ acquisition........................ -- -- 4,049 -- 4,049
Intercompany notes receivable............................ -- 39,434 -- (39,434) --
Other.................................................... 534 74 1 -- 609
---------- ---------- ------------- ------------ --------
Total other assets.................................... 32,411 39,508 4,050 (39,434) 36,535
---------- ---------- ------------- ------------ --------
Total assets............................................... $186,401 $ 44,355 $ 5,249 $(93,206) $142,799
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING BALANCE SHEETS

SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt..................... $ 17 $ -- $ 16 $ -- $ 33
Current maturities of capital lease obligations.......... 285 -- -- -- 285
Accounts payable:
Trade................................................. 16,032 3 -- -- 16,035
Money orders.......................................... 3,022 -- -- -- 3,022
Accrued interest......................................... 5,564 -- 1 (973) 4,592
Accrued compensation and related taxes................... 3,322 -- 1 -- 3,323
Income taxes payable..................................... 313 1,560 235 (1,812) 296
Other accrued taxes...................................... 2,194 -- -- -- 2,194
Accrued insurance........................................ 3,887 -- -- -- 3,887
Other accrued liabilities................................ 6,382 113 122 (3,761) 2,856
---------- ---------- ------------- ------------ --------
Total current liabilities............................. 41,018 1,676 375 (6,546) 36,523
---------- ---------- ------------- ------------ --------
Long-term debt............................................. 100,168 -- 137 -- 100,305
---------- ---------- ------------- ------------ --------
Other non-current liabilities:
Environmental expenses................................... 7,806 -- -- -- 7,806
Capital lease obligations................................ 679 -- -- -- 679
Employment obligations................................... 1,341 -- -- -- 1,341
Accrued dividends on preferred stock..................... 7,958 -- -- -- 7,958
Intercompany note payable................................ 39,434 -- -- (39,434) --
Other.................................................... 5,870 150 40 -- 6,060
---------- ---------- ------------- ------------ --------
Total other non-current liabilities................... 63,088 150 40 (39,434) 23,844
---------- ---------- ------------- ------------ --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock.......................................... -- -- -- -- --
Common stock............................................. 1 -- -- -- 1
Additional paid-in capital............................... 5,396 25 5,001 (5,026) 5,396
Retained earnings (deficit).............................. (23,270) 42,504 (304) (42,200) (23,270)
---------- ---------- ------------- ------------ --------
Total shareholders' equity (deficit).................. (17,873) 42,529 4,697 (47,226) (17,873)
---------- ---------- ------------- ------------ --------
Total liabilities and shareholders deficit................. $186,401 $ 44,355 $ 5,249 $(93,206) $142,799
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS

YEAR ENDED SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales........................................ $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........................................... 220,166 -- -- -- 220,166
Commissions.............................................. 4,787 -- -- -- 4,787
---------- ---------- ------------- ------------ --------
Total revenues........................................ 427,393 -- -- -- 427,393
---------- ---------- ------------- ------------ --------
Cost of sales:
Merchandise.............................................. 132,846 -- -- -- 132,846
Gasoline................................................. 197,268 -- -- -- 197,268
---------- ---------- ------------- ------------ --------
Total cost of sales................................... 330,114 -- -- -- 330,114
---------- ---------- ------------- ------------ --------
Gross profit............................................... 97,279 -- -- -- 97,279
---------- ---------- ------------- ------------ --------
Operating expenses:
Store expenses........................................... 71,945 -- (291) (12,726) 58,928
Store expenses -- related parties........................ 1,280 -- -- -- 1,280
General and administrative expenses...................... 16,731 42 23 -- 16,796
Depreciation and amortization............................ 9,485 13 6 -- 9,504
---------- ---------- ------------- ------------ --------
Total operating expenses.............................. 99,441 55 (262) (12,726) 86,508
---------- ---------- ------------- ------------ --------
Income from operations..................................... (2,162) (55) 262 12,726 10,771
---------- ---------- ------------- ------------ --------
Equity in earnings of subsidiaries......................... 16,605 -- -- (16,605) --
---------- ---------- ------------- ------------ --------
Other income (expense):
Interest expense......................................... (16,095) -- (13) 3,069 (13,039)
Miscellaneous............................................ 677 16,207 204 (15,795) 1,293
---------- ---------- ------------- ------------ --------
Total other expense................................... (15,418) 16,207 191 (12,726) (11,746)
---------- ---------- ------------- ------------ --------
Loss before income taxes................................... (975) 16,152 453 (16,605) (975)
Income tax benefit (expense)............................... -- (5,492) (155) 5,647 --
---------- ---------- ------------- ------------ --------
Net loss................................................... $ (975) $ 10,660 $ 298 $(10,958) $ (975)
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14 -- SUPPLEMENTAL GUARANTOR INFORMATION: (Continued)
THE PANTRY, INC.

SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss).......................................... $ (975) $ 10,660 $ 298 $(10,958) $ (975)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 9,499 -- 5 -- 9,504
Provision for deferred income taxes................... 371 -- -- -- 371
Gain on sale of property and equipment................ (1,054) -- -- -- (1,054)
Provision for environmental expenses.................. 1,574 -- -- -- 1,574
Provision for closed stores........................... (11) -- -- -- (11)
Equity earnings of affiliates......................... (10,958) -- -- 10,958 --
Changes in operating assets and liabilities, net:
Receivables........................................... 129 (664) 8 (527)
Inventories........................................... (2,273) -- -- -- (2,273)
Prepaid expenses...................................... (426) (3) -- (429)
Other non-current assets.............................. (5,378) 14 1 1,068 (4,295)
Accounts payable...................................... 600 3 -- 603
Other current liabilities and accrued expenses........ 3,396 246 135 (384) 3,393
Employment obligations................................ (698) -- -- (698)
Other noncurrent liabilities.......................... 2,970 (131) -- (684) 2,155
---------- ---------- ------------- ------------ --------
Net cash provided by operating activities.................. (3,234) 10,125 447 -- 7,338
---------- ---------- ------------- ------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale...................... (1,874) -- (4) 50 (1,828)
Additions to property and equipment...................... (14,749) -- -- -- (14,749)
Proceeds from sale of property held for sale............. 642 -- 753 (50) 1,345
Proceeds from sale of property and equipment............. 2,315 -- -- -- 2,315
Intercompany notes receivable (payable).................. 9,982 (9,982) -- --
Acquisition of related businesses........................ (12,162) -- -- -- (12,162)
---------- ---------- ------------- ------------ --------
Net cash used in investing activities...................... (15,846) (9,982) 749 -- (25,079)
---------- ---------- ------------- ------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations..... (303) -- -- -- (303)
Principal repayments of long-term debt................... (10) -- (16) -- (26)
Proceeds from issuance of long-term debt................. 200 -- -- -- 200
Net proceeds from equity issue............................. 15,953 -- -- 15,953
Other financing costs.................................... (74) -- -- -- (74)
---------- ---------- ------------- ------------ --------
Net cash provided by (used in) financing activities........ 15,766 -- (16) -- 15,750
---------- ---------- ------------- ------------ --------
Net increase (decrease) in cash............................ (3,314) 143 1,180 -- (1,991)
CASH AT BEGINNING OF YEAR.................................. 1,512 136 3,690 -- 5,338
---------- ---------- ------------- ------------ --------
CASH AT END OF YEAR........................................ $ (1,802) $ 279 $ 4,870 $ -- $ 3,347
---------- ---------- ------------- ------------ --------
---------- ---------- ------------- ------------ --------
</TABLE>

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 15 -- SUBSEQUENT EVENTS:

On October 23, 1997, the Company acquired all of the outstanding common
stock of Lil' Champ Food Stores, Inc. ("Lil' Champ") from Docks U.S.A., Inc. for
$132.7 million in cash and repaid $10.7 million in outstanding indebtedness of
Lil' Champ (the "Lil' Champ Acquisition"). Lil Champ is a leading operator of
convenience stores in Florida and the largest convenience store operator in
northern Florida. Lil Champ's 489 stores are located primarily in northern
Florida and Georgia, with 151 stores concentrated in the Jacksonville, Florida
area. The purchase price, the refinancing of existing Lil' Champ debt, and the
fees and expenses of the Lil' Champ acquisition were financed with the proceeds
from the offering of $200.0 million Senior Subordinated Notes, cash on hand and
the sale to existing stockholders and management of the Company of an additional
$32.4 million of the Company's $.01 par value common stock (the "Equity
Investment") in connection with the Lil' Champ Acquisition. In connection with
the Equity Investment, all shares of Series A Preferred Stock were cancelled and
all rights to accrued dividends relating to the Series A Preferred Stock were
waived.

On October 23, 1997, the Company entered into a new bank credit facility
(the "New Credit Facility") consisting of a $45.0 million revolving credit
facility and a $30.0 million acquisition facility. The New Credit Facility is
available for (i) working capital financing and general corporate purposes of
the Company, (ii) issuing commercial and standby letters of credit and (iii)
acquisitions. The New Credit Facility is secured by substantially all of the
assets of the Company and the Guarantors and is guaranteed by the Guarantors.
The New Credit Facility contains covenants restricting the ability of the
Company and any its subsidiaries to, among others: (i) incur additional debt;
(ii) declare dividends or redeem or repurchase capital stock; (iii) prepay,
redeem or purchase debt; (iv) incur liens; (v) make loans and investments; (vi)
make capital expenditures; (vii) engage in mergers, acquisitions and asset
sales; and (viii) engage in transactions with affiliates. The Company is also
required to comply with financial covenants with respect to (a) a minimum
coverage ratio, (b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage
ratio, and (d) a maximum capital expenditure allowance.

On October 23, 1997, the Company purchased $51.0 million in principal
amount of Senior Notes at a purchase price of 110% of the aggregate principal
amount of each tendered Senior Note plus accrued and unpaid interest up to, but
not including, the date of purchase (the "Tender Offer"). The Company obtained
consents (the "Consent Solicitation") from the holders of the Senior Notes to
amendments and waivers to certain of the covenants contained in the indenture
governing the Senior Notes (the "Senior Notes Indenture"). The Senior Notes
Indenture contains covenants including the restrictions on the Company's ability
to incur additional indebtedness and make acquisitions. The Company obtained
consents to, among other things, permit the offering of the Senior Subordinated
Notes, the Lil' Champ Acquisition and enter into the New Credit Facility. The
consideration paid in respect of validly delivered, and not revoked, consents
was 1 3/4% of the principal amount of the Senior Notes for which consents have
been validity delivered and not revoked. The Company recognized an extraordinary
loss, net of taxes, of approximately $6.0 million in connection with the Tender
Offer and Consent Solicitation.

The Lil' Champ Acquisition will be accounted for under the purchase method
of accounting. Under the purchase method of accounting, the total purchase price
will be allocated to the tangible and intangible assets acquired and liabilities
assumed by the Company based on their respective fair values as of the
acquisition date as determined by valuations and other studies not yet
completed. For purposes of supplemental pro forma information, the excess of the
purchase price over the historical net assets of Lil' Champ (approximately $54.0
million) has been considered to be goodwill and other intangible assets
amortized over a weighted-average period of 30 years, pending the completion of
appraisals and other purchase price allocation adjustments.

<PAGE>
THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 15 -- SUBSEQUENT EVENTS: (Continued)
Supplemental pro forma information, assuming the Lil' Champ Acquisition,
the refinancing of existing Lil Champ debt, the issuance of the Senior
Subordinated Notes, the Tender Offer and Consent Solicitation, and the Equity
Investment occurred at the beginning of each of the periods presented is as
follows:

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenues...................................................................... $929,472 $982,010
Income (loss) before extraordinary items...................................... (6,965) (4,034)
Net income (loss)............................................................. (12,534) (9,956)
</TABLE>

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On June 25, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K regarding the Company's dismissal of
Price Waterhouse LLP as its principal independent accountants and the engagement
of Deloitte & Touche LLP as its new principal independent accountants. As
reported in the Form 8-K, none of Price Waterhouse LLP's reports for either of
the past two years contained adverse opinions, disclaimers of opinion, or were
qualified as to uncertainty, audit scope or accounting principles. In addition,
there were no disagreements with Price Waterhouse LLP on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure in connection with the two most recent fiscal years and any
subsequent interim period preceding the engagement of the new auditors.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 19, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------- ---- --------------------------------------------------
<S> <C> <C>
Peter J. Sodini 56 President, Chief Executive Officer and Director
Dennis R. Crook 54 Senior Vice President, Administration and Gasoline
Marketing
William T. Flyg 55 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney 58 Senior Vice President, Operations
Daniel J. McCormack 54 Vice President, Marketing
John H. Hearne 54 Vice President, Real Estate
Ronald P. Spogli 49 Director
Charles P. Rullman 49 Director
Todd W. Halloran 35 Director
Jon D. Ralph 33 Director
Christopher C. Behrens 36 Director
</TABLE>

PETER J. SODINI, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, joined
The Pantry in February 1996 as Chief Operating Officer and was named President
and Chief Executive Officer in June 1996. Mr. Sodini has served as a director of
the Company since November 1995. Mr. Sodini is a director of Buttrey Food and
Drug Stores Company and Pamida Holding Corporation. From December 1991 to
November 1995, Mr. Sodini was Chief Executive Officer and a director of Purity
Supreme, Inc. Prior to 1991, Mr. Sodini held executive positions at several
supermarket chains including Boys Markets, Inc. and Piggly Wiggly Southern, Inc.

DENNIS R. CROOK, SENIOR VICE PRESIDENT, ADMINISTRATION AND GASOLINE
MARKETING, joined The Pantry in March 1996. From December 1987 to November 1995,
Mr. Crook was Senior Vice President, Human Resources and Labor Relations of
Purity Supreme, Inc.

WILLIAM T. FLYG, SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL
OFFICER. Mr. Flyg joined The Pantry in January 1997. He was employed by Purity
Supreme, Inc. ("Purity") as Chief Financial Officer from January 1992 until the
Company was sold in November 1995, at which time he continued as an employee of
Purity until December 1996.

DOUGLAS M. SWEENEY, SENIOR VICE PRESIDENT, OPERATIONS, joined The Pantry in
March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior Vice
President, Operations of Purity Supreme, Inc.

JOHN H. HEARNE, VICE PRESIDENT, REAL ESTATE, joined the Company in 1984.
Prior to joining the Company, Mr. Hearne was employed for 15 years by Sears,
Roebuck, and Company. He has been active in construction since 1965 and in
commercial real estate and property management since 1977. He holds a real
estate broker's license in both North Carolina and South Carolina.

DANIEL J. MCCORMACK, VICE PRESIDENT, MARKETING, joined The Pantry in March
1996. From 1989 to February 1996, Mr. McCormack was Director of Purchasing of
Purity Supreme, Inc.

RONALD P. SPOGLI, DIRECTOR, has been a director of the Company since
November 1995. He is a founding partner of FS&Co. which was founded in 1983. Mr.
Spogli is the Chairman of the Board and a director of EnviroSource, Inc.

<PAGE>
Mr. Spogli also serves on the Boards of Directors of Calmar Inc., Buttrey Food
and Drug Stores Company, AFC Enterprises, Inc. and Brylane Inc.

CHARLES P. RULLMAN, DIRECTOR, has been a director of the Company since
November 1995. Mr. Rullman joined FS&Co. as a General Partner in 1995. From 1992
to 1995, Mr. Rullman was a General Partner of Westar Capital, a private equity
investment firm specializing in middle market transactions. Prior to joining
Westar, Mr. Rullman spent twenty years at Bankers Trust Company and its
affiliate BT Securities Corporation where he was a Managing Director and
Partner.

TODD W. HALLORAN, DIRECTOR, has been a director of the Company since
November 1995. Mr. Halloran joined FS&Co. in 1995. From 1994 to 1995 and from
1990 to 1994, Mr. Halloran was a Vice President and Associate at Goldman, Sachs
& Co., respectively, where he worked in the Mergers and Acquisition Department
and in the Principal Investment Area. Mr. Halloran is also a director of AFC
Enterprises, Inc.

JON D. RALPH, DIRECTOR, has been a director of the Company since November
1995. Mr. Ralph joined FS&Co. in 1989. Prior to joining FS&Co., Mr. Ralph spent
three years at Morgan Stanley & Co. where he served as an Analyst in the
Investment Banking Division. Mr. Ralph is also a director of EnviroSource, Inc.

CHRISTOPHER C. BEHRENS, DIRECTOR, has been a director of the Company since
February 1996. Since 1994, he has been a principal of Chase Capital Partners, an
affiliate of The Chase Manhattan Corporation engaged in the venture capital and
leveraged buyout business. From 1990 to 1994, Mr. Behrens was a Vice President
in The Chase Manhattan Corporation's Merchant Banking Group. Mr. Behrens is a
director of Portola Packaging and a number of other private companies.

Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders and until their successors are duly elected
and qualified.

<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information with respect to the fiscal 1995,
fiscal 1996 and fiscal 1997 compensation for services in all capacities of the
Company's Chief Executive Officer and four other most highly compensated
executive officers who were serving as executive officers at the end of the last
completed fiscal year and two additional individuals for whom disclosures would
have been provided as an executive officer but for the fact that the individual
was not serving as an executive officer of the Company at the end of the last
completed fiscal year (collectively, the "Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION (A) COMPENSATION (B)
- ----------------------------------- ----------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Peter J. Sodini 1997 $305,218 $150,000 $ 5,908 $2,500
President and Chief 1996 124,086 50,000 3,392 --
Executive Officer (c)
Dennis R. Crook 1997 $151,832 $ 70,000 $ 1,025 $2,019
Senior Vice President, 1996 82,933 20,000 41,250 --
Administration and Gasoline
Marketing (d)
William T. Flyg 1997 $109,615 $ 54,000 $ 3,076 $ --
Senior Vice President,
Finance and Chief Financial
Officer (e)
Douglas Sweeney 1997 $149,983 $ 72,000 $ 2,593 $2,014
Senior Vice President, 1996 91,334 20,000 1,352 --
Operations (f)
Daniel J. McCormack 1997 $ 95,488 $ 45,000 $ 4,269 $1,279
Vice President, Marketing (g) 1996 45,334 15,000 5,934 --
Eugene B. Horne, Jr. 1997 $102,925 $ -- $ 11,436 $2,617
Vice Chairman (h) 1996 182,804 49,413 14,464 3,321
1995 198,747 171,916 17,046 4,620
Mark C. King 1997 $ 95,233 $ -- $ 10,344 $2,435
Senior Vice President, 1996 119,923 -- 11,280 2,885
Finance (i) 1995 100,000 26,607 10,670 3,723
</TABLE>

- ---------------
(a) Consists primarily of executive medical reimbursements, but includes car
allowances for Mr. Horne in the amount of $10,400, $10,400 and $12,000 in
fiscal 1997, 1996 and 1995, respectively, and car allowances for Mr. King
in the amount of $10,200 in each of fiscal 1997, 1996 and 1995,
respectively.

(b) Consists of matching contributions to the Company's 401(k) Savings Plan.
See "Benefit Plan" below.

(c) Mr. Sodini was appointed Chief Operating Officer in February 1996 and
appointed President and Chief Executive Officer of the Company in June 1996
and, accordingly, only fiscal year 1996 and 1997 information is provided.

(d) Dennis R. Crook was appointed Senior Vice President, Administration and
Gasoline Marketing in March 1996 and, accordingly, only fiscal 1996 and
fiscal 1997 information is provided.

(e) William T. Flyg was appointed Senior Vice President, Finance and Chief
Financial Officer of the Company in January 1997 and, accordingly, only
fiscal 1997 information is provided.

(f) Douglas M. Sweeney was appointed Senior Vice President, Operations in
March 1996 and, accordingly, only fiscal year 1996 and 1997 information
is provided.

(g) Daniel J. McCormack was appointed Director, Marketing in March 1996 and,
accordingly, only fiscal year 1996 and 1997 information is provided.

(h) Mr. Horne served as Chief Executive Officer of the Company from December 1,
1995 until April 30, 1996. Mr. Horne served as Vice Chairman of the Company
from May 1996 until June 30, 1997 when he resigned from the Company.

(i) Mr. King served as Senior Vice President, Finance from July 1, 1993 to June
30, 1997 when he resigned from the Company.

<PAGE>
EXECUTIVE EMPLOYMENT CONTRACTS

On June 3, 1996, the Company entered into an employment agreement with Mr.
Crook. This agreement contains customary employment terms and provides for an
annual base salary of $150,000, subject to annual adjustment by the Board of
Directors and participation in any benefit or bonus programs instituted by the
Company. The agreement terminates on March 31, 1998. Pursuant to the terms of
the agreement, if Mr. Crook is terminated by the Company prior to a "change of
control" (as defined) without cause, Mr. Crook shall be entitled to severance
pay for the longer of the balance of the term or one year from the termination
date, subject to certain limitations. If Mr. Crook is terminated by the Company
following a change of control without cause or Mr. Crook terminates his
employment for "good reason" (as defined), Mr. Crook shall be entitled to
severance pay (including regular benefits) for a period of two years from the
termination date, subject to certain limitations. This agreement contains
covenants prohibiting Mr. Crook, for so long as he is employed by or receiving
severance benefits from the Company, from competing with the Company or
soliciting employment from employees of the Company.

On October 1, 1997, the Company entered into an employment agreement with
Mr. Sodini. This Agreement contains customary employment terms and provides for
an annual base salary of $475,000, subject to annual adjustment by the Board of
Directors, participation in any benefit or bonus programs instituted by the
Company, participation in an incentive bonus program which provides for a payout
of a minimum of 25% upon the achievement of goals determined by the Board of
Directors, and other perquisites. This agreement terminates on September 30,
2000. Pursuant to the terms of the agreement, if Mr. Sodini is terminated by the
Company prior to a "change in control" (as defined) with "just cause" (as
defined) or upon death or disability, Mr. Sodini shall be entitled to his then
effective compensation and benefits through the last day of his actual
employment by the Company (for termination for just cause or upon death) or his
effective date of termination, as determined by the Board of Directors (for
termination upon disability). In addition, if Mr. Sodini is terminated because
of death or disability, the Company shall pay to the estate of Mr. Sodini or to
Mr. Sodini, as the case may be, one year's pay (less amounts paid under any
disability plan).

If Mr. Sodini is terminated by the Company prior to a change in control
without cause, Mr. Sodini shall be entitled to severance pay (including regular
benefits) through the term of the agreement until such time as he engages in
other employment. If Mr. Sodini is terminated by the Company following a change
in control without cause or Mr. Sodini terminates his employment for "good
reason" (as defined), Mr. Sodini shall be entitled to severance pay (including
regular benefits) for a period of 18 months from the termination date, subject
to certain limitations. This agreement contains covenants prohibiting Mr.
Sodini, through the period ending on the latter of (i) 18 months after
termination or (ii) such time at which he no longer received severance benefits
from the Company, from competing with the Company or soliciting employment from
employees of the Company.

COMPENSATION OF DIRECTORS

Prior to December 1, 1995, non-employee directors were paid for meeting
attendance. As of December 1, 1995, Directors of the Company receive no
compensation as directors. Directors are reimbursed for their reasonable
expenses in attending meetings.

BENEFIT PLAN

The Company sponsors a 401(k) employee retirement savings plan with
Fidelity Investments for eligible employees. Employees must be at least nineteen
years of age and have one year of service working at least 1,000 hours to be
eligible to participate in the 401(k) plan. Employees may contribute up to 15%
of their annual compensation and contributions are matched by the Company on the
basis of 50% of the first 5% contributed. Matching contribution expense was
$346,000, $330,000 and $305,000 for fiscal years 1995, 1996 and 1997,
respectively.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors of the Company determines the compensation of
Executive Officers. During fiscal 1997, Mr. Sodini participated in Board of
Director deliberations regarding the compensation of the Company's Executive
Officers.

<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of December 15,
1997, with respect to the beneficial ownership of Common Stock by (i) each
person who beneficially owns more than 5% of such shares, (ii) each of the
executive officers named in the Summary Compensation Table, (iii) each director
of the Company and (iv) all executive officers and directors of the Company as a
group.

<TABLE>
<CAPTION>
AMOUNT OF AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE OF
OF BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------------------------- -------------------- -------------
<S> <C> <C>
Freeman Spogli & Co. Incorporated (1) 193,134 83.2%
Ronald P. Spogli (1) -- --
Charles P. Rullman (1) -- --
Jon D. Ralph (2) -- --
Todd W. Halloran (2) -- --

Chase Manhattan Capital L.P. 32,743 17.6%
Christopher C. Behrens (3) (4) 5,263 2.8%

Peter J. Sodini (5) 889 *
Dennis R. Crook -- --
William T. Flyg -- --
Douglas Sweeney -- --
Daniel J. McCormack -- --

All directors and executive officers as
a group (11 individuals) -- --
</TABLE>

- ---------------

* Less than 1.0%.

(1) Includes 46,000 shares issuable on the exercise of currently exercisable
warrants. 141,441 shares and 5,693 shares of common stock are held of
record, by FSEP III and FSEP International, respectively. As general partner
of FS Capital Partners, L.P. ("FS Capital"), which is general partner of
FSEP III, FS Holdings, Inc. ("FSHI") has the sole power to vote and dispose
of the shares owned by FSEP III. As general partner of FS&Co. International,
L.P. ("FS&Co. International"), which is the general partner of FSEP
International, FS International Holdings Limited ("FS International
Holdings") has the sole power to vote and dispose of the shares owned by
FSEP International. Messrs. Spogli and Rullman and Bradford M. Freeman,
William M. Wardlaw, J. Frederick Simmons and John M. Roth are the sole
directors, officers and shareholders of FSHI, FS International Holdings and
Freeman Spogli & Co. Incorporated, and as such may be deemed to be the
beneficial owners of the shares of the common stock and rights to acquire
the common stock owned by FSEP III and FSEP International. The business
address of Freeman Spogli & Co. Incorporated, FSEP III, FS Capital, FSHI and
its sole directors, officers and shareholders is 11100 Santa Monica
Boulevard, Suite 1900, Los Angeles, California 90025 and the business
address of FSEP International, FS&Co. International and FS International
Holdings is c/o Padget-Brown & Company, Ltd., West Winds Building, Third
Floor, Grand Cayman, Cayman Islands, British West Indies.

(2) Each of Messrs. Ralph and Halloran is an employee of an affiliate of Freeman
Spogli & Co. Incorporated.

(3) The business address of Chase Manhattan Capital, L.P. is 380 Madison Avenue,
12th Floor, New York, New York 10017. Mr. Behrens is a principal at Chase
Capital Partners, an affiliate of CMC.

(4) Mr. Behrens is a general partner of Baseball Partners, a New York general
partnership, that is the beneficial owner of 5,263 shares of common stock.
Mr. Behrens disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.

<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CAPITAL AND OTHER TRANSACTIONS

In December 1996, the FS Group invested additional equity in The Pantry,
thereby increasing its aggregate ownership interest to approximately 83.6% on a
fully diluted basis. The FS Group and Chase have together invested $60.8 million
in the aggregate, $22.8 million of which has been invested in new equity
securities of The Pantry. In October 1997, the FS Group, Chase and Peter J.
Sodini purchased an aggregate of $32.4 million of the common stock of the
Company in connection with the Lil' Champ Acquisition, thereby changing the FS
Group's aggregate ownership interest to approximately 83.2% on a fully diluted
basis. Mr. Sodini purchased 889 shares of the common stock of the Company for an
aggregate purchase price of $400,500, payable $185,500 in cash and $215,000 in
the form of a secured promissory note in favor of the Company. The FS Group and
Chase together invested $92.8 million in the aggregate, $54.8 million of which
has been invested in new equity securities of The Pantry. In connection with the
FS Group's previous investments in The Pantry, The Pantry has paid transaction
fees in the amount of $2.5 million to the FS Group. In addition, in connection
with the Lil' Champ Acquisition, The Pantry paid a fee in the amount of $2.0
million to the FS Group.

In August 1996, the FS Group, Chase, The Pantry and other stockholders
entered into a stockholders' agreement whereby (i) the FS Group was granted
certain rights of first offer prior to any transfer of securities, (ii) the FS
Group was granted certain "drag-along" rights with respect to the sale of
securities, (iii) the FS Group, Chase and other stockholders were granted
certain "tag-along" rights to the sale of securities by other stockholders, (iv)
various transfer restrictions were agreed upon by the stockholders and (v)
certain Board representation rights of Chase were established. In August 1996,
the FS Group, Chase, The Pantry and other stockholders entered into registration
rights agreements relating to the common stock and preferred stock of The Pantry
whereby certain demand and "piggyback" registration rights were granted to the
stockholders. In connection with the October 1997 equity investment, the
stockholders agreement and registration rights agreements were amended to
include Mr. Sodini as a party and make the shares purchased subject to such
agreements.

On November 30, 1995 and August 19, 1996, the FS Group and Chase were
involved in certain equity transactions with former owners of the Company and
the Company itself. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Item 12. Security Ownership of Certain Beneficial Owners and
Management".

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits -- The
following documents are filed as part of this Form 10-K.

(1) Consolidated Financial Statements -- See index on page 20.

(2) Financial Statement Schedules -- See index on page 20.

<TABLE>
<CAPTION>
(3) EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- ---------------------------------------------------------------------------------------------
<C> <C> <S>
1.1 (1) Purchase Agreement dated October 17, 1997 among The Pantry, Inc. ("The Pantry" or the
"Company") and First Union Capital Markets Corp.
2.1 (1) Stock Purchase Agreement dated August 26, 1997 by and between PH Holding Corporation ("PH
Holding") and Docks U.S.A., Inc.
2.2 (1) Assignment and Assumption Agreement dated October 23, 1997 between PH Holding and The Pantry.
3.1 (1) Restated Certificate of Incorporation of The Pantry, as amended to date.
3.2 (2) Bylaws of The Pantry, as amended to date.
4.1 (3) Indenture, including the form of 12% Senior Note due 2000, dated November 4, 1993 between The
Pantry and IBJ Schroder Bank and Trust Company ("IBJ Schroder").
4.2 (2) Supplemental Indenture dated December 4, 1995 between The Pantry and IBJ Schroder.
4.3 (1) Second Supplemental Indenture dated October 23, 1997 among The Pantry, Sandhills and IBJ
Schroder.
4.4 (1) Third Supplemental Indenture dated October 23, 1997 between The Pantry, Lil' Champ and IBJ
Schroder.
4.5 (1) Indenture dated as of October 23, 1997 among The Pantry, Sandhills, Lil' Champ (together with
Sandhills, the "Guarantors") and United States Trust Company of New York, as Trustee, with
respect to the 10 1/4% Senior Subordinated Notes due 2007 (including the form of 10 1/4%
Senior Subordinated Note due 2007).
4.6 (1) Registration Rights Agreement dated as of October 23, 1997 among The Pantry, the Guarantors,
CIBC Wood Gundy Securities Corp. and First Union Capital Markets Corp.
4.7 (1) Amended and Restated Registration Rights Agreement dated October 23, 1997 among The Pantry,
FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners International, L.P. ("FSEP
International"), Peter J. Sodini, Chase Manhattan Capital, L.P., CB Capital Investors, L.P.,
and Baseball Partners.
4.8 (1) Amended and Restated Stockholders' Agreement dated October 23, 1997 among The Pantry, FSEP
III, FSEP International, Chase Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1 (4) Stock Purchase Agreement dated November 30, 1995 among The Pantry, FSEP III, FSEP
International, Montrose Value Fund Limited Partnership ("MVP"), Montrose Financial No. 6
Limited Partnership (Pantry) ("MF#6"), W. Clay Hamner and Wayne M. Rogers.
10.2 (5) Stock Purchase Agreement dated November 30, 1995 among The Pantry, Chase Manhattan Capital
Corporation, MVP, MF#6, W. Clay Hamner and Wayne M. Rogers.
10.3 (6) Option Agreement dated November 30, 1995 among The Pantry, MVP and MF#6.
10.4 (7) Commitment dated December 1, 1995 by FSEP III, FSEP International and Chase Manhattan Capital
Corporation for the benefit of MVP and MF#6.
10.5 (8) Agreement to Exercise or Assign Option dated December 1, 1995 among The Pantry, FSEP III, FS
Holdings, Inc., and Chase Manhattan Capital Corporation.
10.6 (9) Settlement Agreement dated July 16, 1996 among MVP, MF#6, W. Clay Hamner, Wayne M. Rogers,
FSEP III, FSEP International, Chase Manhattan Capital Corporation and The Pantry.
10.7 (1) Stock Purchase Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, CB Capital Investors, L.P. and Peter J. Sodini.
10.8 (1) Contribution to Capital Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, Chase Manhattan Capital, L.P., and Baseball Partners.
10.9 (1) Stock Pledge Agreement dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.10(1) Secured Promissory Note dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.11(1)(10) Employment Agreement between Dennis R. Crook and The Pantry.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
(3) EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- ---------------------------------------------------------------------------------------------
<C> <C> <S>
10.12(1)(10) Employment Agreement dated October 1, 1997 between Peter J. Sodini and The Pantry.
10.13(1) Credit Agreement dated as of October 23, 1997 among The Pantry, the financial institutions
listed therein (collectively, "Lenders"), First Union National Bank ("First Union"), as
administrative agent, and Canadian Imperial Bank of Commerce ("CIBC"), as syndication agent
for Lenders.
10.14(1) Company Security Agreement dated as of October 23, 1997 between The Pantry and First Union,
as administrative agent.
10.15(1) Company Pledge Agreement dated as of October 23, 1997 between The Pantry and First Union, as
administrative agent.
10.16(1) Company Trademark Security Agreement dated as of October 23, 1997 between The Pantry and
First Union, as administrative agent.
10.17(1) Collateral Account Agreement dated as of October 23, 1997 between The Pantry and First Union,
as administrative agent.
10.18(1) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (North Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.19(1) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases and
Fixture Filing (South Carolina) dated October 23, 1997 between The Pantry and First Union, as
Agent.
10.20(1) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Tennessee) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union, as Agent.
10.21(1) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases
(Kentucky) dated October 23, 1997 between The Pantry and First Union, as Agent.
10.22(1) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases and
Fixture Filing (Indiana) dated as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.23(1) Form of Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing
(Florida) dated October 23, 1997 between Lil' Champ and First Union, as Agent.
10.24(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of Rents (Georgia) dated
October 23, 1997 between Lil' Champ and First Union, as Agent.
10.25(1) Form of Subsidiary Guaranty.
10.26(1) Form of Subsidiary Security Agreement.
10.27(1) Form of Subsidiary Pledge Agreement.
10.28(1) Form of Subsidiary Trademark Security Agreement.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No.
333-42811).

(2) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995 (the "1995 Form 10-K").

(3) Incorporated by reference to the exhibit designated by same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-72574).

(4) Incorporated by reference to the exhibit designated by exhibit number 10.12
in the Company's 1995 Form 10-K.

(5) Incorporated by reference to the exhibit designated by exhibit number 10.13
in the Company's 1995 Form 10-K.

(6) Incorporated by reference to the exhibit designated by exhibit number 10.14
in the Company's 1995 Form 10-K.

(7) Incorporated by reference to the exhibit designated by exhibit number 10.15
in the Company's 1995 Form 10-K.

(8) Incorporated by reference to the exhibit designated by exhibit number 10.16
in the Company's 1995 Form 10-K.

(9) Incorporated by reference to the exhibit designated by exhibit number 10.1
in the Company's Current Report on Form 8-K dated August 30, 1996.

(10) Represents a management contract or compensation plan arrangement.

<PAGE>
(b) Reports on Form 8-K

(1) On September 5, 1997, the Company filed a Current Report on Form 8-K
with respect to the news release announcing that its wholly-owned
subsidiary, PH Holding Corporation, had entered into a definitive
agreement on August 28, 1997 to acquire Lil' Champ Food Stores, Inc., a
wholly-owned subsidiary of Dock U.S.A., Inc.

(2) On December 19, 1997, the Company filed a Current Report on Form 8-K
announcing The Pantry, Inc.'s acquisition of Lil' Champ Food Stores,
Inc., a wholly-owned subsidiary of Dock U.S.A., Inc., and certain other
related transactions on October 23, 1997.

Schedule I -- Valuation and Qualifying Accounts and Reserves

<PAGE>
SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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/ PETER J. SODINI
------------------------------------
PETER J. SODINI
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: December 19, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ------------------

<S> <C> <C>
/s/PETER J. SODINI President, Chief Executive Officer December 19, 1997
------------------ and Director (Principal Executive
PETER J. SODINI Officer)

/s/WILLIAM T. FLYG Senior Vice President and Chief Financial December 19, 1997
------------------ Officer
WILLIAM T. FLYG (Principal Financial Officer)

/s/JOSEPH J. DUNCAN Controller December 19, 1997
------------------- (Principal Accounting Officer)
JOSEPH J. DUNCAN

/s/RONALD P. SPOGLI Director December 19, 1997
-------------------
RONALD P. SPOGLI

/s/CHARLES P. RULLMAN Director December 19, 1997
---------------------
CHARLES P. RULLMAN

/s/JON D. RALPH Director December 19, 1997
---------------
JON D. RALPH

/s/TODD W. HALLORAN Director December 19, 1997
-------------------
TODD W. HALLORAN

/s/CHRISTOPHER C. BEHRENS Director December 19, 1997
-------------------------
CHRISTOPHER C. BEHRENS
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------
<C> <S>
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
</TABLE>

<PAGE>
THE PANTRY, INC.

SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO FOR BALANCE AT
BEGINNING COSTS AND PAYMENTS OR END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended September 28, 1995:
Allowance for doubtful accounts........................................... $ 376 $ (125) $ -- $ 251
Reserve for environmental issues.......................................... 1,203 4,356 161 5,720
Reserve for closed stores................................................. 410 365 (312) 463
Deferred tax asset valuation allowance.................................... 62 511 -- 573
---------- ---------- ----------- ----------
$2,051 $5,107 $(151) $ 7,007
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Year ended September 26, 1996:
Allowance for doubtful accounts........................................... $ 251 $ (46) $ (55) $ 150
Reserve for environmental issues.......................................... 5,720 617 (105) 6,232
Reserve for closed stores................................................. 463 707 (210) 960
Deferred tax asset valuation allowance.................................... 573 1,209 -- 1,782
---------- ---------- ----------- ----------
$7,007 $2,487 $(370) $ 9,124
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Year ended September 25, 1997:
Allowance for doubtful accounts........................................... $ 150 $ -- $ -- $ 150
Reserve for environmental issues.......................................... 6,232 1,574 -- 7,806
Reserve for closed stores................................................. 960 -- (10) 950
Deferred tax asset valuation allowance.................................... 1,782 (96) -- 1,686
---------- ---------- ----------- ----------
$9,124 $1,478 $ (10) $ 10,592
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>

S-1

<PAGE>
EXHIBIT 12.1

THE PANTRY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEP. 30, SEP. 29, SEP. 28, SEP. 26, SEP. 25,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Pretax (loss) income.................................................. $ 3,326 $ (181) $ (3,639) $(10,778) $ (975)
Fixed charges:
Interest expense.................................................... 7,434 12,047 13,241 11,992 13,039
Amortization of deferred financing costs............................ 162 908 1,038 1,359 1,461
Preferred stock dividends........................................... 331 31 -- 2,654 5,304
Rental expense (1).................................................. 2,334 2,183 2,253 2,709 2,901
-------- -------- -------- -------- --------
Total fixed charges................................................... $ 10,261 $ 15,169 $ 16,532 $ 18,714 $ 22,705
-------- -------- -------- -------- --------
Earnings.............................................................. $ 13,587 $ 14,988 $ 12,893 $ 7,936 $ 21,730
-------- -------- -------- -------- --------
Ratio (shortfall) of earnings to fixed charges........................ 1.32 $ (181) $ (3,639) $(10,778) $ (975)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

- ---------------

(1) One-third of rental expense related to operating leases representing an
appropriate interest factor.

<PAGE>
EXHIBIT 21.1

SUBSIDIARIES OF THE PANTRY, INC.

<TABLE>
<CAPTION>
NAME OF SUBSIDIARY
(AND NAME UNDER WHICH DOES BUSINESS) JURISDICTION OF INCORPORATION
- --------------------------------------- ---------------------------------------
<S> <C>
Sandhills, Inc. Delaware
Lil' Champ Food Stores, Inc. Florida
Pantry Properties, Inc. South Carolina
TC Capital Management, Inc. Delaware
PH Holdings, Inc. North Carolina
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-25-1997
<PERIOD-START> SEP-27-1996
<PERIOD-END> SEP-25-1997
<CASH> 3,347
<SECURITIES> 0
<RECEIVABLES> 2,101
<ALLOWANCES> (150)
<INVENTORY> 17,161
<CURRENT-ASSETS> 28,278
<PP&E> 135,404
<DEPRECIATION> (57,418)
<TOTAL-ASSETS> 142,799
<CURRENT-LIABILITIES> 36,523
<BONDS> 100,305
0
0
<COMMON> 1
<OTHER-SE> (17,873)
<TOTAL-LIABILITY-AND-EQUITY> 142,799
<SALES> 427,393
<TOTAL-REVENUES> 427,393
<CGS> 330,114
<TOTAL-COSTS> 86,508
<OTHER-EXPENSES> (1,293)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,039
<INCOME-PRETAX> (975)
<INCOME-TAX> 0
<INCOME-CONTINUING> (975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (975)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>