CONFIRMATION OF OTC CONVERTIBLE NOTE HEDGE



 Exhibit 10.3 
  
 

 
  
 Confirmation of OTC Convertible Note Hedge

  

					
	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
purposes of the Equity Definitions and a “Swap Transaction” for the purposes of the Swap 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.
		
	Seller:	  	ML.
		
	Buyer:	  	Counterparty.









			
	Shares:	  	The shares of Common stock, par value of USD 0.01, of Counterparty (Security Symbol: “PTRY”) or such other securities or property into which the Reference Notes are convertible on the
date of determination.
		
	Payment Amount Premium:	  	$39.34mm to be paid on the Issue Date, as defined in the Note Indenture.
		
	Exchange:	  	As provided in the Note Indenture in the definition of “Closing Price”.
		
	Related Exchange(s):	  	All Exchanges.
		
	Knock-in Event:	  	Not Applicable.
		
	Knock-out Event:	  	Not Applicable.
		
	Reference Notes:	  	Senior Subordinated Convertible Notes due November 15, 2012 having $135,000,000 principal amount at maturity.
		
	Conversion Event:	  	Each conversion on a Conversion Date (as defined in the Note Indenture) of any Reference Note pursuant to the terms of the Note Indenture (the principal amount at maturity of Reference Notes so
converted, the “Conversion Amount” with respect to such Conversion Event) occurring on or before the Termination Date.
		
	 	  	If the Conversion Amount for any Conversion Event is less than the aggregate principal amount at maturity of Reference Notes then outstanding, then the terms of this Transaction shall continue
to apply, subject to the terms and conditions set forth herein, with respect to the remaining outstanding principal amount at maturity of the Reference Notes.
		
	Note Indenture:	  	The Indenture, dated as of closing of the issuance of the Reference Notes, between Counterparty, the guarantors named therein and Wachovia Bank, National Association as trustee relating to the
Reference Notes, as the same may be amended, modified or supplemented, subject to the “Additional Termination Events” provisions of this Confirmation.
		
	Termination Date:	  	November 15, 2012.
		
	Valuation:	  	 
		
	Valuation Date:	  	The last Trading Day of the Conversion Reference Period in respect of any Conversion Event.
		
	Conversion Reference Periods:	  	The “Conversion Reference Periods”, as defined in the Note Indenture with respect to a Conversion Event.
		
	Full Exchange Business Day:	  	A “Trading Day”, as defined in the Note Indenture.
		
	Conversion Reference Period Disruption:	  	Modified Postponement.
		
	Conversion Reference Period Start Date:	  	The first (1st) Conversion Reference Period in respect of any Conversion Event.

  

 2 









			
	Settlement Terms:	  	 
		
	Settlement:	  	Net Share Settlement, as defined below, with respect to each exercise, unless the Counterparty elects to pay cash for all or a portion of the Remaining Shares in the manner provided in Section
4.13(b) under the Note Indenture in respect of a Conversion Event (and provides ML with notice of such election prior to the first Trading Day of the applicable Conversion Reference Period), in which case settlement will be in cash for all or a
portion of the exercise with respect to such Conversion Event.
		
	Settlement Currency:	  	USD.
		
	Settlement Date:	  	The third (3rd) Full Exchange Business Day following the Valuation Date in respect of any Conversion Event occurring on or before the Termination Date.
		
	Conversion Notice:	  	Counterparty agrees to provide ML with notice of any Conversion Event within two (2) Business Days of the Conversion Date and in any event no later than one (1) Business Day following
Counterparty’s receipt of notice of such Conversion Event from the Trustee under the Note Indenture.
		
	Net Share Settlement:	  	On each Settlement Date, ML shall deliver to Counterparty, through the Agent, a number of Shares equal to the related Final Settlement Amount.
		
	Remaining Shares:	  	“Remaining Shares,” as defined in Note Indenture, with respect to the applicable Conversion Event
		
	Final Settlement Amount:	  	Remaining Shares
		
	Share Adjustments:	  	 
		
	Consequences for Merger Events:	  	 
		
	 Share-for-Share:
	  	 Not Applicable, Shares will be adjusted as provided in the Note Indenture.

		
	 Share-for-Other:
	  	 Not Applicable, Shares will be adjusted as provided in the Note Indenture.

		
	 Share-for-Combined:
	  	 Not Applicable, Shares will be adjusted as provided in the Note Indenture.

		
	Tender Offer:	  	 Not Applicable

		
	Nationalization, Insolvency or Delisting:	  	 Not Applicable

		
	Additional Disruption Events:	  	 
		
	 Change in Law:
	  	 Not Applicable

		
	 Failure to Deliver:
	  	 Applicable. 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 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 the Settlement Date but for such “illiquidity in the market.”


  

 3 









			
	 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

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

	 	1.	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: 

  

	 	a.	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; and 

  

	 	b.	Counterparty has publicly disclosed all material information necessary for Counterparty 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. 

  

	 	2.	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. If
Counterparty would be obligated to receive cash from ML pursuant to the terms of this Agreement for any reason without having had the right (other than pursuant to this paragraph (2)) to elect to receive Shares in satisfaction of such payment
obligation, then Counterparty may elect that ML deliver to Counterparty a number of Shares having a cash value equal to the amount of such payment obligation (such number of Shares to be delivered to be determined by the Calculation Agent acting in
a commercially reasonable manner to determine the number of Shares that could be purchased over a reasonable period of time with the cash equivalent of such payment obligation). Settlement relating to any delivery of Shares pursuant to this
paragraph (2) shall occur within a reasonable period of time. 

  
 Additional Termination Events: 
  
 The occurrence of any
of the following shall be an Additional Termination Event with respect to Counterparty (which shall be the sole Affected Party and this Transaction shall be the sole Affected Transaction): 
  

	 	1.	an Amendment Event occurs (in which case the entirety of this Transaction shall be subject to termination); 

  

 4 









	 	2.	a Repayment Event occurs (in which case this Transaction shall be subject to termination only in respect of the principal amount of Reference Notes that cease to be outstanding in
connection with or as a result of such Repayment Event); or 

  

	 	3.	the transactions contemplated by the Purchase Agreement among the Counterparty, the guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(“MLPFS”) and Wachovia Capital Markets, LLC as Initial Purchasers, dated as of November 16, 2005 (the “Purchase Agreement”) relating to the purchase of the Reference Notes shall fail to close as a result of any
breach by the Counterparty or any Initial Purchaser of their respective obligations thereunder or as a result of any action, or failure to act, by the Counterparty or any Initial Purchaser thereunder or as a result of a failure or any condition
thereunder, in which case the entirety of this Transaction shall terminate automatically. 

  
 If the transactions contemplated by the Purchase Agreement shall fail to close for any reason other than a breach of the Purchase Agreement by the Initial Purchasers, then the entirety of this Transaction shall
terminate automatically and all payments previously made hereunder, including the Payment Amount Premium less an amount equal to 2.694mm Shares times USD 0.70 per Share times an amount equal to the excess, if any, of the closing price of the
Shares on the Trade Date over the closing price of the Shares on the date of the Termination Event; provided that any negative amount shall be replaced by zero. 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 in the preceding sentence is a good faith estimate of such damages and not a penalty. If the transactions contemplated by the Purchase Agreement shall
fail to close because of a breach of the Purchase Agreement by the Initial Purchasers, then the entirety of this Transaction shall terminate automatically, and all payments previously made hereunder, including the Payment Amount Premium, shall be
promptly returned to the person making such payment. In addition, if an Amendment Event or Repayment Event occurs, no payments shall be required hereunder in connection with the Termination Event arising as a result of such Amendment Event or
Repayment Event. 
  
 As used in this Section
Additional Termination Events: 
  
 “Amendment
Event” means that the Counterparty amends, modifies, supplements or waives any term of the Note Indenture or the Reference Notes relating to the principal amount, coupon, maturity, repurchase obligation of the Counterparty, redemption
right of the Counterparty, any term relating to conversion of the Notes (including changes to the conversion price, conversion settlement dates or conversion conditions), or any other term that would require consent of the holders of not less than
100% of the principal amount of the Reference Notes to amend. 
  
 “Repayment Event” means that (a) any Reference Notes are repurchased (whether in connection with or as a result of a change of control, howsoever defined, or for any other reason) by the Counterparty,
(b) any Reference Notes are delivered to the Counterparty in exchange for delivery of any property or assets of the Counterparty or any of its subsidiaries (howsoever described), other than as a result of and in connection with a Conversion
Event, (c) any principal of any of the Reference Notes is repaid prior to the Final Maturity Date, as defined in the Note Indenture (whether following acceleration of the Reference Notes or otherwise), provided that no payments of cash made in
respect of the conversion a Note shall be deemed a payment of principal under this clause (c), (d) any Reference Notes are exchanged by or for the benefit of the holders thereof for any other securities of the Counterparty or any of its
affiliates (or any other property, or any combination thereof) pursuant to any exchange offer or similar transaction or (e) any of the Notes is surrendered by Counterparty to the trustee for cancellation, other than registration of a transfer
of such Notes or as a result of and in connection with a Conversion Event. 
  
 Staggered Settlement: 
  
 If ML determines reasonably and
in good faith that the number of Shares required to be delivered to Counterparty hereunder on any Settlement Date would exceed 8.5% of all outstanding Shares, then ML may, by notice to Counterparty on or prior to such Settlement Date (a
“Nominal Settlement Date”), elect to deliver the Shares comprising the related the Final Settlement Amount on two or more dates (each, a “Staggered Settlement Date”) as follows: 
  

	 	1.	in such notice, ML will specify to Counterparty the related Staggered Settlement Dates (the first of which will be such Nominal Settlement Date and the last of which will be no
later than the twentieth (20th) Exchange Business Day following such Nominal Settlement Date) and the number of
Shares that it will deliver on each Staggered Settlement Date; 

  

 5 









	 	2.	the aggregate number of Shares that ML will deliver to Counterparty hereunder on all such Staggered Settlement Dates will equal the number of Shares that ML would otherwise be
required to deliver on such Nominal Settlement Date; and 

  

	 	3.	the Net Share Settlement terms will apply on each Staggered Settlement Date, except that the Shares comprising the Final Settlement Amount will be allocated among such Staggered
Settlement Dates as specified by ML in the notice referred to in clause (1) above. 

  
 Notwithstanding anything herein to the contrary, ML shall be entitled to deliver Shares to Counterparty from time to time prior to the date on which ML would be obligated to deliver them to Counterparty pursuant to
Net Share Settlement terms set forth above, and Counterparty agrees to credit all such early deliveries against ML’s obligations hereunder in the direct order in which such obligations arise. No such early delivery of Shares will accelerate or
otherwise affect any of Counterparty’s obligations to ML hereunder. In addition, within 30 days of the Termination Date or any Settlement Date (with respect to the period before the Settlement Date to the extent Counterparty reasonably
anticipates the occurrence of such 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. 
  

			
	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 and purchases of Shares, with the applicable provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations each thereunder,
including, without limitation, Rules 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 ML in the case of paragraphs (c) and (d) below) 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 hereof, 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;
		
	 	  	(b) if Counterparty were to have purchased a number of Shares equal to the Number of Shares using MLPFS as broker, such purchase(s) would have complied in all material respects with all
contractual obligations of Counterparty;

  

 6 









			
	 	 	(c) Except pursuant to the terms of the Note Indenture, neither ML nor Counterparty, as the case may be, is entering into this Agreement to facilitate a distribution of the Shares or in
connection with a future issuance of securities; and
		
	 	 	(d) Neither ML nor Counterparty, as the case may be, is entering into this Agreement to create actual or apparent trading activity in the Shares (or any security convertible into or exchangeable
for Shares) or to manipulate the price of the Shares (or any security convertible into or exchangeable for Shares).

  
 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

  

			
	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 Agreement; provided however that ML may assign its rights and
delegate its obligations hereunder, in whole or in part, to any affiliate (an “Assignee”) of Merrill Lynch & Co., Inc. (“ML&Co.”), 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 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.

  

 7 









			
	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 (such 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 the untruth of any
representation by such Indemnifying Party or a breach by such Indemnifying Party of any 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.

  
 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 the 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. 
  
 “Termination
Currency” means USD. 
  

 8 








 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. 

  

	 	(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

  

 9 








 Additional Notice Requirements: The Counterparty hereby agrees to promptly deliver to ML a copy of all notices and
other communications given to the holders of any Reference Notes (whether or not required to be given) pursuant to the terms of the Note Indenture on the dates provided in the Note Indenture and all other notices given and other communications made
by Counterparty in respect of the Reference Notes to holders of any Reference Notes . The Counterparty further covenants to ML that it shall promptly notify ML of each Conversion Event (identifying in such notice (a “Conversion
Notice”) the principal amount at maturity of Reference Notes being converted), Amendment Event (including in such notice a detailed description of any such amendment) and Repayment Event (identifying in such notice the nature of such
Repayment Event and the principal amount at maturity of Reference Notes being paid). The Counterparty shall deliver each Conversion Notice to ML within two Business Days following the occurrence of the related Conversion Event and in any event no
later than one Business Day following Counterparty’s receipt of notice of such Conversion Event from the Trustee under the Note Indenture. The Counterparty hereby acknowledges and agrees that its obligations under this Section shall continue as
obligations of the Counterparty notwithstanding any transfer by it of any of its rights or obligations to any other person or entity in accordance with the Section titled Staggered Settlement above. 
  
 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 
  
 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 
  

 10 








 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, whose judgments, determinations and
calculations in this Transaction and any related hedging transaction between the parties shall be made in good faith and in a commercially reasonable manner. 
  
 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 Shares, such that neither party shall be required to deliver any fractional Shares. 
  

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. 
  

 11 








 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; 
  
 (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 

  

 12 








 
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. 
  

 13 








 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

  

 14 








 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. (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 Convertible Note Hedge 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. 
  

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


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


  

 15 








 

 
  
 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 Transactions 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.

  

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 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. 
  

 17