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Distribution Service Agreeement

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DISTRIBUTION SERVICE AGREEMENT


This Distribution Service Agreement (the "Agreement") is made and entered into and is effective as of the 10th day of October, 1999, by and between The Pantry, Inc., a Delaware corporation ("Pantry") and Lil' Champ Food Stores, Inc., a Florida corporation ("Lil' Champ) (Pantry and Lil' Champ are hereinafter sometimes referred to collectively as the "Company") and McLANE COMPANY, INC., a Texas corporation (hereinafter referred to as "McLane").


RECITALS


WHEREAS, Company is in the business of operating retail convenience food stores; and


WHEREAS, McLane is in the business of wholesale distribution of food and non-food/general merchandise products throughout the United States of America;


NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the parties hereto agree as follows:


ARTICLE I


SCOPE OF AGREEMENT


1.1 Company Stores. For purposes of this Agreement, the term "stores" means the owned or managed convenience food stores of Company. Should Company build new or otherwise acquire additional stores after the date of this Agreement, such additional stores shall be included within the definition of stores.


1.2 Franchisees and Licensees. During the term of this Agreement, Company agrees to recommend McLane as the supplier to any franchisees and licensees of Company, if any.


1.3 Purchase of Products and Services. During the term of this Agreement Company will purchase from McLane, and McLane will sell to Company, all of Company's requirements of wholesale food and non-food/general merchandise products customarily supplied by convenience food wholesalers; provided, however, that the foregoing shall have no effect upon products purchased by Company from other vendors for whom McLane is not an approved supplier for existing and future branded fast food operations; and further, provided, that Company may purchase (i) traditional DSD products from DSD (direct store delivery) vendors, and (ii) all types of products currently being purchased from other vendors other than full-line convenience food wholesalers (it being understood that McLane may at any time propose for additional business). Such products to be purchased from


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."


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McLane shall include those standard convenience food store items, including, but not limited to, the following (the "Products"):


(a) Groceries, including coffee, tea, cereal, canned meats, condiments, juice, baby food, canned and dry goods and eggs;


(b) Deli foods, including meats and salads, breakfast foods, nachos and bulk sausage, franks, cheese and fish;


(c) Frozen foods, such as fruits, vegetables and juices;


(d) Frozen fast foods, such as burritos, pizza, pizza pieces, frozen sandwiches and salads;


(e) Candy, snacks and popcorn;


(f) Cigarettes and tobacco products;


(g) Cold packaged meats, lunch meats and cheeses;


(h) Shortening, breading and kitchen supplies;


(i) Private or controlled label soft drinks and beverages;


(j) Post mix products;


(k) Store supply items, i.e., bags, wraps, fast food supplies (including napkins, individual condiments and cleaners);


(l) Cooler items, i.e., cheese, biscuits, dips, cultured products, butter and margarine;


(m) Health and beauty aids, hosiery, and film and flash; and,


(n) General merchandise items, including motor oil, other automotive products, housewares, hardware, electrical supplies, baby supplies, sunglasses, lighters, toys and pet supplies.


McLane, by and through its divisions and/or subsidiaries, shall supply and deliver those products described hereinabove which are ordered by Company on a weekly basis according to those prices outlined in the Billing Plans attached hereto as Exhibit "A" and made a part hereof. The foregoing described product categories and pricing plan may be adjusted as market conditions change, and significant changes in fuel prices may also involve additional charges, all in accordance with Article V hereof.


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McLane's right to propose coverage of other vendor/supplier sources would require a competitive offer with the terms offered by vendors.


1.4 Application of Agreement to Acquired Stores. This Agreement shall apply to any convenience store chain or group of convenience stores directly or indirectly acquired by the Company subsequent to the date of this Agreement which store(s) are not then covered by an existing supply agreement. Should said acquired store(s) be covered by an existing supply agreement, this Agreement shall apply upon the expiration of the then existing supply agreement. The Company is permitted to renegotiate with an existing supplier as the existing service agreement expires and McLane has the option to match the terms offered by existing supplier for such acquired stores.


The Company will be paid a service allowance for each acquired store or new store pursuant to Section 3.2.


1.5 Cost. All merchandise (whether purchased by McLane directly from a manufacturer or from another source), other than cigarettes, shall be billed at McLane's cost, plus applicable percentage markups for each UIN department as set forth on the Billing Plan, plus any federal, state or local taxes where prescribed by law (e.g. state tax on tobacco products). This total is then reduced by promotional deals and allowances granted by manufacturers specifically to retailers for the time period provided by the manufacturers during their buy period. For purposes of this Agreement, McLane's cost shall mean the manufacturer's current publicly quoted delivered cost based on the buying bracket in which McLane normally buys that product for that particular McLane division or subsidiary. Delivered cost includes freight expense from manufacturers' shipping point to the appropriate McLane division or subsidiary and provides sort and segregation of that product. Backhaul income generated by McLane using its own or another authorized carrier, at McLane's expense, shall be retained by McLane. This publicly quoted delivered cost will be without regard to any cash discount or volume rebates allowed by the manufacturer to McLane. McLane reserves the right to impute cash discounts of up to two percent (2%) or any portion thereof which is not allowed by the manufacturer to McLane and to do so based upon the delivered cost. For purposes of this Agreement the term "manufacturer" means the person or entity that manufactures or causes others to manufacture goods or products which are marketed under brands or labels controlled by such person or entity.


1.6 Favored Nations. McLane warrants that the net price of Products based on a market basket approach, inclusive of all allowances, discounts and rebates, paid by Company for Products delivered hereunder will be at least equal to the net price paid by any other customer of McLane based upon any other respective customers of McLane in the same geographic location and in the same class of trade and similar volume.


1.7 Obligations on Default/Termination. In the event this Agreement is terminated as a result of a breach of and/or default in the terms and/or conditions of this Agreement by


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Company or for any other reason, then Company shall pay McLane all of the remaining unamortized portion of the Service Allowance described in Section 3.1 herein.


ARTICLE II


SUPPLY SERVICES


2.1 Product Delivery. McLane, by and through its divisions and/or subsidiaries, shall supply and deliver those Products described hereinabove which are ordered by Company on a weekly basis except as otherwise agreed to by the parties. Deliveries will be scheduled seven (7) days per week, twenty-four (24) hours a day. Stores will not be required to accept delivery during hours when such stores are closed, where city ordinance prohibits or when a delivery would create a major business disruption. McLane delivery vehicles will be allowed to park on either side of a Store permitting McLane's ramp to touch down on Store's sidewalk. At no time will entry to Store or gas pumps be blocked by McLane delivery vehicles. Deliveries should be conducted so as not to unreasonably hinder parking at stores but delivery vehicles shall be entitled to park so as to be able to lower the walkboard onto the sidewalk in front of a store provided space is available when the delivery vehicle arrives.


McLane will hold reviews every four (4) weeks with Company to analyze McLane's order quality (i.e, over, short and damaged products) and on-time deliveries. McLane agrees that it shall maintain a service level (i.e., the ratio of products invoiced to products ordered) of not less than *%. In the event McLane fails to maintain a level of order quality of *%, on-time deliveries of *%, or a service level of at least *% over any eight (8) consecutive week period, then Company shall notify McLane in writing setting forth the details of any such failure. If McLane does not achieve the required levels of order quality, during the immediately succeeding eight (8) week period, then Company shall have the right to have all deliveries made *, as of McLane's next reroute date.


2.2 *


2.3 Other Customers of McLane. This Agreement shall in no way act to foreclose McLane from supplying and delivering products or services to any other customer or entity.


2.4 Twice Per Week Delivery. McLane will provide twice weekly delivery to * percent (*%) of Company's stores. In the event the Company requires twice weekly delivery to more than * percent (*%), Company will be assessed an additional $* per week per store service charge. Should Company require twice weekly delivery in more than * percent (*%) of its Stores, McLane and Company will negotiate an appropriate fee for those additional deliveries.


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."


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ARTICLE III


COMPENSATION


3.1 Service Allowance. McLane agrees to pay to Company a Service Allowance in the total amount of $* within ten (10) business days after the date the last party executes this Agreement (the "Service Allowance") subject to repayment by Company to McLane and to additional Service Allowance payments by McLane to Company in accordance with Section 3.2 below.


.. The Service Allowance is based on $* per Store per year and shall
be amortized over the term of this Agreement applying the straight-line
method of amortization in accordance with generally accepted accounting
principles. This Service Allowance shall be reduced by the amount of the
unamortized service allowance paid by McLane in accordance with that one
certain Distribution Service Agreement dated March 29, 1998 entered into by
and between the Company and McLane, as the same may have been amended
through the Effective Date (the "Prior Agreement"), which amount the
Company and McLane agree is $*, making the Service Allowance payable to
Company $*.


3.2 Service Allowance Annual Adjustment. On each anniversary date of this Agreement, the Service Allowance will be adjusted for net Store openings or closings during the proceeding twelve (12) month period. In order to complete its Store evaluations, the Company may close, during the term of this Agreement, up to * (*) Stores with no penalty under this Agreement. The amount to be paid by McLane to Company for new stores and the amount to be paid to McLane by Company for closed stores shall be equal to the number of full months from opening or closing (as applicable) through the end of the term of this Agreement multiplied by $*. The amount will be paid to Company or paid by Company to McLane (if closings exceed openings) within thirty (30) days following each anniversary date of this Agreement. The administration and calculation will be performed by McLane/Carolina, Inc. and the Vice President of Merchandising of Company.


3.3 Volume Incentive. Company shall be entitled to a volume incentive program by which McLane will pay Company a volume rebate of *% on * purchases. Payment will be made at the conclusion of each 4 week accounting period. The volume incentive is expected to cause Company to increase purchases from McLane.


3.4 Payment Terms for Products Purchased. Company shall cause payment to be made by wire transfer to McLane for all Products purchased by the stores not later than 12:00 Noon, Central Standard Time or, if applicable, Central Daylight Savings Time, on the * following the week of delivery (for the purpose of this Section 3.4, each week is considered to end on Friday).


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."


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For Illustration Purposes Only: For deliveries made during the week of
October 16, 1998 through October 22, 1999, payment will be due and
payable to McLane no later than 12:00 Noon, Central Standard Time, or,
if applicable, Central Daylight Savings Time, on *.


McLane understands that the Company may be unable to routinely comply
with the terms as stated. Alternately the Company may require an
additional * days beyond stated terms. As compensation for the
extension of terms in addition to a difference in accounting reporting
periods, the Company, upon request of McLane, shall make a deposit of
funds with McLane in an amount of up to * days of sales which
shall be maintained at all times. The deposit will be adjusted as
necessary to reflect increases or decreases in sales volume. Company
agrees to make an initial deposit of $* on or before December
1, 1999.


McLane will review the Company's payment history with McLane and
average outstanding accounts receivable balance on or before May 31,
2000 to determine if the Company's initial deposit should be increased.
Upon any termination of this Agreement or upon any breach of this
Agreement by the Company, McLane shall be entitled to offset the amount
on deposit against any amounts due McLane by the Company.


3.5 Tote and Canister Charges. McLane will charge Company $* for each net tote left at a Store and credit the Company $* for each net tote picked up from a Store. This net charge or credit will also apply to CO2 canisters at the rate of $* per canister. In order not to negatively impact the Company's cash flow, McLane will determine, from delivery documents for the week prior to the Effective Date of this Agreement, the number of totes and CO2 canisters in the Stores as of the Effective Date of this Agreement. The number of totes times $* per tote and the number of canisters times $* per canister will be set up as a receivable by McLane and a payable by the Company. At the conclusion of this Agreement, these accounts will be reconciled by McLane and Company.


ARTICLE IV


TERM AND TERMINATION


4.1 Term. This Agreement shall commence and become effective on the Effective Date hereof and, unless earlier terminated in accordance with terms of this Agreement, will continue thereafter for a period of five (5) years from the Effective Date. Upon termination of this Agreement, McLane and Company will each fulfill their respective obligations hereunder with respect to all orders that have been placed by Company and/or delivered by McLane prior to the effective date of such termination.


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
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4.2 Service Commencement Date. The "Effective Date" means October 10, 1999, unless changed by mutual agreement of the parties.


4.3 Termination. In the event Company fails to make payments for any Products or services purchased from McLane at such time as payment is required to be made by this Agreement ("Payment Default"), McLane will have the immediate right to suspend performance of its obligations under this Agreement until such time as the Payment Default is cured. In the event of a Payment Default, if such default is not cured within twenty-four (24) hours after Company receives notice of default from McLane, then this Agreement shall terminate and all amounts outstanding to McLane, including, but not limited to, the remaining unamortized portion of the Service Allowance, will be immediately due and payable. However, nothing in this Agreement shall constitute a waiver of McLane's remedies under applicable law.


Additionally, McLane may suspend performance of its obligations and/or terminate this Agreement in the event of Insolvency of Pantry or Lil' Champ. In the event of a termination, the Company shall immediately repay the unamortized portion of the Service Allowance to McLane.


The Company may terminate this Agreement (i) immediately on written notice to McLane following a default by McLane with respect to the payment of any amounts owed to the Company under the terms of this Agreement, which default has remained uncured for five (5) days after McLane's receipt of written notice of such default from Company, (ii) sixty (60) days following Company's written notice to McLane that McLane is in a breach of its material obligations hereunder, if such breach has not been cured within such sixty (60) day period, (iii) immediately following the Insolvency of McLane, (iv) upon sixty (60) days notice if McLane is found to be in violation of Section 2.1, (v) immediately, following the violation of Section 6.4 by McLane or (vi) * If the Company terminates this Agreement for one of the above enumerated reasons, then no fee or other amount shall be due and payable by the Company to McLane in connection with such termination.


For purposes of this Agreement,


(A) "Insolvency" shall mean that, with respect to an entity, such entity shall (i) make a general assignment for the benefit of creditors or an agent authorized to liquidate its assets, (ii) become the subject of an "order for relief" within the meaning of the United States Bankruptcy Code, and such order is not stayed within sixty (60) days, (iii) file a petition in bankruptcy or for reorganization, or effect a plan or other arrangement with creditors, (iv) file an answer to a creditor's petition, admitting the material allegations thereof, for involuntary bankruptcy or for reorganization or to effect a plan or other arrangement with creditor, (v) apply to a court for the appointment of a receiver or


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."


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custodian for substantially all of its assets or properties, with or without consent, and such receiver is not discharged with sixty (60) days after appointment or (vi) adopt a plan of complete liquidation of its assets; and


(B) *


4.4 Auditing. Company's authorized representative shall have the right during normal business hours upon minimum of fourteen (14) days notice to examine only those records applicable to Company's specific account in order to verify cost and the cost plus margin. If such examination discloses an overstatement of cost or the cost plus margin price, McLane shall reimburse Company for the overcharge. If such examination discloses an understatement of cost or the cost plus margin price, Company shall reimburse McLane for the undercharge. If a pattern of overcharge is established, Company has the right to terminate this Agreement. In order for a "pattern of overcharge" to be established, Company must conclusively establish that during any twelve (12) consecutive month period, the overstatements must be in excess of the understatements by more than five percent (5%) of the total amount of the Company's purchases from McLane in such twelve (12) month period.


ARTICLE V


RENEGOTIATION


After the Effective Date, either party hereto shall have the right to send a notice requesting renegotiation of this Agreement (a "Renegotiation Notice") in the event of a change in the present circumstances which affect product or delivery cost or if McLane's Products and services or prices to Company are not competitive based on a total market basket approach with respect to the Products and services to be provided by McLane to Company pursuant to this Agreement. In addition, any comparison of prices and services shall only be with a full-line distributor competitor of McLane. This Agreement shall continue unchanged until the parties agree on any change(s) to be made, unless terminated pursuant to the following terms and provisions of this Article. If the parties do not agree to a change or changes within sixty (60) days after a Renegotiation Notice is sent, the party sending the Renegotiation Notice shall have the right to terminate this Agreement by sending a Notice of Termination to the other party within three (3) days after the expiration of such sixty (60) day renegotiation period, and in such event the termination shall become effective sixty (60) days after the date of the other party's receipt of the Notice of Termination. Neither party shall have any right to send more than one Renegotiation Notice within any calendar year. Upon any termination of this Agreement pursuant to this Article V, Company shall pay to McLane *% of the unamortized portion of the Service Allowance


* Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."


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on the effective date of termination. After the fifth (5/th/) full year of this Agreement the service allowance shall be earned and the so called straight line amortization method terminated.


ARTICLE VI


MISCELLANEOUS


6.1 Organization, Good Standing, Etc. Company hereby represents and warrants to McLane that it is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite power and authority, and all material licenses, permits and certificates to own and operate its properties and assets and to carry on its business. Company further represents and warrants that it is duly qualified to do business and is in good standing as a foreign corporation in each othe
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