-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bgq7rl2KqF5h9v3BteW14oZ8orsIgn2bX7McLV/iUF75ZH/AXxPvLGIBg1ST9YTS Qm3w04sPmBHirYutOEWjNg== 0000037912-96-000014.txt : 19960731 0000037912-96-000014.hdr.sgml : 19960731 ACCESSION NUMBER: 0000037912-96-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960615 FILED AS OF DATE: 19960730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD LION INC CENTRAL INDEX KEY: 0000037912 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 560660192 STATE OF INCORPORATION: NC FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06080 FILM NUMBER: 96601134 BUSINESS ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 BUSINESS PHONE: 7046338250 MAIL ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 FORMER COMPANY: FORMER CONFORMED NAME: FOOD TOWN STORES INC DATE OF NAME CHANGE: 19830510 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 15, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........to........... Commission File number 0-6080 FOOD LION, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0660192 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1330, 2110 Executive Drive Salisbury, NC 28145-1330 (Address of principal executive office) (Zip Code) (704) 633-8250 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Outstanding shares of common stock of the Registrant as of July 19, 1996. Class A Common Stock 235,668,134 Class B Common Stock 233,252,364 Page 1 of 40 The Exhibit index is located on page 15. FOOD LION, INC. INDEX TO FORM 10-Q JUNE 15, 1996 PAGE NUMBER Part I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Income for the 12 and 24 weeks ended June 15, 1996 and June 17, 1995 3-4 Balance sheets as of June 15, 1996, December 30, 1995 and June 17, 1995 5 Statements of Cash Flows for the 24 weeks ended June 15, 1996 and June 17, 1995 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12-13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit Index 15 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. STATEMENTS OF INCOME (Unaudited) For the 12 Weeks ended June 15, 1996 and June 17, 1995 (Dollars in thousands except per share data) June 15, 1996 June 17, 1995 12 WEEKS (A) (B) (A) (B) % % Net sales $2,084,414 $1,895,208 100.00 100.00 Cost of goods sold 1,640,768 1,504,752 78.72 79.40 Gross profit 443,646 390,456 21.28 20.60 Selling and administrative expenses 306,410 274,382 14.70 14.48 Interest expense 19,639 18,691 .94 .98 Depreciation 37,951 33,888 1.82 1.79 SFAS No. 121 charge 364,000 326,961 17.46 17.25 Income before income taxes 79,646 63,495 3.82 3.35 Provision for income taxes 31,062 24,763 1.49 1.31 Net income $ 48,584 $ 38,732 2.33 2.04 Earnings per share $ .10 $ 0.08 Dividends per share $ .03 $ 0.02 Weighted average number of shares outstanding Class A 235,689,846 244,075,739 Class B 234,617,072 239,405,864 Total 470,306,918 483,481,603
-3- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. STATEMENTS OF INCOME (Unaudited) For the 24 Weeks ended June 15, 1996 and June 17, 1995 (Dollars in thousands except per share data) June 15, 1996 June 17, 1995 24 WEEKS (C) (D) (C) (D) % % Net sales $4,108,867 $3,761,470 100.00 100.00 Cost of goods sold 3,253,598 2,987,941 79.18 79.44 Gross profit 855,269 773,529 20.82 20.56 Selling and administrative expenses 585,398 543,215 14.26 14.44 Interest expense 38,643 37,565 .94 1.00 Depreciation 74,970 66,998 1.82 1.78 SFAS No. 121 charge 9,640 .23 708,651 647,778 17.25 17.22 Income before income taxes 146,618 125,751 3.57 3.34 Provision for income taxes 57,181 49,354 1.39 1.31 Net income $ 89,437 $ 76,397 2.18 2.03 Earnings per share $ 0.19 $ 0.16 Dividends per share $ 0.06 $ 0.05 Weighted average number of shares outstanding Class A 236,446,163 244,108,677 Class B 235,276,093 239,488,489 Total 471,722,256 483,597,166
-4- FOOD LION, INC. BALANCE SHEETS (Dollars in thousands) (Unaudited) June 15, 1996 December 30, 1995 June 17, 1995 Assets Current assets: Cash and cash equivalents $ 75,690 $ 70,035 $ 125,730 Receivables 123,494 127,995 133,583 Inventories 871,203 881,021 801,883 Prepaid expenses and other 102,703 73,362 80,572 Total current assets 1,173,090 1,152,413 1,141,768 Property, at cost, less accumulated depreciation 1,538,938 1,492,852 1,375,046 Total assets $2,712,028 $2,645,265 $2,516,814 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable, trade $ 404,444 $ 363,571 $ 354,392 Accrued expenses 322,831 316,569 289,076 Capital lease obligations - current 16,667 15,032 10,219 Other liabilities - current 3,457 3,523 3,368 Total current liabilities 747,399 698,695 657,055 Long-term debt 315,300 355,300 355,300 Capital lease obligations 398,033 372,645 315,255 Deferred income taxes 44,120 44,120 46,190 Deferred compensation 705 726 661 Other liabilities 78,820 71,269 66,582 Total liabilities 1,584,377 1,542,755 1,441,043 Shareholders' Equity: Class A non-voting common stock, $.50 par value 117,805 119,255 121,956 Class B voting common stock, $.50 par value 116,776 118,313 119,521 Retained earnings 893,070 864,942 834,294 Total shareholders' equity 1,127,651 1,102,510 1,075,771 Total liabilities and shareholders' equity $2,712,028 $2,645,265 $2,516,814
-5- FOOD LION, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the 24 Weeks ended June 15, 1996 and June 17, 1995 (Dollars in thousands) 24 Weeks June 15, 1996 June 17, 1995 Cash flows from operating activities Net income $ 89,437 $ 76,397 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 74,970 66,998 Gain on disposals of property ( 463) ( 707) SFAS No. 121 charge 9,640 Changes in operating assets and liabilities: Receivables 4,501 7,045 Inventories 9,818 51,401 Prepaid expenses and other ( 29,341) ( 12,667) Accounts payable and accrued expenses 47,135 8,015 Income taxes payable (22,169) Deferred compensation ( 21) ( 7) Other liabilities 7,485 9,252 Total adjustments 123,724 107,161 Net cash provided by operating activities 213,161 183,558 Cash flows from investing activities Proceeds from disposal of property 7,939 6,189 Capital expenditures (102,936) ( 76,887) Net cash used in investing activities ( 94,997) ( 70,698) Cash flows from financing activities Net payments under short-term borrowings ( 20,000) Principal payments under capital lease obligations ( 8,213) ( 5,995) Principal payments on long-term debt ( 40,000) ( 25) Proceeds from issuance of common stock 541 18 Repurchase of common stock ( 38,599) ( 4,776) Dividends paid ( 26,238) ( 23,221) Net cash used in financing activities (112,509) ( 53,999) Net increase in cash and cash equivalents 5,655 58,861 Cash and cash equivalents at beginning of period 70,035 66,869 Cash and cash equivalents at end of period $ 75,690 $125,730 -6- Notes to Financial Statements (Dollars in thousands) 1) Basis of Presentation: The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures normally required by generally accepted accounting principles or those normally made in the Annual Report on Form 10-K of Food Lion, Inc. (the "Company"). Accordingly, the reader of this Form 10-Q should refer to the Company's Form 10-K for the year ended December 30, 1995 for further information. The financial information has been prepared in accordance with the Company's customary accounting practices and has not been audited. In the opinion of management, the financial information includes all adjustments consisting of normal recurring accruals necessary for a fair presentation of interim results. 2) Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: June 15, 1996 June 17, 1995 Interest (net of amounts capitalized)* $38,905 $37,282 Income taxes 87,826 76,551 *Interest capitalized 623 1,044 Capital lease obligations for stores of $46,179 and $18,495 were incurred in the 24 week period of 1996 and 1995, respectively. Capital lease retirements of $10,943 and $1,111 were recorded in the 24 week period of 1996 and 1995, respectively. The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. -7- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS (12 and 24 weeks ended June 15, 1996 compared to 12 and 24 weeks ended June 17, 1995) Net sales increased 10.0% and 9.2% for the quarter and year to date, respectively. Same store sales increased 6.0% for the quarter and 5.6% year to date. Sales were positively impacted by the following: renovations and expansion of older stores, the expansion of many stores to 24-hour service along with operating and marketing initiatives such as the "Gold Lion Guarantee," "MVP Customer Program" and sports marketing promotions. The 1996 business plan includes opening 50 new stores (up to 17 of these replacing older stores) and renovating approximately 120 existing stores. As of the end of the second quarter, the Company had opened seven new stores (offsetting three older units) and renovated 41 existing stores. In addition to the planned openings, the Company acquired the assets of Food Fair of North Carolina, Inc. in the first quarter which contributed nine additional stores, resulting in a total of 1,086 stores operating at the end of the second quarter this year compared with 1,046 stores last year. Gross profits increased 0.68% of sales for the quarter and 0.26% of sales year to date. Gross profits were positively impacted by the increase in customer traffic in the fresh departments (deli and market), areas that command a higher gross profit. The increase in the deli department gross profit is also due to a 25.6% increase in the number of stores with deli-bakeries (785 stores this year compared to 625 stores last year). Gross profits have also been positively impacted by the growth of Food Lion's private label program (currently representing 13% of total sales). Finally, gross profits increased due to a decrease in shrinkage in the grocery and perishable departments. For the quarter, selling and administrative expenses increased 0.22% of sales primarily due to increases in store rent and advertising. Store rent included a provision accrued for 1996 store closings of $9.2 million or 0.44% of sales (older units to be replaced by new Food Lion locations). Advertising expenses increased as a result of additional print and media costs incurred as the Company focused marketing efforts on certain markets. Year to date, selling and administrative expenses decreased 0.18% of sales primarily as the result of the Company's control of variable costs such as salaries, supplies, benefits and maintenance repairs during a period of strong sales performance offset by increased advertising.(1) Interest expense decreased 0.04% of sales and 0.06% of sales for the quarter and year to date, respectively. This year, during the second quarter, Note Purchase Agreements totaling $40.0 million (due 2/1/97) were repurchased contributing to the decrease. This decrease was offset by an increase in the number of stores with capital leases (413 this year compared to 365 last year). -8- Depreciation increased 0.03% of sales and 0.04% of sales for the quarter and year to date, respectively primarily due to remodels and new store openings since second quarter last year.(1) During the first quarter of 1996, Food Lion implemented Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" (SFAS No. 121). The implementation of SFAS No. 121 created a non-operating, non-cash charge against first quarter earnings of $9.6 million to properly reflect the carrying value of the Company's assets. Excluding the SFAS No. 121 charge, earnings per share were $0.20 year to date. At year end 1993, the Company established a pre-tax charge of $170.5 million (approximately $104 million after tax) to cover management's best estimate of the costs associated with closing 88 underperforming stores in 1994. During the first six months of 1994, the Company closed 84 of these stores (a decision was made in early 1994 to keep four stores open). As of the end of the second quarter 1996, the Company has charged $59.8 million against the provision (including $11.5 million during the second quarter), primarily as a result of the payment of remaining rent obligations on leased stores, and the disposition of store inventory and property. As of June 15, 1996, the Company had made no additional adjustments to the realizable value of the properties. The Company believes the provision is adequate at this time and will continue to monitor and evaluate the provision to make necessary adjustments. (1)Last year the quarter and year to date included 0.12%, 0.06%, 0.03% of sales and 0.11%, 0.07%, 0.03% of sales, respectively for selling and administrative expenses, interest expense and depreciation, respectively, for certain leases misclassified as capital rather than operating which were later adjusted in the third quarter of 1995. -9- Liquidity and Capital Resources Cash provided by operating activities totaled $213.2 million for the 24 weeks ended June 15, 1996 compared with $183.6 million for the same period last year. The increase in 1996 was primarily a factor of increased net income along with an increase in payables and income taxes payable, offset by an increase in prepaid expenses and changes in the comparative levels of inventory. Capital expenditures totaled $102.9 million for the 24 weeks ended June 15, 1996 compared with $76.9 million for the same period in 1995. The increase is primarily due to equipment costs for renovations and new stores along with costs associated with the Food Fair acquisition during the first quarter of 1996. During the second quarter of 1996, the Company opened four new stores and renovated 34 existing stores. For the year, the Company plans to open 50 new stores and renovate approximately 120 stores. The majority of the new stores will be opened under conventional leasing arrangements and, as a result, the impact on liquidity of owning stores will be insignificant in 1996. Significant cash capital expenditures currently estimated for the remainder of 1996 are as follows: Store expansion and new store construction $ 47 million Equip new and renovated stores $ 81 million Land costs $ 5 million Capital expenditures for 1996 will be financed through funds generated from operations, existing bank and credit lines, and other debt, if necessary. The Company will consider the possibility of sale-leaseback transactions on certain free- standing, Company-owned stores in the future if advantageous opportunities are presented by potential lessors. The Company maintains the following bank and credit lines: $250 million commercial paper program under which no borrowings were outstanding during the second quarter or as of June 15, 1996 and June 17, 1995. A revolving credit facility with a syndicate of commercial banks providing $350 million in committed lines of credit. This facility will expire in November, 1999. There were no borrowings against these lines as of June 15, 1996 and June 17, 1995. -10- Additional short-term committed lines of credit totaling $30.5 million. These lines of credit are available when needed. The company is not required to maintain compensating balances and borrowings may occur periodically. Borrowings during the quarter were as follows (see table below): $30.5 million Short-term Committed Lines 1996 1995 Outstanding borrowings at end of second quarter 0 0 Average borrowings $ 6.4 million 0 Maximum amount outstanding $23.0 million 0 Daily weighted average interest rate 5.371% N/A Periodic short-term borrowings under informal credit arrangements, which are available to the Company at the discretion of the lender. Borrowings for the quarter were as follows (see table below): Informal Credit Lines 1996 1995 Outstanding borrowings at end of second quarter 0 0 Average borrowings $ 5.3 million 0 Maximum amount outstanding $25.0 million 0 Daily weighted average interest rate 5.449% N/A During the second quarter of 1996, the Company expended $17.7 million for the purchase of Class A and Class B shares, as part of the Company's stock repurchase plans. The Company purchased 425,000 shares of Class A stock during the quarter at an average price of $7.06 per share, and 1,924,750 shares of Class B stock at an average price of $7.55 per share. Additional purchases may be made in the open market under the current program which began May, 1996 as deemed in the best interest of shareholders. Since the original plan which began in May, 1995, 8,642,615 Class A shares and 6,018,750 Class B shares have been repurchased at a total cost of $89.5 million. -11- Part II OTHER INFORMATION Item 1. Legal Proceedings The Company has had no significant developments related to legal matters since the Item 1 disclosure included in the Company's Form 10Q filed on May 1, 1996 for the quarter ended March 23, 1996. Item 2. Change in Securities This item is not applicable. Item 3. Defaults Upon Senior Securities This item is not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a). The Company held its Annual Meeting of Shareholders on May 2, 1996. (b). Not applicable (c). Matters voted upon at the meeting: Election of Directors Broker For Withheld Non-Votes Pierre Olivier Beckers 202,790,582 563,540 32,239,992 Dr. Jacqueline Kelly Callomore 202,804,427 549,695 32,239,992 William G. Ferguson 202,749,780 604,342 32,239,992 Dr. Bernard W. Franklin 202,727,338 626,784 32,239,992 Jean-Claude Coppieters `t Wallant 202,798,365 555,757 32,239,992 Gui De Vaucleroy 202,796,635 557,487 32,239,992 Margaret Kluttz 202,704,099 650,023 32,239,992 Tom E. Smith 202,576,537 777,585 32,239,992 Philippe Stroobant 202,820,976 533,146 32,239,992 Joseph C. Hall, Jr. 202,779,115 575,007 32,239,992 -12- Appointment of Independent Accountants Broker For Against Abstain Non-Votes Coopers & Lybrand, 203,026,798 123,257 204,067 32,239,992 L.L.P. Approval of 1996 Employee Stock Incentive Plan of Food Lion, Inc. Broker For Against Abstain Non-Votes 197,035,185 5,900,208 418,729 32,239,992 Approval of Key Executive Annual Incentive Bonus Plan Broker For Against Abstain Non-Votes 193,513,711 9,073,762 766,649 32,239,992 (d). Not applicable. Item 5. Other Information This item is not applicable. Item 6. Exhibits and Reports on Form 8-K (a). Exhibits 10a-Employee Stock Incentive Plan 10b-Key Executive Annual Incentive Bonus Plan 11-Computation of Earnings per Share 27-Financial Data Schedule (b). The Company did not file a report on Form 8-K for the period ended June 15, 1996. -13- SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. FOOD LION, INC. Registrant DATE: July 30, 1996 BY: Dan A. Boone Dan A. Boone Vice President-Finance Chief Financial Officer Principal Financial Officer (Duly Authorized Officer) -14- EXHIBIT INDEX SEQ. PAGE EXHIBIT # DESCRIPTION NO. 10a Employee Stock Incentive Plan 16-29 10b Key Executive Annual Incentive Bonus Plan 30-37 11 Computation of Earnings per Share 38 27 Financial Data Schedule 39-40 -15- EX-11 2 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (Amounts in thousands except Years Ended per share amounts) June 15, 1996 June 17, 1995 PRIMARY NET INCOME $ 89,437 $76,397 WEIGHTED AVERAGE COMMON SHARES AND OTHER COMMON STOCK EQUIVALENTS: COMMON STOCK OUTSTANDING 471,722 483,597 STOCK OPTIONS 269 0 471,991 483,597 PRIMARY EARNINGS PER SHARE (*) $ .1895 $ .1580 FULLY DILUTED NET INCOME $ 89,437 $76,397 ELIMINATION OF INTEREST EXPENSE, NET OF RELATED TAX EFFECT, APPLICABLE TO 5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 1,614 1,614 ADJUSTED INCOME APPLICABLE TO COMMON STOCK $ 91,051 $78,011 WEIGHTED AVERAGE COMMON SHARES AND OTHER COMMON STOCK EQUIVALENTS: COMMON STOCK OUTSTANDING 471,722 483,597 STOCK OPTIONS 561 41 SHARES ISSUABLE UPON CONVERSION OF 5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 (AS OF DATE OF ISSUE JUNE 14, 1993) 14,557 14,557 486,840 498,195 FULLY DILUTED EARNINGS PER SHARE (*) $ .1870 $ .1566 (*) NOTE: Dilution is less than 3%. Therefore, common stock equivalents have been excluded from the total weighted average common shares. EX-27 3
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, the Consolidated Statements of Income and the Consolidated Statement of Cash Flows and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-28-1996 DEC-31-1995 JUN-15-1996 75690 0 123494 0 871203 1173090 2421008 882070 2712028 747399 315300 0 0 234581 893070 2712028 4108867 4108867 3253598 3253598 0 0 38643 146618 57181 89437 0 0 0 89437 .19 0
EX-10.A 4 1996 EMPLOYEE STOCK INCENTIVE PLAN OF FOOD LION, INC.1 1. Purpose. The purpose of the 1996 Employee Stock Incentive Plan of Food Lion, Inc. (the "Plan") is to encourage and enable selected key employees of Food Lion, Inc. (the "Corporation") to acquire or to increase their holdings of Class A common stock of the Corporation (the "Common Stock") in order to promote a closer identification of their interests with those of the Corporation and its shareholders, thereby further stimulating their efforts to enhance the efficiency, soundness, profitability, growth and shareholder value of the Corporation. This purpose will be carried out through the granting of incentive stock options ("Incentive Options"), nonqualified stock options ("Nonqualified Options") and Restricted Stock (herein so called). Incentive Options and Nonqualified Options shall be referred to herein collectively as "Options." 2. Administration of the Plan. (a) The Plan shall be administered by those members of the Stock Option Committee of the Board of Directors of the Corporation (the "Committee"), but not less than two, who (1) are eligible to administer the Plan pursuant to the disinterested administration requirements of Rule 16b-3(c)(2)(i) (or any successor rule) under the Securities Exchange Act of 1934 and (2) qualify as "outside directors," as such term is used for purposes of Section 162(m) of the Internal Revenue Code of 1986 and any rules and regulations promulgated thereunder (the "Code"). Any action taken by the Committee may be taken by a written instrument signed by all of the members of the Committee and any such action so taken by written consent shall be as fully effective as if it had been taken by a majority of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Committee shall have full and final authority in its discretion to take any action with respect to the Plan including, without limitation, the following: (i) to prescribe the form or forms of the investments or agreements evidencing any Options or Restricted Stock granted under the Plan; (ii) to establish, amend and rescind rules, regulations and guidelines for the administration of the Plan; (iii) to construe and interpret the Plan and the instruments or agreements evidencing Options or Restricted Stock granted under the Plan; (iv) to establish and interpret rules, regulations and guidelines for administering the Plan; and (v) to make all other determinations deemed necessary or advisable for administering the Plan. (b) In the case of an individual who is a Section 16 Insider, the Committee shall have full and final authority in its discretion to determine which of such individuals shall receive Options or Restricted Stock, the nature of each Option as an Incentive Option or a Nonqualified Option, the times or effective dates when Options or Restricted Stock shall be granted, the number of shares of Common Stock to be granted as Restricted Stock or to be subject to each Option, the Option Price (determined in accordance with Section 6) and the time or times when, and the conditions, if any, upon the happening of which each Option shall be exercisable including determining whether or not to accelerate the exercise date of an Option as provided in Section 6(b). (c) Except as otherwise determined by the Committee in accordance with Section 2(d), an individual who is not a Section 16 Insider and who is promoted to one of the positions or salary grade levels set forth in Exhibit A to the Plan or who is employed by the Corporation in one of the positions or salary grade levels set forth in Exhibit A for a period of service set forth in Exhibit A shall be granted, effective as of the date of such promotion or of completion of such period of service, the number of Incentive Options specified in Exhibit A. The recipient of Options granted pursuant to this Section 2(c) shall be entitled to exercise such Options during the period ending on the fifth anniversary of the date the grant is effective and beginning (i) in the case of 1/3 of the Options, on the third anniversary of the date the grant is effective, (ii) in the case of an additional 1/3 of the Options, on the fourth anniversary of the date the grant is effective, and (iii) in the case of the final 1/3 of the Options, on the date that is four years and six months from the date the grant is effective. Any Option granted pursuant to this section 2(c) that is not exercised by the fifth anniversary of the date the grant is effective shall terminate. In the event an employee of the Corporation receives a grant of Options pursuant to this Section 2(c) as a result of promotion to or completion of a period of service in a position and then is demoted from that position, any of such Options that have not been exercised prior to the effective date of the demotion shall be forfeited. The exercise price of each Option granted pursuant to this Section 2(c) shall be the fair market value (determined in accordance with Section 6(a)(ii)) of the Common Stock on the date the grant is effective. The Committee shall have full and final authority in its discretion to modify Exhibit A, including, without limitation, adding positions or salary grade levels to or deleting positions or salary grade levels from the list of those eligible for awards, increasing or decreasing the number of Options granted upon promotion to a position or salary grade level or completion of a period of service in a position or salary grade level , and increasing or decreasing the period of service in a position or salary grade level required for grant of Options; provided that, no such modification by the Committee shall affect the rights of a Participant under any Option granted prior to the date of the Committee's action. (d) In the case of an individual who is not a Section 16 Insider and who is a "key employee" as determined by the Committee in accordance with Section 5(b), the Committee shall have full and final authority in its discretion to grant Options or Restricted Stock in addition to those Options granted pursuant to Section 2(c), and to determine which of such individuals shall receive such Options or Restricted Stock, the nature of each such Option as an Incentive Option or a Nonqualified Option, the times or effective dates when such Options shall be granted, the number of shares of Common Stock to be subject to each such Option, the Option Price (determined in accordance with Section 6) and the time or times when, and the conditions, if any, upon the happening of which each such Option shall be exercisable, including determining whether or not to accelerate the exercise date of an Option as provided in Section 6(b). Notwithstanding the provisions of Section 2(c), the Committee shall have full and final authority in its discretion to determine that an individual who would otherwise be entitled, pursuant to Section 2(c), to be granted Options upon a promotion or completion of a period of service, shall not receive such a grant or shall be granted a reduced number of Options; provided that, no such determination by the Committee shall be effective unless it is made before the date on which the grant of Options pursuant to Section 2(c) would otherwise be effective. 3. Effective Date. The effective date of the Plan, as amended, shall be February 8, 1996 (the "Effective Date"). Options may be granted under the Plan on and after the effective date, but not after February 8, 2006. 4. Shares of Common Stock Subject to the Plan. The number of shares of Common Stock that may be issued pursuant to the exercise of Options granted hereunder and the grant of Restricted Stock shall not exceed in the aggregate Ten Million (10,000,000) shares of either authorized but unissued shares of Common Stock of the Corporation, or shares of Common Stock held in the Corporation's treasury, including shares purchased on the open market. The Corporation hereby reserves sufficient authorized shares of Common Stock to meet the exercise of Options granted hereunder or the grant of Restricted Stock hereunder. Any shares subject to an Option or a Restricted Stock grant which for any reason expires or is terminated unexercised as to such shares may again be the subject of a grant under the Plan of an Option or Restricted Stock. If there is any change in the shares of Common Stock because of a merger, consolidation or reorganization involving the Corporation or a related corporation, or if the Board of Directors of the Corporation declares a stock dividend or stock split distributable in shares of Common Stock, or if there is a change in the capital stock structure of the Corporation or a related corporation affecting the Common Stock, the number of shares of Common Stock reserved for issuance under the Plan shall be correspondingly adjusted, and the Committee shall make such adjustments to Options, Restricted Stock grants or to any provisions of this Plan as the Committee deems equitable to prevent dilution or enlargement of Options. The maximum aggregate number of shares of Common Stock with respect to which Options may be granted and that may be granted as Restricted Stock (or any combination of grants of Options and Restricted Stock) to any employee in any calendar year during the term of this Plan shall be three hundred thousand (300,000) shares. 5. Eligibility. An Option or shares of Restricted Stock may be granted only to an individual who satisfies the following eligibility requirements on the date of grant. (a) The individual is an employee of the Corporation or a related corporation. For this purpose, an individual shall be considered to be an "employee" only if there exists between the individual and the Corporation or a related corporation the legal and bona fide relationship of employer and employee. In determining whether such a relationship exists, the regulations of the United States Treasury Department relating to the determination of the employment relationship for the purpose of collection of income tax on wages at the source shall be applied. (b) The individual falls within the classification of key employees of the Corporation or a related corporation. For this purpose, "key employees" are those employees who are in a position materially to affect the profits of the Corporation or such related corporation by reason of the nature and extent of each such employee's duties, responsibilities, personal capabilities, performance and potential. Each individual who is employed by the Corporation in one of the positions or salary grade levels set forth in Exhibit A, as such Exhibit A may be modified by the Committee in accordance with Section 2(c), shall be a key employee for purposes of the Plan. The Committee shall determine which employees, in addition to those described in the preceding sentence, qualify as key employees. (c) The individual, being otherwise eligible to receive an Option or Restricted Stock under this Section 5, is granted an Option pursuant to Section 2(c) or is selected by the Committee as an individual to whom an Option shall be granted (an "Optionee") or to whom Restricted Stock shall be granted. (d) With respect to Incentive Options, the individual does not own, immediately before the time that the Incentive Option is granted, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation. For this purpose, an individual will be deemed to own stock which is attributable to him under Section 424(d) of the Code. 6. Options. (a) Option Price. Both Incentive Options and Nonqualified Options may be granted under the Plan. The price per share at which an Option may be exercised (the "Option Price") shall be the fair market value per share of the Common Stock on the date the Option is granted. For this purpose, the following rules shall apply: (i) An Option granted pursuant to paragraph (c) of Section 2 shall be deemed to be granted on the date specified in that paragraph. Any other Option shall be deemed to be granted on the date that the Committee acts to grant the Option, or on any later date specified by the Committee as the effective date of the Option. (ii) The fair market value of the Common Stock on the date the option is granted shall be determined in good faith by the Committee, and shall mean the closing sales price of such Common Stock as reported on the NASDAQ National Market System on the date the Option is granted, or if the Option is not granted on a trading date, on the trading date immediately preceding the date the Option is granted; provided, that if the Common Stock is not included in the NASDAQ National Market System on the date the Option is granted, the fair market value of the Common Stock shall be determined in accordance with the applicable provisions of Section 20.2031-2 of the Federal Estate Tax Regulations, or in any other manner consistent with the Code and accompanying regulations. (iii) In no event shall there first become exercisable by the Optionee in any one calendar year Incentive Options granted by the Corporation or any related corporation with respect to shares having an aggregate fair market value (determined at the time an option is granted) greater than $100,000; provided, that to the extent that an Incentive Option granted under this Plan exceeds the foregoing limitation, it shall be treated for all purposes under the Plan as a Nonqualified Option. (b) Option Period and Limitations on the Right to Exercise Options. (i) The period during which an Option granted pursuant to paragraph (c) of Section 2 may be exercised shall be the period specified in that paragraph. The period during which any other Option may be exercised (the "Option Period") shall be determined by the Committee at the time the Option is granted. Such period shall not extend more than ten years from the date on which the Option is granted. Any Option or portion thereof not exercised before expiration of the Option Period shall terminate. (ii) An Option may be exercised by giving written notice of at least ten days to the Committee at such place as the Committee shall direct. Such notice shall specify the number of shares of Common Stock to be purchased pursuant to the Option and the aggregate purchase price to be paid therefor, and shall be accompanied by the payment of such purchase price. Such payment shall be in the form of cash or shares of Common Stock owned by the Optionee at the time of exercise, or in any combination of cash and shares. Shares of Common Stock tendered in payment on the exercise of an Option shall be valued at their fair market value on the date of exercise, as determined by the Committee by applying the provisions of Section 6(a)(ii). (iii) No Option shall be exercised unless the Optionee is, at the time of exercise, an employee as described in Section 5(a), and has been an employee continuously since the date the Option was granted, subject to the following: (A) An Option shall not be affected by any change in the terms, conditions or status of the Optionee's employment, provided that the Optionee continues to be an employee of the Corporation or a related corporation. (B) The employment relationship of an Optionee shall be treated as continuing intact for any period that the Optionee is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed ninety days or, if longer, as long as the Optionee's right to reemployment is guaranteed either by statue or by contract. The employment relationship of an Optionee shall also be treated as continuing intact while the Optionee is not in active service because of such disability under Section 422. For purposes of this Section 6(b)(iii)(B), "disability" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than twelve months. The Committee shall determine whether there is a disability within the meaning of this section. (C) If the employment of an Optionee is terminated because of retirement (herein, "retirement") as provided in Section 1.20 (or any successor provision) of the Profit Sharing Retirement Plan of Food Lion, Inc. or any successor plan thereto applicable to the Optionee, or if the Optionee dies while he is an employee or after his termination of employment because of retirement, the Option may be exercised only to the extent exercisable on the date of the Optionee's retirement or death (the "termination date"), except that the Committee, in its sole and absolute discretion, may accelerate the date that any Option which was not otherwise exercisable on the termination date shall be exercisable in whole or in part, without any obligation to accelerate such date with respect to other Options granted to the Optionee or to accelerate such date with respect to Options granted to any other Optionee, or to treat all Optionees similarly situated in the same manner. The Option must be exercised, if at all, prior the earlier of: (1) the close of the period of twelve months (three months in the case of an Incentive Option) next succeeding the termination date; or (2) the close of the Option Period. In the event of the Optionee's death, such Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession. (D) If the employment of the Optionee is terminated for any reason other than as provided in subparagraph (C) immediately preceding, his Option may be exercised only to the extent exercisable on the date of such termination of employment, except that the Committee, in its sole and absolute discretion, may accelerate the date that any Option which was not otherwise exercisable on the date of such termination of employment shall be exercised in whole or in part, without any obligation to accelerate such date with respect to other Options granted to the Optionee or to accelerate such date with respect to Options granted to any other Optionee, or to treat all Optionees similarly situated in the same manner. The Option must be exercised, if at all, prior to the earlier of: (1) the close of the period of three months less one day next succeeding the date of termination of employment; or (2) the close of the Option Period. If the Optionee dies following such termination of employment and prior to the earlier of the dates specified in (1) and (2) in the immediately preceding sentence, the Optionee shall be treated as having died while employed under subparagraph (C) immediately preceding (treating for this purpose the Optionee's date of termination of employment as the termination date). (iv) An Optionee or his legal representative, legatees or distributees shall not be deemed to be the holder of any shares of Common Stock subject to an Option unless and until certificates for such shares are issued to him or them under the Plan. Common Stock certificates shall be issued and distributed as soon as practicable following the date of exercise of an Option. (c) Stock Option Agreement. The grant of any Option under the Plan shall be evidenced by the execution of a 1996 Employee Stock Option Agreement of Food Lion, Inc. (the "Agreement") between the Corporation and the Optionee. Such Agreement shall set forth the date of grant of the Option, the number of shares of Common Stock subject to the Option, the Option Price, the Option Period and the time or times when and the conditions upon the happening of which the Option shall become exercisable. Such Agreement shall also designate the Option as an Incentive Option or a Nonqualified Option, and shall set forth any restrictions which shall apply to the shares to be purchased thereunder, and any other terms and conditions consistent with the provisions of the Plan and applicable law and regulations to which the Option shall be expressly made subject at the time the Option is granted. (d) Nontransferability of Options and Shares. No Option shall be transferable (including by pledge or hypothecation) other than by will or the laws of intestate succession or, if applicable, pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. An Option shall be exercisable during the Optionee's lifetime only by him. Shares of Common Stock acquired upon the exercise of an Option shall not, without the consent of the Committee, be disposed of until the expiration of six months after the date the Option was granted. 7. Restricted Stock. (a) Terms and Conditions. Grants of Restricted Stock shall be subject to the terms and conditions set forth in this Section 7 and any additional terms and conditions, not inconsistent with the express terms and provisions of the Plan, as the Committee, in its sole discretion, shall set forth in a grant instrument or agreement. Restricted Stock may be granted alone or in addition to any grant of Options under the Plan. Subject to the terms of the Plan, the Committee shall determine the number of shares of Restricted Stock to be granted to an individual and the Committee may impose different terms and conditions on any particular Restricted Stock grant made to any individual. (b) Restrictions. A grant of Restricted Stock is a grant of a number of shares of Common Stock to a Participant, subject to such restrictions, terms and conditions as the Committee deems appropriate, including, without limitation, (a) restrictions on the sale, assignment, transfer, hypothecation or other disposition of such shares, (b) the requirement that the Participant deposit such shares with the Company while such shares are subject to such restrictions, (c) the requirement that such shares be forfeited upon termination of employment for specified reasons within a specified period of time and (d) restrictions on the vesting of such shares based on service, the attainment of performance goals, a change of control of the Corporation or a related corporation or other factors. (c) Restriction Period. In accordance with Sections 7(a) and 7(b) of the Plan, Restricted Stock shall only become unrestricted and vest in the Participant in accordance with such vesting schedule relating to the restriction applicable to such Restricted Stock, if any, as the Committee may establish at the time of the grant in the relevant grant instrument or agreement (the period over which such stock vests being referred to herein as the "Restriction Period"). During the Restriction Period such stock shall be and remain unvested and a Participant may not sell, assign, transfer, pledge, encumber or otherwise dispose of or hypothecate such stock. Upon satisfaction of the vesting schedule and any other applicable restrictions, terms and conditions, the Participant shall be entitled to receive payment of the Restricted Stock or a portion thereof, as the case may be, as provided in Section 7(d) of the Plan. (d) Issuance of Restricted Stock Shares. The actual issuance of any share of Restricted Stock issued in connection with a grant hereunder may be evidenced in such manner as the Committee, in its sole discretion, shall deem appropriate including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Restricted Stock granted hereunder, such certificate shall bear, among any other required legends, the following legend: The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including, without limitation, forfeiture events) contained in the 1996 Employee Stock Incentive Plan of Food Lion, Inc. and a grant instrument or agreement delivered or entered into between the registered owner hereof and Food Lion, Inc. Copies of such Plan and instrument or agreement are on file in the office of the Secretary of Food Lion, Inc., and Food Lion, Inc. will furnish to the record holder of the certificate, without charge, upon written request at its principal place of business a copy of such Plan and grant instrument or agreement. The Committee may provide that the Corporation may retain, at its option, the physical custody of any stock certificate representing any grants of Restricted Stock during the Restriction Period or require that the Restricted Stock be placed in escrow or trust, along with a stock power endorsed in blank, until all restrictions or vesting provisions are satisfied or removed. (e) Payment of Restricted Stock Grants. After the satisfaction and/or lapse of the restrictions, terms and conditions established by the Committee in respect of a grant of Restricted Stock, a certificate (without the legend set forth in Section 7(d) above) for the number of shares of Common Stock which are no longer subject to such restrictions, terms and conditions shall, as soon as practicable thereafter, be delivered to the Participant. (f) Shareholder Rights. Except as may otherwise be provided in the relevant grant instrument or agreement, an individual shall have, during the Restriction Period with respect to the shares of Common Stock received under a grant of Restricted Stock, all of the rights of a shareholder of the Corporation, including, without limitation, the right to vote the shares and to receive any cash dividends. Stock dividends issued with respect to such Restricted Stock shall be treated as additional Restricted Stock grants and shall be subject to the same restrictions and other terms and conditions that apply to the shares of Restricted Stock with respect to which such stock dividends are issued. 8. Withholding. The Committee shall require any Optionee or recipient of Restricted Stock hereunder to timely pay the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of such recipient. Notwithstanding the foregoing, the Committee may provide at the time of grant that the Optionee or recipient shall, or that the Optionee or recipient may, satisfy such obligation in whole or in part, and any other local, state, or federal income tax obligations resulting from the exercise or surrender of a Nonqualified Option or the vesting of Restricted Stock by electing (such election being referred to herein as the "Election") to deliver to the Corporation shares of Common Stock owned by the Optionee at the time of exercise, or to have the Corporation withhold from the shares of Common Stock to which the recipient is entitled. The number of shares to be delivered or withheld shall have a fair market value (determined in accordance with Section 6(a)(ii) hereof) as of the date that the amount of tax to be withheld is determined (the "Tax Date") as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Except to the extent the Committee determines otherwise, the following additional rules shall apply with respect to Elections: (a) Each Election must be made in writing to the Committee prior to the Tax Date. The Committee may reject any Election, or may suspend or terminate the right to make an Election. An Election, once made by the recipient and accepted by the Committee, shall be irrevocable. (b) Notwithstanding the foregoing, if a recipient is an officer or director of the Corporation within the meaning of Section 16 of the Securities Exchange Act of 1934, then, unless approved by the Committee, (i) no Election shall be made as of a Tax Date which occurs within six months of the date of grant of a Nonqualified Option, and (ii) the Election, as well as the withholding of shares, must occur during a period beginning on the third business day following the date or release for publication of the Corporation's quarterly or annual summary statements of revenues and earnings and ending on the twelfth business day following such date. 9. No Right or Obligation of Continued Employment. Nothing contained in the Plan shall require the Corporation or a related corporation to continue to employ the recipient of an Option or Restricted Stock, nor shall any such individual be required to remain in the employment of the Corporation or a related corporation. Options granted under the Plan shall not be affected by any change in the duties or position of the Optionee, as long as such individual remains an employee of the Corporation or a related corporation (taking into account the provisions of Section 6(b)(iii)(B) hereof). A change in the duties or position of a recipient of Restricted Stock shall have such effect, if any, on such grant of Restricted Stock as may be provided in the relevant grant instrument or agreement. 10. Retirement Plans. In no event shall any amounts accrued, distributable or payable under the Plan be treated as compensation for the purpose of determining the amount of contributions or benefits to which any person shall be entitled under any retirement plan sponsored by the Corporation or a related corporation that is intended to be a qualified plan within the meaning of Section 401(a) of the Code. 11. Certain Definitions. For purposes of the Plan, the following terms shall have the meaning indicated: (a) "Related corporation" shall mean any parent, subsidiary or predecessor of the Corporation. (b) "Parent" or "parent corporation" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation if each corporation other than the Corporation owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain. (c) "Subsidiary" or "subsidiary corporation" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation of each corporation other than the past corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain. (d) "Predecessor" or "predecessor corporation" shall mean a corporation which was a party to a transaction described in Section 424(a) of the Code (or which would be so described if a substitution or assumption under that Section had occurred) with the Corporation, or a corporation which is a parent or subsidiary of the Corporation, or a predecessor of any such corporation. (e) "Section 16 Insider" shall mean an individual who is serving as a director (including a director who is an employee), any individual who is serving in a position designated as an "executive officer" by the Board of Directors of the Corporation, or any individual required to file pursuant to Rule 16a-3 under Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") as an "officer" within the meaning of Rule 16a-1(f) of the Exchange Act, as such Act and Rules may hereinafter be amended from time to time. 12. Amendment and Termination of the Plan. The Plan may be amended or terminated at any time by the Board of Directors of the Corporation; provided that such amendment or termination shall not, without the consent of an Optionee or grantee of Restricted Stock, adversely affect the Optionee's or grantee's rights with respect to an Option or shares of Restricted Stock previously granted; and provided further, that approval by the shareholders of the Corporation shall be required for any amendment which would (i) increase the number of shares of Common Stock which may be issued under the Plan, except to the extent of adjustments pursuant to Section 4, or (ii) materially change the requirements for eligibility to be an Optionee or grantee of Restricted Stock. Notwithstanding the foregoing, shareholder approval shall be required for any other amendments which require such approval in order to secure an exemption from Section 16(b) of the Securities Exchange Act of 1934. 13. Restrictions on Shares. The Committee may impose such restrictions on any shares of Common Stock acquired pursuant to grants hereunder as it may deem advisable, including without limitation restrictions under the Securities Act of 1933, as amended, and under any Blue Sky or securities laws applicable to such shares. The Committee may cause a restrictive legend to be placed on any certificate issued pursuant to an Option hereunder in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel. 14. Applicable Law. The Plan shall be governed by and construed in accordance with the laws of the State of North Carolina, except to the extent federal law may be applicable. 15. Shareholder Approval. The Plan is subject to approval by the shareholders of the Corporation on or before June 1, 1996. Options and Restricted Stock granted prior to such shareholder approval shall be conditioned upon and shall be effective only upon approval of the Plan by such shareholders on or before such date. 16. Predecessor Plans. The Food Lion, Inc. 1983 Employee Stock Option Plan, as amended, and the 1991 Employee Stock Option Plan of Food Lion, Inc. (together, the "Predecessor Plans") shall continue in effect following the effective date of this Plan, and shall be applicable with respect to all options issued under the Predecessor Plans before the effective date of this Plan. EXHIBIT A TO 1996 EMPLOYEE STOCK INCENTIVE PLAN OF FOOD LION, INC. Salary Grade I, II 0 Minimum 0 Discretionary after five years of service Salary Grade III 50 Minimum 50 Discretionary after five years of service Salary Grade IV 100 Minimum 100 Discretionary after five years of service Salary Grade V 100 Minimum 150 Discretionary after five years of service Salary Grade VI 250 Minimum 250 Discretionary after five years of service Salary Grade VII 500 Minimum 500 Discretionary after five years of service Salary Grade VIII, IX, X 1000 Minimum 0 Discretionary after five years of service 1 1991 Plan as Amended in 1994 and 1996. EX-10.B 5 Food Lion, Inc. Key Executive Annual Incentive Bonus Plan March 1996 I. Purpose The purpose of the Key Executive Annual Incentive Bonus Plan is to provide a means to reward Food Lion's Chief Executive Officer and other key executive officers as designated by the Senior Management Compensation Committee of the Board of Directors for the success of Food Lion, Inc. The Plan design creates the opportunity for cash awards based on annual profits in excess of a threshold level of return on average shareholders' equity. It is expected that the opportunity for additional compensation provided by the Plan will serve to motivate and retain the CEO and other designated Participants and provide appropriate rewards for continued and growing profitability. II. Definitions The following terms shall have the meanings set forth below when used in connection with the Plan and its related documents: A. "Plan" shall mean this Key Executive Annual Incentive Bonus Plan. B. "Code" shall mean the Internal Revenue Code of 1986, as amended. C. "Company" shall mean Food Lion, Inc., and any subsidiary thereof. D. "Committee" shall mean the Senior Management Compensation Committee. Members of this Committee shall be appointed from time to time by the Board of Directors from its own membership. E. "Participant" shall mean the Chief Executive Officer of Food Lion, Inc. or any other executive officer of the Company who is selected by the Committee pursuant to Article III hereof. F. "Plan Year" shall mean the fiscal year in which the Plan is in effect. G. "Profits" shall be determined on the basis of the Company's fiscal year by the Company's independent public accountants in accordance with generally accepted accounting principles, consistently applied, measured after Profit-Sharing Plan accruals or contributions and before any accrual, charge or deduction of the following items: 1. federal and state income taxes; 2. the amount of the Plan Year Bonus Funding as determined under Article V hereunder; 3. any LIFO adjustments to the inventory of the Company; 4. Non-recurring, non-cash charges; and 5. Non-cash charges or deductions that result from purchase accounting for acquisitions that occur after the effective date of the Plan. H. "Average Equity" shall mean the sum of the shareholders' equity at the beginning of the Company's fiscal year plus the shareholders' equity at the end of the fiscal year before any effect of the Plan Year Bonus Funding under this Plan (both determined by the Company's independent public accountants in accordance with generally accepted accounting principles, consistently applied) divided by two. I. "Return on Average Equity" shall be measured as Profits divided by Average Equity. J. "Beneficiary/Estate" shall mean the Participant's named beneficiary of any Plan awards, on file with the Company, or where no beneficiary has been named, the Participant's estate. K. "Normal Retirement" shall mean the normal retirement date specified within the Company's qualified retirement plan(s). L. "Permanent Disability" shall be defined in the Company's long-term disability plan or as defined by the Committee. III. Eligibility and Notification of Participation The Participants shall be selected by the Committee from among the class consisting of the Chief Executive Officer of the Company and other executive officers of the Company. The selection process shall occur annually, no later than 90 days after the beginning of the Plan Year, and those employees selected shall be notified of their participation in the upcoming Plan Year through a written communication from the Committee. IV. Bonus Potential The Bonus Potential for each Participant in the plan shall be set by the Committee no later than 90 days after the beginning of the Plan Year. The Bonus Potential shall be set as a fixed percentage (the "Participant's Percentage of Net Profit") of Profit in excess of a fixed percentage Return On Average Equity (ROAE) threshold. The aggregate of all of the Participants' Percentages of Net Profit shall not exceed 100 %. V. Individual Award Determination Each Participant's bonus award shall be calculated as specified in Article IV based upon the Company's financial performance for the fiscal year. Under no circumstances may any Participant's actual bonus award exceed the dollar amounts generated by the formula and procedure specified in Article IV. The actual awards may, however, be adjusted downward from the amounts generated by the formula, subject to the discretion of the Committee and taking into account the Participant's individual performance objectives for the fiscal year, as confirmed in writing within 90 days of the start of the fiscal year, and such other factors as the Committee may deem relevant for consideration; provided, however, that a reduction in the amount of one Participant's bonus shall not result in an increase in the amount payable to another Participant. VI. Individual Maximum Bonus Award The maximum annual bonus award that may be paid to any single Participant in the Plan shall be $750,000. VII. Payment of Awards Awards shall be paid in cash annually on or before March 15 following the Plan Year in which any performance goal established under the Plan is exceeded on an Award Payment Date selected by the Committee, unless the Participant elects to defer all or a percentage of the award through the deferral option of Article VIII. Awards shall only be paid upon the determination and written certification by the Committee that the performance goal of achieving a minimum ROAE, as established by the Committee in accordance with Paragraph IV herein was satisfied. VIII. Deferral Option Instead of receiving their awards on the Award Payment Date, Participants may elect to defer all or a percentage of their awards from any Plan Year until retirement or for some other specified purpose. This election to defer must be made through a written communication to the Committee prior to the Plan year with respect to which the award would be paid (i.e., prior to commencement of the period of service with respect to which the award would be paid). The election shall be effective for all subsequent Plan Years unless, prior to the beginning of any Plan Year, the Participant revokes or changes the deferral election. Any revocation or change shall be effective only for Plan Years subsequent to the fiscal year in which such revocation or change is filed with the Committee. All amounts deferred under the Plan, plus accrued interest, shall be unsecured, general obligations of the Company. Title to and beneficial ownership of any assets, whether cash or investments, which the Company may set aside or earmark to meet its deferred obligation under the Plan, shall at all times remain the property of the Company; and no Participant or beneficiary shall under any circumstance acquire any property interest in any specific assets or the Company. A. Deferral Limitation The deferral option is subject to the following limitation: If an election is made to defer, the minimum deferral for any Plan Year shall be $1,000. The Participant's election must state which of the following procedures shall apply in the event that his/her elected deferral percentage results in less than $1,000 deferral: 1. No deferral shall be made for the Plan Year and payment of the entire award shall occur on the Award Payment Date; 2. The deferral percentage of the award shall automatically be increased to defer the minimum $1,000. If the total award is less than $1,000, no deferral will be made and payment will occur on the Award Payment Date. B. Payment of Deferred Awards Deferred awards shall be credited to the deferral account on the Award Payment Date. Interest shall accrue on deferred awards at the 10-year government bond rate adjusted annually as of each anniversary of the Award Payment Date on which the award is credited to a deferral account. The deferred principal, plus the interest on the principal, shall be payable to the Participant, or, in the event of the Participant's death, to his/her beneficiary/estate, in one single lump sum payment from among the following payment methods or contingency payment methods elected by the Participant: 1. Contingency Payment Methods Deferred principal and accrued interest may also be payable to the Participant, or, in the event of his/her death, to his/her beneficiary/estate, under any of the following conditions: a. Participant's Financial Hardship -- Payment to occur when requested by the Participant at some future date in one lump sum as the result of financial hardship due to unforeseeable emergencies as determined by the Committee. The Committee shall use the following guideline in determining financial hardship: Circumstances of sufficient severity that a Participant or his/her family are clearly endangered by present or impending want or privation. b. Participant's Permanent Disability -- Payment to occur in one lump sum one month following the Participant's permanent disability. c. Participant's Death-- Payment to the Participant's beneficiary/estate to occur in one lump sum one month following the Participant's death. d. Participant's Termination of Employment With The Company For Any Reason -- Payment to occur in one lump sum one month following Participant's termination. IX. Vesting A Participant shall be 100 percent vested in any bonus awards payablefor a particular Plan Year if he or she is employed for the entire Plan year. A Participant's voluntary or involuntary termination of employment during the Plan year for any reson other than permanent disability, normal retirement or death shall, at the option of the Committee, be cause for cancellation of all rights to the receipt of his/her bonus award for that particular Plan Year. Should termination of employment during the Plan Year occur as the result of permanent disability, normal retirement, or death, the Participant, or his/her beneficiary/estate, shall be eligible for a prorated bonus award, based upon the percentage of that period worked compared to twelve (12) months. Any Participant voluntarily or involuntarily terminating his/her employment for any reason after the Plan Year but prior to the Award Payment Date, shall be eligible to receive an award as though the Participant were still an employee of the Company except for (1), (2), and (3) below. In the event of a Participant's death following the Plan Year but prior to the Award Payment Date, his/her beneficiary/estate shall be eligible to receive his/her award. No award shall be payable to any Participant under the following circumstances if they should occur prior to the award payment date for the Plan Year: 1. Participant admits to theft from the Company; 2. Participant is convicted of a theft from the Company; 3. Participant is discharged for cause. X. Designation of Beneficiary A Participant shall have the right to designate the person or persons who shall have the right to receive, in the event of the Participant's death, any award payments which may be payable by the Company. Such designation shall be in a form acceptable to the Company and shall be valid upon receipt by the Company. Any beneficiary designation made under such document shall be revocable at any time unless expressly made irrevocable. In the event that, at the Participant's death, there is no beneficiary designated for purposes of receiving any bonus payments from the Plan, such payments shall be paid to the Participant's estate. XI. Administration The Plan has been established and is administered by the Committee subject to such limitations as are necessary to ensure compliance with the requirements of section 162(m) and the regulations thereunder relating to "qualified performance- based compensation." The Committee shall have full power and authority in its sole discretion to construe and interpret the Plan, and to determine which key executives of the Company shall participate, what their Bonus Potential Percentages shall be (subject to the maximum of Article VI), and what their final awards will be. All determinations and decisions of the Committee shall be unanimous and shall be final and binding on all persons, except that no member of the Committee may at any time participate in any decision affecting his/her unique interests. Subject to ratification by the Board of Directors, the Committee shall have full authority to amend, alter, modify, and terminate the Plan provided such action is for subsequent years and becomes effective the first day of the following Plan year. XII. General Provisions A. The Plan does not create in any employee or group of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate or otherwise modify an employee's employment at any time. B. Nothing contained in this document shall be construed to create a trust or escrow account of any kind or create any fiduciary relationship. Moneys set aside or invested under the Plan shall continue for all purposes to be a part of the general assets of the Company, and no entity or person other than the Company shall, by virtue of the provisions of this Plan, have any interest in such moneys. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. C. To the extent permitted by law, the right of any Participant or his/her beneficiary/estate to any payment under this Plan shall not be subject in any manner to attachment or other legal process for the debts of such Participant or beneficiary/estate; and any such payment shall not be subject to anticipation, alienation, sale, transfer, assignment, or encumbrance. D. The Plan is intended not to be an employee benefit plan subject to the provisions of the Employment Retirement Income Security Act of 1974, as amended. -----END PRIVACY-ENHANCED MESSAGE-----