Stock Compensation Plans

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

We recognize compensation expense on a straight-line basis over the requisite service period of each award. For performance-based restricted stock, the expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest. For all employee share-based payment awards, the expense recognized has been adjusted for estimated forfeitures. Estimated forfeiture rates are developed based on our analysis of historical forfeiture data.

Total share-based compensation expense, which is included in general and administrative expense in the Consolidated Statements of Operations, was $3.3 million, $2.7 million and $2.8 million in fiscal 2014, 2013 and 2012, respectively. The related income tax benefit was $1.3 million, $1.1 million and $1.2 million in fiscal 2014, 2013 and 2012, respectively. As of September 25, 2014 we have approximately 1.3 million shares available for equity grants.

Stock Option Awards

All options granted vest over a three-year period, with one-third of each grant vesting on the anniversary of the initial grant and have contractual lives of seven years. Additionally, the terms and conditions of awards under the plans may differ from one grant to another. Under the Omnibus Plan, stock options may only be granted to employees with an exercise price at least equal to the fair market value of the related common stock on the date the option is granted.

A summary of the status of stock options under our plans and changes during fiscal 2014 is presented in the table below:



(in thousands, except exercise price or as otherwise noted)	Shares		Weighted-Average Exercise Price		Weighted-Average Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding, September 26, 2013	727		$	21.58	2.9	$	71
Granted	128		15.76
Exercised	(22	)	11.31			$	100
Forfeited options	(28	)	13.45
Expired options	(215	)	34.62
Options outstanding, September 25, 2014	590		$	16.32	3.5	$	2,833

Options vested and expected to vest, September 25, 2014	573		$	16.38	3.4	$	2,734
Options exercisable, September 25, 2014	360		$	18.03	2.1	$	1,318

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model, which uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of our common stock price. We use historical data to estimate option exercises and employee terminations used in the model. The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted average assumptions used in the Black-Scholes-Merton option pricing model for options issued in fiscal 2014, 2013 and 2012 are as follows:



	Years Ended
	September 25, 2014			September 26, 2013			September 27, 2012
Weighted-average expected lives (years)	3.0			3.0			3.0
Risk-free interest rate	0.7		%	0.4		%	0.4		%
Expected volatility	40.9		%	43.1		%	50.2		%
Dividend yield	—		%	—		%	—		%
Weighted-average grant date fair value	$	4.49		$	3.40		$	3.86

The weighted average grant date fair value of options granted during fiscal 2014, 2013 and 2012 was $574 thousand, $579 thousand and $660 thousand, respectively.

Stock options exercised during fiscal 2014 and 2013 were not material. There were no stock options exercised during fiscal 2012.

The total fair value of options that vested during fiscal 2014, 2013 and 2012 was $369 thousand, $323 thousand and $283 thousand, respectively. At September 25, 2014, there was $645 thousand of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.8 years.

Restricted Stock Awards

Restricted stock awards and restricted stock units are valued at the market price of a share of our common stock on the date of grant. In general, employee awards vest in equal annual installments at the end of each fiscal year of a three-year period from the date of grant. We also issue restricted stock awards and units to our Board of Directors annually, which vests over a one-year period. The weighted average fair value for restricted stock awards was $13.60 in fiscal 2014, $12.07 in fiscal 2013 and $12.89 in fiscal 2012. The weighted average fair value for restricted stock units was $15.44 in fiscal 2014 and $12.14 in fiscal 2013.There were no grants of restricted stock units in fiscal 2012. Transactions related to restricted stock awards and restricted stock units issued under the Omnibus Plan for the year ended September 25, 2014 are summarized as follows:



	Restricted Stock				Restricted Stock Units
(in thousands, except per share amounts)	Restricted Stock Awards		Weighted-Average Grant Date Fair Value Per Share		Restricted Stock Units		Weighted-Average Grant Date Fair Value Per Share
Nonvested at September 26, 2013	375		$	12.07	12		$	12.14
Granted	135		$	15.63	9		$	15.44
Vested	(210	)	$	12.52	(12	)	$	12.14
Forfeited	(66	)	$	12.46	—		$	—
Nonvested at September 25, 2014	234		$	13.60	9		$	15.44

The total fair value of restricted stock awards that vested was approximately $2.8 million, $2.1 million and $1.5 million in fiscal 2014, 2013 and 2012, respectively. The total fair value of restricted stock units that vested was approximately $178 thousand in fiscal 2014. There were no vested restricted stock units in fiscal 2013 and 2012. The remaining unrecognized compensation expense related to unvested restricted stock awards at September 25, 2014 was $2.3 million, which is expected to be recognized over a weighted-average period of 1.6 years. The remaining unrecognized compensation expense related to unvested restricted stock units at September 25, 2014 was $65 thousand, which is expected to be recognized over a weighted-average period of 0.5 years.

Performance-based Restricted Stock Awards

During fiscal 2014, we granted restricted stock awards that have performance conditions that will be measured at the end of the employee’s requisite service period, which provide a range of vesting possibilities from 0% to 150%. The performance-based restricted awards generally vest in three annual installments commencing on the first anniversary of the grant date. These awards are expensed based on the probability of achieving performance metrics. If the performance metric is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The weighted average fair value for performance-based restricted stock was $14.94 in fiscal 2014, $11.92 in fiscal 2013 and $13.32 in fiscal 2012. Transactions related to performance-based restricted stock awards issued under the Omnibus Plan for the year ended September 25, 2014 are summarized as follows:



(in thousands, except per share amounts)	Performance-based Restricted Stock Awards		Weighted-Average Grant Date Fair Value Per Share
Nonvested at September 26, 2013	330		$	11.92
Granted	203		$	15.77
Vested	—		$	—
Forfeited	(312	)	$	12.29
Nonvested at September 25, 2014	221		$	14.94

The total fair value of performance-based restricted stock awards that vested was approximately $62 thousand in fiscal 2013. No performance-based restricted stock vested in fiscal 2014 and 2012. The remaining unrecognized compensation expense related to unvested performance-based restricted stock awards at September 25, 2014 was $2.5 million, which is expected to be recognized over a weighted-average period of 1.5 years.