CONFIRMATION OF OTC WARRANT



 Exhibit 10.5 
  
 

 
  
 Confirmation of OTC Warrant Transaction

  

					
	Original Date:	  	November 16, 2005	  	ML Ref:            
			
	To:	  	The Pantry, Inc. (“Counterparty”)	  	 
			
	Attention:	  	Dan Kelly	  	 
			
	From:	  	Merrill Lynch International (“ML”)	  	 
	 	  	Merrill Lynch Financial Centre	  	 
	 	  	2 King Edward Street	  	 
	 	  	London EC1A 1HQ	  	 

  
 Dear Sir / Madam: 
  
 The purpose of this letter agreement (this
“Confirmation”) is to confirm the terms and conditions of the above-referenced transaction entered into between Counterparty and ML through its agent Merrill Lynch, Pierce, Fenner & Smith Incorporated
(“MLPFS” or “Agent”) on the Trade Date specified below (the “Transaction”). This Confirmation constitutes a “Confirmation” as referred to in the Agreement specified
below. 
  
 The definitions and provisions contained in the 2000
ISDA Definitions (the “Swap Definitions”) and the 2002 ISDA Equity Derivatives Definitions (the “Equity Definitions” and, together with the Swap Definitions, the “Definitions”),
in each case as published by the International Swaps and Derivatives Association, Inc., are incorporated into this Confirmation. In the event of any inconsistency between the Swap Definitions and the Equity Definitions, the Equity Definitions will
govern, and in the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. References herein to a “Transaction” shall be deemed to be references to a “Share Option Transaction” for
the purposes of the Equity Definitions and to a “Swap Transaction” for the purposes of the Swap Definitions. For purposes of this Transaction, “Warrant Style”, “Warrant Type”, “Number of Warrants”,
“Exercise Price” and “Warrant Entitlement” (each as defined below) shall be used herein as if such terms were referred to as “Option Style”, “Option Type”, “Number of Options”, “Strike
Price” and “Option Entitlement”, respectively, in the Definitions. 
  
 This Confirmation evidences a complete binding agreement between you and us as to the terms of the Transaction to which this Confirmation relates. This Confirmation (notwithstanding anything to the contrary herein),
shall be subject to an agreement in the 1992 form of the ISDA Master Agreement (Multicurrency Cross Border) (the “Master Agreement” or “Agreement”) as if we had executed an agreement in such form (but without any
Schedule and with elections specified in the “ISDA Master Agreement” Section of this Confirmation) on the Trade Date of the first such Transaction between us. In the event of any inconsistency between the provisions of that Agreement and
this Confirmation, this Confirmation will prevail for the purpose of this Transaction. 
  
 The terms of the particular Transaction to which this Confirmation relates are as follows: 
  

			
	General Terms:	  	 
		
	Trade Date:	  	November 16, 2005
		
	Effective Date:	  	The fourth (4th) Business Day immediately following the Trade Date.
		
	Warrant Style:	  	European
		
	Warrant Type:	  	Call









			
	Seller:	  	Counterparty
		
	Buyer:	  	ML
		
	Shares:	  	Shares of common stock, par value of USD 0.01, of Counterparty (Security Symbol: “PTRY”).
		
	Number of Warrants:	  	2.694mm
		
	Reference Notes:	  	Senior Subordinated Convertible Notes due November 15, 2012 having $135,000,000 principal amount at maturity
		
	Multiple Exercise:	  	Inapplicable
		
	Exercise Price:	  	$62.86
		
	Premium:	  	$22.69mm
		
	Premium Payment Date:	  	The fourth (4th) Business Day following the Trade Date.
		
	Exchange:	  	NYSE
		
	Related Exchange(s):	  	All
		
	Procedures for Exercise:	  	 
		
	Expiration Time:	  	11:59 pm
		
	Expiration Date:	  	November 15, 2012
		
	Exercise Date:	  	Expiration Date
		
	Multiple Exercise:	  	Not Applicable
		
	Automatic Exercise:	  	Applicable
		
	Valuation:	  	 
		
	Valuation Date:	  	The last Averaging Date
		
	Averaging Dates:	  	The fifteen (15) Full Exchange Business Days beginning on the Averaging Period Start Date.
		
	Full Exchange Business Day:	  	A Scheduled Trading Day that has a scheduled closing time for its regular trading session that is 4 pm (New York City time) or the then standard closing time for regular trading on the
Exchange.
		
	Averaging Date Market Disruption:	  	Modified Postponement
		
	Averaging Period Start Date:	  	The third (3rd) Full Exchange Business Day following the Expiration Date.

  

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	Settlement Terms:	  	 
		
	Cash Settlement:	  	Counterparty may elect to settle this Transaction by Cash Settlement or Net Physical Settlement by providing ML with irrevocable notice (“Settlement Notice”) in
accordance with the Settlement Method Election provisions herein and in Section 7.1 of the Equity Definitions. In the event that Counterparty does not so notify ML, this Transaction shall be settled pursuant to the Default Settlement Method
provision below.
		
	Settlement Currency:	  	USD
		
	Settlement Price:	  	The arithmetic mean of the closing price of the Shares on the Exchange on each Averaging Date.
		
	Cash Settlement Payment Date:	  	Fourth (4th) Currency Business Day after the Valuation Date
		
	Settlement Method Election:	  	Applicable with respect to Cash Settlement or Net Physical Settlement only.
		
	Electing Party:	  	Counterparty
		
	Settlement Method Election Date:	  	Exercise Date
		
	Default Settlement Method:	  	Net Physical Settlement, except as provided below. In the event that this Transaction is settled by Net Physical Settlement, Counterparty shall deliver to ML on the seventh Full Exchange
Business Day following the Valuation Date a number of Shares (the “Delivered Shares”) equal to the Net Physical Settlement Amount divided by the Settlement Price, with any fractional Share amounts rounded up to a whole
share.
		
	Net Physical Settlement Amount:	  	With respect to the Valuation Date, an amount, as calculated by the Calculation Agent, equal to the Number of Warrants multiplied by the Exercise Price Differential.
		
	Exercise Price Differential:	  	In respect of the Valuation Date, an amount equal to the greater of: (a) the excess, if any, of the Settlement Price over the Exercise Price, and (b) zero.
		
	Net Physical Settlement Adjustment:	  	Subject to the Maximum Deliverable Share Amount, if ML receives any Delivered Shares under this Transaction:
		
	 	  	(a) ML shall sell the Delivered Shares in a commercially reasonable manner until the amount received by ML for the sale of the Shares (the “Proceeds Amount”) is equal to
the Net Physical Settlement Amount. Any remaining Delivered Shares shall be returned to Counterparty.
		
	 	  	(b) If the Proceeds Amount is less than the Net Physical Settlement Amount, Counterparty shall promptly deliver upon notice from ML additional Shares to ML until the dollar amount from the sale
of such Shares by ML equals the difference between the Net Physical Settlement Amount and the Proceeds Amount. In no event shall Counterparty be required to deliver to ML a number of Shares greater than the Maximum Deliverable Share
Amount.
		
	Conditions to Net Physical Settlement:	  	(1) At least 15 Full Exchange Business Days prior to the Expiration Date, Counterparty shall (i) make available to ML an effective registration statement (the “Registration
Statement”) filed pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), and such prospectuses as ML

  

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	 	 	may reasonably request to comply with the applicable prospectus delivery requirements (the “Prospectus”) for the resale by ML of such number of Shares as ML shall
reasonably specify, such Registration Statement to be effective and Prospectus to be current until the earliest of the date on which (A) all Delivered Shares have been sold by ML or returned to Counterparty pursuant to the Net Physical Settlement
Adjustment provision above or (B) ML has advised Counterparty that it no longer requires that such Registration Statement be effective (the “Registration Period”) or (ii) Counterparty has provided a legal opinion in form and
substance satisfactory to ML (with customary assumptions and exceptions) that the Shares issuable upon exercise of these Warrants will be freely tradable under the Securities Act upon delivery to ML and not subject to any legend restricting
transferability. It is understood that the Registration Statement and Prospectus will cover a number of Shares reasonably estimated by ML to be potentially deliverable by Counterparty in connection with Net Physical Settlement
hereunder;
		
	 	 	In addition, the following representation, which Counterparty shall be deemed to make on each day during the Registration Period, shall be true and correct:
		
	 	 	 “Counterparty represents that the Registration Statement, at the time the same became effective, did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; Counterparty represents the Prospectus (as the same may be supplemented from time to time) does not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.”

		
	 	 	(2) At least 10 Full Exchange Business Days prior to the Expiration Date, Counterparty will enter into a Registration Rights Agreement with ML in form and substance reasonably acceptable to ML,
which agreement will contain among other things, customary representations and warranties and indemnification and other rights relating to the registration of a number of Shares equal to the number of Delivered Shares and others Shares deliverable
hereunder up to the Maximum Deliverable Share Amount.
		
	 	 	(3) Counterparty shall promptly pay to ML a $0.02 per Share fee for each Delivered Share.
		
	 	 	In the event Counterparty fails to comply with any of the conditions set forth in “Net Physical Settlement Terms” herein, Counterparty shall settle the Transaction
through Cash Settlement; provided however, that notwithstanding the foregoing, if Counterparty shall have been unable to obtain an effective Registration Statement by the Cash Settlement Payment Date, then upon notice to ML,
Counterparty may deliver to ML unregistered Shares in an amount determined by ML based upon its commercially reasonable judgment of the market value of such Shares. In no event shall Counterparty be required to deliver to ML a number of Shares
greater than the Maximum Deliverable Share Amount.
		
	 	 	Notwithstanding the foregoing, with respect to any Delivered Shares delivered hereunder, in the event that ML is unable to sell such Shares on the Exchange without incurring material additional
transaction costs, Counterparty shall promptly pay in cash or Shares an additional amount to ML equal to 2% of the Exercise Price.

  

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	Limitations on Net Physical Settlement by Counterparty:	  	The total number of Shares that may be delivered at settlement by Counterparty with respect to this Transaction and the Transaction described in the Confirmation of OTC Warrant
Transaction between the Counterparty and ML dated as of November 21, 2005, shall not exceed two times the sum of the total number of Warrants covered by this Transaction and such other Transaction and in any event the sum of such Shares for both
Transactions shall not exceed 19.5% of the Counterparty’s outstanding Shares on the Effective Date (“Maximum Deliverable Share Amount”).
		
	 	  	Counterparty represents and warrants that the number of Available Shares as of the Trade Date is greater than the Maximum Deliverable Share Amount. Counterparty covenants and agrees
that Counterparty shall not take any action of corporate governance or otherwise to reduce the number of Available Shares below the Maximum Deliverable Share Amount.
		
	 	  	For this purpose, “Available Shares” means the number of Shares Counterparty currently has authorized (but not issued and outstanding) less the maximum number
of Shares that may be required to be issued by Counterparty in connection with stock options, convertibles, and other commitments of Counterparty that may require the issuance or delivery of Shares in connection therewith.
		
	Adjustments:	  	 
		
	Dividends:	  	 
		
	Extraordinary Dividends:	  	Any and all dividends paid by Counterparty.
		
	Method of Adjustment:	  	Calculation Agent Adjustment
		
	Extraordinary Events:	  	 
			
	Consequences of Merger Events:	  	(a) Share-for-Share:	 	Modified Calculation Agent Adjustment
			
	 	  	(b) Share-for-Other:	 	Cancellation and Payment, except in the case of a Merger Event falling within clause (iii) of the definition of Merger Event that is not made by Counterparty or to which Counterparty does not
agree (each such event, an “Exceptional Merger Event”), in which case the Cancellation Amount is determined as provided under Determination of Exceptional Cancellation Amount
			
	 	  	    Agreed Model:	 	Applicable, except in the case of an Exceptional Merger Event in which case Not Applicable.
			
	 	  	    Interest Rate:	 	USD-LIBOR-BBA
			
	 	  	(c) Share-for-Combined:	 	Component Adjustment, except in the case of an Exceptional Merger Event, in which case Component Adjustment with respect to Share consideration and with respect to all non-Share consideration,
payment of a Cancellation Amount is determined as provided under Determination of Exceptional Cancellation Amount and treated as provided for in Cancellation and Payment
		
	Determination of Exceptional Cancellation Amount:	  	Counterparty will pay ML the Cancellation Amount, when applicable as provided herein, determined, by reference to the table set forth in Schedule I (the “Unwind Value
Table”), as follows:
		
	 	  	(1) The value in USD of the non-Share consideration payable in the applicable Merger Event shall be termed the “Applicable Price”. The number of
full

  

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	 	 	months between the Early Termination Date and the Expiration Date is termed “Months to Expiration”. The term “Intrinsic Value” shall mean the
excess, if any, of the Applicable Price over the Exercise Price.
		
	 	 	(2) If Applicable Price equals a row in the Unwind Value Table and if the Months to Expiration is equal to a column of the Unwind Table, the Unwind Value located at the row and column equal to
the Applicable Price and the Months to Expiration.
		
	 	 	(3) If the Applicable Price falls between two Applicable Price rows in the Unwind Value Table or the Months to Expiration falls between two Months to Expiration columns in the Unwind Value
Table, the Unwind Value will be determined by straight-line interpolation between the Unwind Values set forth for the higher and lower Applicable Price rows and the two Months to Expiration columns, as applicable.
		
	 	 	(4) If the Applicable Price is greater then the largest row in the Unwind Value Table, the Unwind Value obtained by adding to the Intrinsic Value the amount set forth in the Unwind Value Table
in the column equal to the Months to Expiration (and if the Months to Expiration falls between two columns in the Unwind Value Table, the amount obtained by straight-line interpolation between the two Months to Expiration columns).
		
	 	 	(5) The Unwind Value is per Warrant and the Cancellation Amount, which shall be paid by Counterparty to ML, is equal to the product of the number of Warrants times the Unwind Value determined
above.
		
	 	 	(6) ML and Counterparty agree that actual damages would be difficult to ascertain under these circumstances and that the amount of liquidated damages resulting from the determination of the
Cancellation Amount is a good faith estimate of such damages and not a penalty.
		
	 	 	(7) In the case of Calculation Agent Adjustment or Modified Calculation Agent Adjustment permitted hereunder, the Unwind Value Table will be subject to adjustment as provided in Section
11.2(c) of the Equity Definitions (in the case of a Potential Adjustment Event) or the applicable provision of Article 12 of the Equity Definitions (in the case of an Extraordinary Event to the extent it does not result in Cancellation and
Payment).
	
	With respect to any Extraordinary Events hereunder, upon the occurrence of Cancellation and Payment in whole or in part, the parties agree that the amount to be paid, in accordance
with the Equity Definitions, shall constitute a Transaction Early Termination Amount, subject to satisfaction by the payment or delivery of Shares or cash as set forth in the Early Termination section below.
		
	Tender Offer:	 	Not Applicable
		
	Nationalization:	 	Cancellation and Payment
		
	Insolvency or Delisting:	 	Cancellation and Payment, Cancellation Amount determined as provided under Determination of Exceptional Cancellation Amount
		
	Additional Disruption Events:	 	 
		
	 Change in Law:
	 	Not Applicable

  

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	 Failure to Deliver:
	 	Applicable; provided that if there is an “illiquidity in the market” on a day that would have been a Settlement Date, then the Settlement Date shall be the first succeeding Full
Exchange Business Day on which there is no “illiquidity in the market,” but in no such event shall the Settlement Date be later than the date that is twenty (20) Full Exchange Business Days immediately following what would have been in the
Settlement Date but for such “illiquidity in the market.”
		
	 Insolvency Filing:
	 	Applicable
		
	 Hedging Disruption Event:
	 	Not Applicable
		
	 Increased Cost of Hedging:
	 	Not Applicable
		
	 Hedging Party:
	 	ML
		
	 Loss of Stock Borrow:
	 	Not Applicable
		
	 Increased Cost of Stock Borrow:
	 	Not Applicable
		
	 Determining Party:
	 	ML
		
	Non-Reliance:	 	Applicable
		
	Agreements and Acknowledgments Regarding Hedging Activities:	 	Applicable
		
	Additional Acknowledgments:	 	Applicable

  
 Other Provisions:

  

			
	Treatment of Certain Termination Events:	 	In the case of Illegality, Exceptional Merger Event (but not other Merger Events), Force Majeure Event or Tax Event where Counterparty is the Affected Party, then Cancellation and Payment,
Cancellation Amount determined as provided under Determination of Exceptional Cancellation Amount.
		
	Early Termination:	 	 Notwithstanding any provision to the contrary, upon the designation of an Early Termination Date hereunder, a party’s payment obligation in
respect of this Transaction only (and as determined under Determination of Exceptional Cancellation Amount, when applicable) and in accordance with Second Method and Market Quotation (the “Transaction Early Termination
Amount”) may, at the option of Counterparty, be satisfied by the party owing such amount by the delivery of a number of Shares equal to the Transaction Early Termination Amount divided by the Termination Price (“Early
Termination Stock Settlement”); provided, however, that Counterparty must notify ML of its election of Early Termination Stock Settlement by the close of business on the day that the notice designating the Early
Termination Date is effective.
  
 “Termination Price”
means the closing price per Share on the Exchange on the Early Termination Date.
  
 A number of Shares calculated as being due in respect of any Early Termination Stock Settlement will be deliverable on the third Full


  

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	 	 	 Exchange Business Day following the date that notice pursuant to Section 6(d)(i) of the Agreement specifying the number of Shares deliverable is
effective. Section 6(d)(i) of the Agreement is hereby amended by adding the following words after the word “paid” in the fifth line thereof: “or any delivery is to be made, as applicable.”
  
 If ML receives Shares in connection with an Early Termination Stock Settlement, ML shall
sell such Shares in a commercially reasonable manner until the amount received by ML for the sale of such Shares (net of transaction costs) (the “Proceeds Amount”) is equal to the Transaction Early Termination Amount. Any
remaining Shares shall be returned to Counterparty. If the Proceeds Amount is less than the Transaction Early Termination Amount, Counterparty shall promptly deliver additional Shares to ML upon request until the dollar amount from the sale of such
additional Shares by ML (net of transaction costs) equals the difference between the Transaction Early Termination Amount and the Proceeds Amount. In no event shall Counterparty be required to deliver to ML a number of Shares greater than the
Maximum Deliverable Share Amount.
  
 On or prior to the Early Termination Date
(if Early Termination Stock Settlement is elected), Counterparty shall enter into a registration rights agreement with ML in form and substance reasonably acceptable to ML and shall satisfy the conditions contained therein and Counterparty shall
file and diligently pursue to effectiveness a Registration Statement pursuant to Rule 415 under the Securities Act. If and when such Registration Statement shall have been declared effective by the Commission, Counterparty shall have made available
to ML such Prospectuses as ML may reasonably request to comply with the applicable prospectus delivery requirements for the resale by ML of such number of Shares as ML shall specify (or, if greater, the number of Shares that Counterparty shall
specify). Such Registration Statement shall be effective and Prospectus shall be current until the earliest of the date on which (A) all Shares delivered by Counterparty in connection with an Early Termination Date and all Shares held by ML for
hedging purposes have been sold by ML or (B) ML has advised Counterparty that it no longer requires that such Registration Statement be effective (the “Termination Registration Period”). It is understood that the Registration
Statement and Prospectus will cover a number of Shares reasonably estimated by ML to be potentially deliverable by Counterparty in connection with Early Termination Stock Settlement hereunder. On each day during the Registration Period Counterparty
shall represent that each of its filings under the Securities Act, the Exchange Act, or other applicable securities laws that are required to be filed have been filed and that, as of the respective dates thereof and as of the date of this
representation, there is no misstatement of a material fact contained therein or omission of a material fact required to be stated therein or necessary to make the statements therein not misleading.
  
 If Counterparty is unable to deliver Shares subject to an effective Registration Statement
as set forth above, Counterparty may deliver unregistered Shares in an amount determined by ML based upon its commercially reasonable judgment of the market value of such Shares. In no event shall Counterparty be required to deliver to ML a number
of Shares greater than the Maximum Deliverable Share Amount.

		
	Compliance with Securities Laws:	 	Each party represents and agrees that it has complied, and will comply, in connection with this Transaction and all related or contemporaneous sales

  

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	 	 	 and purchases of Shares, with the applicable provisions of the Securities Act, the Exchange Act, and the rules and regulations thereunder,
including, without limitation, Rule 10b-5 and Regulation M under the Exchange Act, provided that each party shall be entitled to rely conclusively on any information communicated by the other party concerning such other party’s market
activities and provided further that Counterparty shall have no liability as a result of a breach of this representation due to ML’s gross negligence or willful misconduct.
  
 Each party further represents that if such party (“X”) purchases any Shares from the other party pursuant to this Transaction,
such purchase(s) will comply in all material respects with (i) all laws and regulations applicable to X, and (ii) all contractual obligations of X.

		
	 	 	Counterparty (and in the case of (b) and (c) below, ML) represents that as of the date hereof:
		
	 	 	(a) each of its filings under the Exchange Act that are required to be filed from and including the ending date of Counterparty’s most recent prior fiscal year have been filed and that, as
of the respective dates thereof and as of the date of this representation, there is no misstatement of material fact contained therein or omission of a material fact required to be stated therein or necessary to make the statements therein in light
of the circumstances in which they were made not misleading (when taken together with Counterparty’s previous filings under the Exchange Act);
		
	 	 	(b) Neither ML nor Counterparty, as the case may be, is entering into this Agreement to facilitate a distribution of the common stock or in connection with a future issuance of
securities;
		
	 	 	(c) Neither ML nor Counterparty, as the case may be, is entering into this Agreement to create actual or apparent trading activity in the common stock (or any security convertible into or
exchangeable for common stock) or to manipulate the price of the common stock (or any security convertible into or exchangeable for common stock); and
		
	 	 	(d) the number of Available Shares on the date hereof is greater than the Maximum Deliverable Share Amount.

  
  

					
	Account Details:	 	 	 	 
		
	 Account for payments to Counterparty:
	 	Wachovia Bank
	 	 	 	 	ABA# 053000219
	 	 	 	 	ACCT# 2073089595370
		
	 Account for payment to ML:
	 	Chase Manhattan Bank, New York
	 	 	 	 	ABA# 021000021
	 	 	 	 	FAO: ML Equity Derivatives
	 	 	 	 	A/C: 066213118

  

			
	Agreement Regarding Shares:	 	Counterparty agrees that, in respect of any Shares delivered to ML, such Shares shall be, upon such delivery, duly and validly authorized, issued and outstanding, fully paid and nonassessable
and subject to no adverse claims of any other party. The issuance of such Shares does not and will not require the consent, approval, authorization, registration or

  

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	 	 	qualification of any government authority, except such as shall have been obtained on or before the delivery date of any Shares or in connection with any Registration Statement filed with
respect to any Shares.
		
	Covenant Regarding Shares:	 	Counterparty covenants that it shall not take any action to decrease the number of Available Shares below the Maximum Deliverable Share Amount.
		
	Bankruptcy Rights:	 	In the event of Counterparty’s bankruptcy, ML’s rights in connections with this Transaction shall not exceed those rights held by common shareholders. For the avoidance of doubt, the
parties acknowledge and agree that ML’s rights with respect to any other claim arising from this Transaction prior to Counterparty’s bankruptcy shall remain in full force and effect and shall not be otherwise abridged or modified in
connection herewith.
		
	Set-Off:	 	The Set-off provisions in the Agreement shall apply to this Transaction, except in the event of Counterparty’s bankruptcy, in which case Set-off shall not apply.
		
	Collateral:	 	None.
		
	Transfer:	 	Neither party may transfer its rights or obligations under this Transaction except in accordance with Section 7 of the Master Agreement; provided, however, that ML may assign its
rights and delegate its obligations hereunder, in whole or in part, to any other person with prior consent of the Counterparty not to be unreasonably withheld, (an “Assignee”), effective (the “Transfer Effective
Date”) upon delivery to Counterparty of (a) an executed acceptance and assumption by the Assignee (an “Assumption”) of the transferred obligations of ML under this Transaction (the “Transferred
Obligations”); (b) and if such Assignee is an affiliate of Merrill Lynch & Co., Inc. (“ML&Co.”) an executed guarantee (the “Guarantee”) of ML&Co. of the Transferred
Obligations. On the Transfer Effective Date, (a) ML shall be released from all obligations and liabilities arising under the Transferred Obligations; and (b) the Transferred Obligations shall cease to be a Transaction(s) under the Agreement and
shall be deemed to be a Transaction(s) under the ISDA Master Agreement between Assignee and Counterparty, provided that, if at such time Assignee and Counterparty have not entered into a ISDA Master Agreement, Assignee and Counterparty shall be
deemed to have entered into an ISDA form of Master Agreement (Multicurrency-Cross Border) without any Schedule attached thereto.
		
	Regulation:	 	ML is regulated by The Securities and Futures Authority Limited and has entered into this Transaction as principal.
		
	Indemnity:	 	Each party (such party the Indemnifying Party) agrees to indemnify the other party and its Affiliates and their respective directors, officers, agents and controlling parties (each other party
and each such person being an “Indemnified Party”) from and against any and all losses, claims, damages and liabilities, joint and several, to which such Indemnified Party may become subject because of a breach by such
Indemnifying Party of any representation or covenant hereunder, in the Agreement or any other Agreement relating to the Agreement or Transaction and will reimburse any Indemnified Party for all reasonable expenses (including reasonable legal fees
and expenses) as they are incurred in connection with the investigation of, preparation for, or defense of, any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party
thereto.
		
	Tax Disclosure:	 	Effective from the date of commencement of discussions concerning the Transaction, each of Counterparty and ML (and each of its respective employees, representatives, or other agents) may
disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the Transaction and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment
and tax structure.

  

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 Additional Agreements, Representations and Covenants of Counterparty, Etc.:

  

	 	(a)	Counterparty hereby represents and warrants to ML, on each day from the Trade Date to and including the date by which ML is able to initially complete a hedge of its position
created by this Transaction, that: 

  

	 	(1)	it will not, and will not permit any person or entity subject to its control to, bid for or purchase Shares during such period except as disclosed in the Offering Memorandum
relating to the Reference Notes, provided, however, that such period shall not exceed sixty (60) days; and 

  

	 	(2)	it has publicly disclosed all material information necessary for it to be able to purchase or sell Shares in compliance with applicable law and that it has publicly disclosed all
material information with respect to its condition (financial or otherwise) to the extent required by applicable law. 

  

	 	(b)	The parties hereby agree that all documentation with respect to this Transaction is intended to qualify this Transaction as an equity instrument for purposes of EITF 00-19.


  

	 	(c)	No collateral shall be required by either party for any reason in connection with this Transaction. 

  

	 	(d)	ML may elect to defer exercise of any Warrant hereunder as provided below, and Automatic Exercise shall not apply with respect to any Warrant, to the extent the exercise of such
Warrant would cause ML to become, directly or indirectly, the beneficial owner of more than 8.5 percent of the class of the Counterparty’s equity securities that is comprised of the Shares for purposes of Section 13 of the Securities
Exchange Act of 1934, as amended (in such case, an “Excess Share Owner”). 

  
 ML shall provide prior notice to Counterparty, through the Agent, if the exercise of any Warrant hereunder would cause ML to become directly or
indirectly, an Excess Share Owner; provided that the failure of ML to provide such notice shall not alter the effectiveness of the provisions set forth in the preceding sentence and any purported exercise in violation of such provisions shall
be void and have no effect. 
  
 If ML elects not to exercise any
Warrant because such exercise would cause ML to become, directly or indirectly, an Excess Share Owner and ML thereafter disposes of Shares owned by it or any action is taken that would then permit ML to exercise such Warrant without such exercise
causing it to become, directly or indirectly, an Excess Share Owner, then ML shall provide notice of the taking of such action to Counterparty, through the Agent, and such Warrant shall then become exercisable by ML to the extent such Warrant is
otherwise or had otherwise become exercisable hereunder. In such event, the Expiration Date with respect to such Warrant shall be the date on which Counterparty receives such notice from ML, and the related Settlement Date shall be as soon as
reasonably practicable after receipt of such notice but no more than three (3) Business Days thereafter (but in no event shall the Settlement Date occur prior to the date on which it would have otherwise occurred but for the provisions of this
paragraph (d)); provided that the related Net Physical Settlement Amount shall be the same as the Net Physical Settlement Amount but for the provisions of this paragraph (d). In addition, within 30 days of the maturity date of the
Settlement Date, Counterparty shall use its reasonable efforts to refrain from activities which could reasonably be expected to result in ML’s ownership of Shares exceeding 10% of all issued and outstanding Shares. 
  

	 	(e)	ML hereby agrees that from the Trade Date through to and including each Settlement Date, it will: 

  

	 	(1)	use its reasonable efforts to not become an “affiliate” of Counterparty as such term is defined in Regulation 144(a)(1) under the Securities Act; 


 

 11 









	 	(2)	not vote any Shares, as to which it has the right to exercise a vote; and 

  

	 	(3)	not permit any director, officer, employee, agent or affiliate of ML to serve as a member of the board of directors of Counterparty. 

  
 ISDA Master Agreement 
  
 With respect to the Agreement, ML and Counterparty each
agree as follows: 
  
 Specified Entities: 
  
 (i) in relation to ML, for the purposes of: 
  

			
	Section 5(a)(v):	 	not applicable
	Section 5(a)(vi):	 	not applicable
	Section 5(a)(vii):	 	not applicable
	Section 5(b)(iv):	 	not applicable

  
 and (ii) in
relation to Counterparty, for the purposes of: 
  

			
	Section 5(a)(v):	 	not applicable
	Section 5(a)(vi):	 	not applicable
	Section 5(a)(vii):	 	not applicable
	Section 5(b)(iv):	 	not applicable

  
 “Specified Transaction” will have the meaning specified in Section 14 of this Agreement. 
  
 The “Credit Event Upon Merger” provisions of Section 5(b)(iv) of the Agreement will not apply to ML and
Counterparty. 
  
 The “Automatic Early
Termination” provision of Section 6(a) of the Agreement will not apply to ML or to Counterparty. 
  
 Payments on Early Termination for the purpose of Section 6(e) of the Agreement: (i) Market Quotation shall apply; and (ii) the Second Method
shall apply, except as otherwise provided therein. 
  
 “Termination Currency” means USD. 
  
 Tax
Representations: 
  

	 	(I)	For the purpose of Section 3(e) of the Agreement, each party represents to the other party that it is not required by any applicable law, as modified by the practice of any
relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii), or 6(e) of the Agreement) to be made by
it to the other party under the Agreement. In making this representation, each party may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of the Agreement, (ii) the satisfaction of the
agreement contained in Section 4(a)(i) or 4(a)(iii) of the Agreement, and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of the Agreement, and (iii) the satisfaction
of the agreement of the other party contained in Section 4(d) of the Agreement; provided that it will not be a breach of this representation where reliance is placed on clause (ii) above and the other party does not deliver a form or
document under Section 4(a)(iii) of the Agreement by reason of material prejudice to its legal or commercial position. 

  

 12 









	 	(II)	For the purpose of Section 3(f) of the Agreement, each party makes the following representations to the other party: 

  

	 	(i)	ML represents that it is a corporation organized under the laws of England and Wales. 

  

	 	(ii)	Counterparty represents that it is a corporation incorporated under the laws of the State of Delaware. 

  
 Delivery Requirements: For the purpose of Sections 3(d), 4(a)(i) and (ii) of the Agreement, each party
agrees to deliver the following documents: 
  
 Tax forms,
documents or certificates to be delivered are: 
  
 Each party
agrees to complete (accurately and in a manner reasonably satisfactory to the other party), execute, and deliver to the other party, United States Internal Revenue Service Form W-9 or W-8 BEN, or any successor of such form(s): (i) before the
first payment date under this agreement; (ii) promptly upon reasonable demand by the other party; and (iii) promptly upon learning that any such form(s) previously provided by the other party has become obsolete or incorrect. 

 
 Other documents to be delivered:- 
  

							
	 Party Required to
 Deliver Document

	  	 Document Required to be Delivered

	  	 When Required

	  	 Covered by
 Section 3(d)
 Representation


	Counterparty	  	 Evidence of the authority and true
 signatures of each
official or
 representative signing this Confirmation
	  	 Upon or before
 execution and

delivery of this
 Confirmation
	  	Yes
				
	Counterparty	  	 Certified copy of the resolution of the
 Board of
Directors or equivalent
 document authorizing the execution and
 delivery of this Confirmation
	  	 Upon or before
 execution and
 delivery of this
 Confirmation
	  	Yes
				
	ML	  	 Guarantee of its Credit Support
 Provider, substantially
in the form of
 Exhibit A attached hereto, together with
 evidence of the authority and true
 signatures of the signatories, if applicable
	  	 Upon or before
 execution and
 delivery of this
 Confirmation
	  	Yes

  
 Addresses for Notices: For the purpose of Section 12(a) of the Agreement: 
  
 Address for notices or communications to ML: 
  

					
	Address:	  	Merrill Lynch International
	 	  	Merrill Lynch Financial Centre
	 	  	2 King Edward Street, London EC1A 1HQ
	Attention:	  	Manager, Fixed Income Settlements
	Facsimile No.:	  	44 207 995 2004                 Telephone No.: 44 207 995 3769	  	 

  
 (For all purposes) 

 
 Additionally, a copy of all notices pursuant to Sections 5, 6, and 7 as well as any
changes to Counterparty’s address, telephone number or facsimile number should be sent to: 
  

	
	GMI Counsel
	Merrill Lynch World Headquarters
	4 World Financial Center
	New York, New York 10080
	Attention: Global Equity Derivatives
	Facsimile No.: 212 449-6576         Telephone No.: 212 449-6309

  

 13 








 Address for notices or communications to Counterparty for all purposes: 
  

	
	The Pantry, Inc.
	1801 Douglas Drive
	Sanford, NC 27331
	Attention: Daniel Kelly
	Facsimile No.: (919) 774-3329         Telephone No.: (919) 774-6700 ext. 5202
	
	with a copy to:
	
	Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
	Post Office Box 2611
	Raleigh, NC 27602-2611
	Attention: Carl Patterson
	Facsimile No.: (919) 821-6800         Telephone No.: (919) 821-1220

  
 Process Agent: For the purpose
of Section 13(c) of the Agreement, ML appoints as its process agent: 
  

	
	Merrill Lynch, Pierce, Fenner & Smith Incorporated
	222 Broadway, 16th Floor
	New York, NY 10038
	Attention: Litigation Department
	
	Counterparty does not appoint a Process Agent.

  
 Multibranch Party. For the
purpose of Section 10(c) of the Agreement: Neither ML nor Counterparty is a Multibranch Party. 
  
 Calculation Agent. The Calculation Agent is ML. 
  
 Credit Support Document. 
  
 ML: Guarantee of Merrill Lynch & Co., Inc. (“ML&Co.”) in the form attached hereto as Exhibit A. 
  
 Counterparty: Not Applicable 
  
 Credit Support Provider. 
  
 With respect to ML: ML&Co. and with respect to Counterparty, Not Applicable. 
  

Governing Law. This Confirmation will be governed by, and construed in accordance with, the substantive laws of the State of New York. 

 
 Netting of Payments. The provisions of Section 2(c) of the
Agreement shall not be applicable to this Transaction; provided, however, that with respect to this Agreement or any other ISDA Master Agreement between the parties, any Share delivery obligations on any day of Counterparty, on the one
hand, and ML, on the other hand, shall be netted. The resulting Share delivery obligation of a party upon such netting shall be rounded down to the nearest number of whole Common Shares, such that neither party shall be required to deliver any
fractional Common Shares. 
  

 14 








 Accuracy of Specified Information. Section 3(d) of the Agreement is hereby amended by adding in the
third line thereof after the word “respect” and before the period the words “or, in the case of audited or unaudited financial statements or balance sheets, a fair presentation of the financial condition of the relevant person.”

  
 Basic Representations. Section 3(a) of the Agreement is
hereby amended by the deletion of “and” at the end of Section 3(a)(iv); the substitution of a semicolon for the period at the end of Section 3(a)(v) and the addition of Sections 3(a)(vi), as follows:

  
 Eligible Contract Participant; Line of Business. It is
an “eligible contract participant” as defined in the Commodity Futures Modernization Act of 2000 and it has entered into this Confirmation and this Transaction in connection with its business or a line of business (including financial
intermediation), or the financing of its business. 
  
 Amendment of Section 3(a)(iii). Section 3(a)(iii) of the Agreement is modified to read as follows: 
  
 No Violation or Conflict. Such execution, delivery and performance do not materially violate or conflict with any law known by it to be applicable
to it, any provision of its constitutional documents, any order or judgment of any court or agency of government applicable to it or any of its assets or any material contractual restriction relating to Specified Indebtedness binding on or affecting
it or any of its assets. 
  
 Amendment of Section 3(a)(iv).
Section 3(a)(iv) of the Agreement is modified by inserting the following at the beginning thereof: 
  
 “To such party’s best knowledge,” 
  
 Additional Representations: 
  
 Counterparty Representations. Counterparty (i) has such knowledge and experience in financial and business affairs as to be capable of evaluating the merits
and risks of entering into this Transaction; (ii) has consulted with its own legal, financial, accounting and tax advisors in connection with this Transaction; and (iii) is entering into this Transaction for a bona fide business purpose to
hedge risks related to the Reference Notes. 
  
 Counterparty is not and has
not been the subject of any civil proceeding of a judicial or administrative body of competent jurisdiction that could reasonably be expected to impair materially Counterparty’s ability to perform its obligations hereunder. 
  
 Counterparty will by the next succeeding Business Day notify ML upon obtaining knowledge of
the occurrence of any event that would constitute an Event of Default, a Potential Event of Default or a Potential Adjustment Event. 
  
 As of the date hereof, Counterparty is not insolvent. 
  
 Acknowledgements: 
  
 (1) The parties acknowledge and agree that there are no other representations, agreements or other undertakings of the parties in relation to this Transaction, except as
set forth in this Confirmation. 
  
 (2) The parties hereto intend for: 

 
 (a) this Transaction to be a “securities contract” as defined
in Section 741(7) of Title 11 of the United States Code (the “Bankruptcy Code”), qualifying for the protections under Section 555 of the Bankruptcy Code; 
  

 15 








 (b) a party’s right to liquidate this Transaction and to exercise any other remedies upon the
occurrence of any Event of Default under the Agreement with respect to the other party to constitute a “contractual right” as defined in the Bankruptcy Code; and 
  
 (c) all payments for, under or in connection with this Transaction, all payments for the Shares and the transfer of such
Shares to constitute “settlement payments” as defined in the Bankruptcy Code. 
  
 Amendment of Section 6(d)(ii). Section 6(d)(ii) of the Agreement is modified by deleting the words “on the day” in the second line thereof and substituting therefor “on the day that is
three Local Business Days after the day”. Section 6(d)(ii) is further modified by deleting the words “two Local Business Days” in the fourth line thereof and substituting therefor “three Local Business Days.”

  
 Amendment of Definition of Reference Market-Makers. The definition of
“Reference Market-Makers” in Section 14 is hereby amended by adding in clause (a) after the word “credit” and before the word “and” the words “or to enter into transactions similar in nature to
Transactions.” 
  
 Consent to Recording. Each party consents to the
recording of the telephone conversations of trading and marketing personnel of the parties and their Affiliates in connection with this Confirmation. To the extent that one party records telephone conversations (the “Recording Party”) and
the other party does not (the Non-Recording Party”), the Recording Party shall in the event of any dispute, make a complete and unedited copy of such party’s tape of the entire day’s conversations with the Non-Recording Party’s
personnel available to the Non-Recording Party. The Recording Party’s tapes may be used by either party in any forum in which a dispute is sought to be resolved and the Recording Party will retain tapes for a consistent period of time in
accordance with the Recording Party’s policy unless one party notifies the other that a particular transaction is under review and warrants further retention. 
  
 Disclosure. Each party hereby acknowledges and agrees that ML has authorized Counterparty to disclose this Transaction and any
related hedging transaction between the parties if and to the extent that Counterparty reasonably determines (after consultation with ML) that such disclosure is required by law or by the rules of Nasdaq or any securities exchange.

  
 Severability. If any term, provision, covenant or condition of this
Confirmation, or the application thereof to any party or circumstance, shall be held to be invalid or unenforceable in whole or in part for any reason, the remaining terms, provisions, covenants, and conditions hereof shall continue in full force
and effect as if this Confirmation had been executed with the invalid or unenforceable provision eliminated, so long as this Confirmation as so modified continues to express, without material change, the original intentions of the parties as to the
subject matter of this Confirmation and the deletion of such portion of this Confirmation will not substantially impair the respective benefits or expectations of parties to this Agreement; provided, however, that this severability
provision shall not be applicable if any provision of Section 2, 5, 6 or 13 of the Agreement (or any definition or provision in Section 14 to the extent that it relates to, or is used in or in connection
with any such Section) shall be so held to be invalid or unenforceable. 
  
 Affected Parties. For purposes of Section 6(e) of the Agreement, each party shall be deemed to be an Affected Party in connection with Illegality and any Tax Event. 
  

 16 








 Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy
of this Confirmation enclosed for that purpose and returning it to us. 
  

			
	 Very truly yours,

	
	 MERRILL LYNCH INTERNATIONAL

		
	By:	 	 /s/ Rhonda Lucarelli


	Name:	 	 
	Title:	 	Authorized Signatory
	
	Confirmed as of the date first above written:
	
	THE PANTRY, INC.
		
	By:	 	 /s/ Daniel J. Kelly


	Name:	 	Daniel J. Kelly
	Title:	 	VP/CFO
	
	Acknowledged and agreed as to matters relating to the Agent:
	
	 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, 
 solely in its capacity as Agent hereunder

		
	By:	 	 /s/ Angelina Lopes


	Name:	 	 
	Title:	 	Authorized Signatory

  

 17 








 SCHEDULE I 
  

																												
	 	 	 	 	 Unwind $ Value Per Warrant
 Months to Maturity


	 	 	 	 	84

	 	72

	 	60

	 	48

	 	36

	 	24

	 	12

	 	1


	 Cash Takeover Price:
	 	$	35.00	 	$	6.60	 	$	6.71	 	$	5.92	 	$	4.40	 	$	2.88	 	$	1.42	 	$	0.28	 	$	0.00
	 	$	39.29	 	$	8.90	 	$	8.95	 	$	8.00	 	$	6.21	 	$	4.34	 	$	2.42	 	$	0.67	 	$	0.00
	 	$	45.00	 	$	12.35	 	$	12.31	 	$	11.18	 	$	9.07	 	$	6.78	 	$	4.30	 	$	1.67	 	$	0.00
	 	$	50.00	 	$	15.71	 	$	15.57	 	$	14.29	 	$	11.94	 	$	9.35	 	$	6.44	 	$	3.09	 	$	0.02
	 	$	55.00	 	$	19.32	 	$	19.07	 	$	17.66	 	$	15.11	 	$	12.27	 	$	9.02	 	$	5.09	 	$	0.21
	 	$	60.00	 	$	23.14	 	$	22.78	 	$	21.24	 	$	18.54	 	$	15.51	 	$	12.00	 	$	7.64	 	$	1.63
	 	$	70.00	 	$	31.29	 	$	30.70	 	$	28.96	 	$	26.04	 	$	22.76	 	$	18.94	 	$	14.22	 	$	8.42
	 	$	85.00	 	$	44.41	 	$	43.51	 	$	41.54	 	$	38.46	 	$	35.04	 	$	31.15	 	$	26.62	 	$	22.36
	 	$	100.00	 	$	58.22	 	$	57.04	 	$	54.92	 	$	51.80	 	$	48.40	 	$	44.65	 	$	40.61	 	$	37.35
	 	$	120.00	 	$	77.24	 	$	75.77	 	$	73.53	 	$	70.45	 	$	67.16	 	$	63.68	 	$	60.18	 	$	57.35
	 	$	300.00	 	$	255.71	 	$	253.44	 	$	251.00	 	$	248.37	 	$	245.68	 	$	242.91	 	$	240.04	 	$	237.35
	 	 	Above:	 	 	Intrinsic + $15	 	 	Intrinsic + $13	 	 	Intrinsic + $10	 	 	Intrinsic + $7	 	 	Intrinsic + $5	 	 	Intrinsic + $3	 	 	Intrinsic + $1	 	 	Intrinsic + $0

  

 18 








 EXHIBIT A 
  
 GUARANTEE OF MERRILL LYNCH & CO., INC. 
  
 FOR VALUE RECEIVED, receipt of which is hereby acknowledged, MERRILL LYNCH & CO., INC., a corporation duly
organized and existing under the laws of the State of Delaware (“ML & Co.”), hereby unconditionally guarantees to The Pantry, Inc., Inc. (the “Company”), the due and punctual payment of any and all amounts payable by
Merrill Lynch International, a company organized under the laws of England and Wales (“ML”), under the terms of the Confirmation of OTC Warrant Transaction between the Company and ML, dated as of November 16, 2005 (the
“Confirmation”), including, in case of default, interest on any amount due, when and as the same shall become due and payable, whether on the scheduled payment dates, at maturity, upon declaration of termination or otherwise, according to
the terms thereof. In case of the failure of ML punctually to make any such payment, ML & Co. hereby agrees to make such payment, or cause such payment to be made, promptly upon demand made by the Company to ML & Co.; provided,
however that delay by the Company in giving such demand shall in no event affect ML & Co.’s obligations under this Guarantee. This Guarantee shall remain in full force and effect or shall be reinstated (as the case may be) if at any
time any payment guaranteed hereunder, in whole or in part, is rescinded or must otherwise be returned by the Company upon the insolvency, bankruptcy or reorganization of ML or otherwise, all as though such payment had not been made. 
  
 ML & Co. hereby agrees that its obligations hereunder shall be
unconditional, irrespective of the validity, regularity or enforceability of the Confirmation; the absence of any action to enforce the same; any waiver or consent by the Company concerning any provisions thereof; the rendering of any judgment
against ML or any action to enforce the same; or any other circumstances that might otherwise constitute a legal or equitable discharge of a guarantor or a defense of a guarantor. ML & Co. covenants that this guarantee will not be
discharged except by complete payment of the amounts payable under the Confirmation. This Guarantee shall continue to be effective if ML merges or consolidates with or into another entity, loses its separate legal identity or ceases to exist.

  
 ML & Co. hereby waives diligence; presentment;
protest; notice of protest, acceleration, and dishonor; filing of claims with a court in the event of insolvency or bankruptcy of ML; all demands whatsoever, except as noted in the first paragraph hereof; and any right to require a proceeding first
against ML. 
  
 ML & Co. hereby certifies and warrants
that this Guarantee constitutes the valid obligation of ML & Co. and complies with all applicable laws. 
  
 This Guarantee shall be governed by, and construed in accordance with, the laws of the State of New York. 
  
 This Guarantee may be terminated at any time by notice by ML & Co.
to the Company given in accordance with the notice provisions of the Confirmation, effective upon receipt of such notice by the Company or such later date as may be specified in such notice; provided, however, that this Guarantee shall continue in
full force and effect with respect to any obligation of ML under the Confirmation entered into prior to the effectiveness of such notice of termination. 
  
 This Guarantee becomes effective concurrent with the effectiveness of the Confirmation, according to its terms. 
  
 IN WITNESS WHEREOF, ML & Co. has caused this Guarantee to be
executed in its corporate name by its duly authorized representative. 
  

 19 









			
	MERRILL LYNCH & CO., INC.
		
	By:	 	 /s/ Patricia Kropiewnicki


	Name:	 	Patricia Kropiewnicki
	Title:	 	Designated Signatory
	Date:	 	November 16, 2005


  

 20 








 

 
  
 COVER STATEMENT 
 CLIENT/COUNTERPARTY RELATIONSHIP 
  
 Dear Client/Counterparty: 
  
 Merrill Lynch is pleased to provide the attached statement of Generic Risks Associated with Over-the-Counter Derivative Transactions under this Cover
Statement that concerns, among other things, the nature of our relationship with you in the context of such transactions. This statement was developed for our new and our ongoing client/counterparties in response to suggestions that OTC derivative
dealers consider taking steps to ensure that market participants utilizing OTC derivatives understand their risk exposures and the nature of their relationships with dealers before they enter into OTC derivative transactions. 
  
 Merrill Lynch (“we”) are providing to you and your organization
(“you”) the attached statement of Generic Risks Associated with Over-the-Counter Derivative in order to identify, in general terms, certain of the principal risks associated with individually negotiated over-the-counter (“OTC”)
derivative transactions. The attached statement does not purport to identify the nature of the specific market or other risks associated with a particular transaction. 
  
 Before entering into an OTC derivative transaction, you should ensure that you fully understand the terms of the
transaction, relevant risk factors, the nature and extent of your risk of loss and the nature of the contractual relationship into which you are entering. You should also carefully evaluate whether the transaction is appropriate for you in light of
your experience, objectives, financial resources, and other relevant circumstances and whether you have the operational resources in place to monitor the associated risks and contractual obligations over the term of the transaction. If you are
acting as a financial adviser or agent, you should evaluate these considerations in light of the circumstances applicable to your principal and the scope of your authority. 
  
 If you believe you need assistance in evaluating and understanding the terms or risks of a particular OTC derivative
transaction, you should consult appropriate advisers before entering into the transaction. 
  
 Unless we have expressly agreed in writing to act as your adviser with respect to a particular OTC derivative transaction pursuant to terms and conditions specifying the nature and scope of our advisory relationship,
we are acting in the capacity of an arm’s length contractual counterparty to you in connection with the transaction and not as your financial adviser or fiduciary. Accordingly, unless we have so agreed to act as your adviser, you should not
regard transaction proposals, suggestions or other written or oral communications from us as recommendations or advice or as expressing our view as to whether a particular transaction is appropriate for you or meets your financial objectives.

  
 Finally, we and/or our affiliates may from time to time take
proprietary positions and/or make a market in instruments identical or economically related to OTC derivative transactions entered into with you, or may have an investment banking or other commercial relationship with and access to information from
the issuer(s) of securities, financial instruments, or other interests underlying OTC derivative transactions entered into with you. We may also undertake proprietary activities, including hedging transactions related to the initiation or
termination of an OTC derivative transaction with you, that may adversely affect the market price, rate index or other market factor(s) underlying an OTC derivative transaction entered into with you and consequently the value of the transaction.








 

 
  
 GENERIC RISKS ASSOCIATED WITH

 OVER-THE-COUNTER DERIVATIVE TRANSACTIONS 
  

OTC derivative transactions, like other financial transactions, involve a variety of significant risks. The specific risks presented by a particular OTC derivative
transaction necessarily depend upon the terms of the transaction and your circumstances. In general, however, all OTC derivative transactions involve some combination of market risk, credit risk, funding risk and operational risk. 
  
 Market risk is the risk that the value of a transaction will
be adversely affected by fluctuations in the level or volatility of or correlation or relationship between one or more market prices, rates or indices or other market factors or by illiquidity in the market for the relevant transaction or in a
related market. 
  
 Credit risk is the risk that a
counterparty will fail to perform its obligations to you when due. 
  
 Funding risk is the risk that, as a result of mismatches or delays in the timing of cash flows due from or to your counterparties in OTC derivative transactions or related hedging, trading, collateral or other transactions,
you or your counterparty will not have adequate cash available to fund current obligations. 
  
 Operational risk is the risk of loss to you arising from inadequacies in or failures of your internal systems and controls for monitoring and quantifying the risks and contractual obligations associated
with OTC derivative transactions, for recording and valuing OTC derivative and related transactions, or for detecting human error, systems failure or management failure. 
  
 There may be other significant risks that you should consider based on the terms of a specific transaction. Highly customized OTC derivative
transactions in particular may increase liquidity risk and introduce other significant risk factors of a complex character. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in
the value or level of an underlying or related market factor. 
  
 Because the
price and other terms on which you may enter into or terminate an OTC derivative transaction are individually negotiated, these may not represent the best price or terms available to you from other sources. 
  
 In evaluating the risks and contractual obligations associated with a particular OTC
derivative transaction, you should also consider that an OTC derivative transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Accordingly, it may not be
possible for you to modify, terminate or offset your obligations or your exposure to the risks associated with a transaction prior to its scheduled termination date. 
  
 Similarly, while market makers and dealers generally quote prices or terms for entering into or terminating OTC derivative transactions and
provide indicative or mid-market quotations with respect to outstanding OTC derivative transactions, they are generally not contractually obligated to do so. In addition, it may not be possible to obtain indicative or mid-market quotations for an
OTC derivative transaction from a market maker or dealer that is not a counterparty to the transaction. Consequently, it may also be difficult for you to establish an independent value for an outstanding OTC derivative transaction. You should not
regard your counterparty’s provision of a valuation or indicative price at your request as an offer to enter into or terminate the relevant transaction at that value or price, unless the value or price is identified by the counterparty as firm
or binding. 
  
 This brief statement does not purport to disclose all of the
risks and other material considerations associated with OTC derivative transactions. You should not construe this generic disclosure statement as business, legal, tax or accounting advice or as modifying applicable law. You should consult your own
business, legal, tax and accounting advisers with respect to proposed OTC derivative transactions and you should refrain from entering into any OTC derivative transaction unless you have fully understood the terms and risks of the transaction,
including the extent of your potential risk of loss.