-----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, WonynA/WsKT1XTFu20KVwcDTVKCBSFaoFRGNyK3VAwQykUOzifnkgYwgUHLPg6c4 e4Az7O223o+JhJW0rgIA1g== 0000037912-99-000010.txt : 19990403 0000037912-99-000010.hdr.sgml : 19990403 ACCESSION NUMBER: 0000037912-99-000010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990401 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-K405 SEC ACT: SEC FILE NUMBER: 000-06080 FILM NUMBER: 99584741 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-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 2, 1999. Commission File No. 0-6080 F O O D L I O N, INC. (Exact name of registrant as specified in its charter) Incorporated in North Carolina 56-0660192 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 1330, 2110 Executive Drive Salisbury, North Carolina 28145-1330 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code-- (704) 633-8250 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.50 per share Class B Common Stock, par value $.50 per share (Title of Class) 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[x] The aggregate market value of the voting and non-voting stock held by non- affiliates of the Registrant based on the price of such stock at the close of business on March 26, 1999, was $1,033,294,366 and $1,457,690,498, respectively. For purposes of this report and as used herein, the term "non-affiliate" includes all shareholders of the Registrant other than Directors, executive officers, and other senior management of the Registrant and persons holding more than five per cent of the outstanding voting stock of the Registrant. Outstanding shares of common stock of the Registrant as of March 26, 1999. Class A Common Stock - 247,914,301 Class B Common Stock - 230,830,364 Exhibit index is located on sequential page 16 hereof. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Form 10-K: 1. Annual Report to Shareholders for the year ended January 2, 1999, or is incorporated by reference in Part II hereof. 2. Proxy Statement for the 1999 Annual Meeting of Shareholders of the Company to be held on May 6, 1999, or is incorporated by reference in Part III hereof. PART I Item 1. Business. Food Lion, Inc. (the "Company") engages in one line of business, the operation of retail food supermarkets in the southeastern and Mid-Atlantic regions of the United States. The Company was incorporated in North Carolina in 1957 and maintains its corporate headquarters in Salisbury, North Carolina. The Company's stores, which are operated under the names of "Food Lion" and "Kash n' Karry," sell a wide variety of groceries, produce, meats, dairy products, seafood, frozen food, deli/bakery and non-food items such as health and beauty care, prescriptions, and other household and personal products. The Company offers nationally and regionally advertised brand name merchandise as well as products manufactured and packaged for the Company under the private labels of "Food Lion" and "Kash n' Karry." The Company offers over 30,000 Stock Keeping Units (SKU's) in its Food Lion locations and over 35,000 in its Kash n' Karry locations. The Company's current Food Lion store prototype is a 38,000 square foot model. The current Kash n' Karry store prototype is a 46,000 square foot model. The products sold by the Company are purchased through a centralized buying department at the Company's headquarters. The centralization of the buying function allows the management of the Company to establish long-term relationships with many vendors providing various alternatives for sources of product supply. The business in which the Company is engaged is highly competitive and characterized by low profit margins. The Company competes with national, regional and local supermarket chains, supercenters, discount food stores, single unit stores, convenience stores, warehouse clubs and drug stores. The Company will continue to develop and evaluate new retailing strategies that will respond to its customers' needs. Seasonal changes have no material effect on the operation of the Company's supermarkets. As of January 2, 1999, 1,207 supermarkets were in operation as follows: Delaware 12 North Carolina 409 Florida 186 Pennsylvania 7 Georgia 56 South Carolina 112 Kentucky 12 Tennessee 81 Maryland 49 Virginia 266 West Virginia 17 -2- As of March 26, 1999, the Company had opened 21 supermarkets since January 2, 1999, closed one supermarket, relocated four supermarkets and had signed leases for 16 supermarkets which are expected to open in either 1999 or 2000. Warehousing and distribution facilities, including its transportation fleet, are owned and operated by the Company and are located in Green Cove Springs and Plant City, Florida; Salisbury and Dunn, North Carolina; Greencastle, Pennsylvania; Elloree, South Carolina; Clinton, Tennessee; and Disputanta, Virginia. As of January 2, 1999, the Company employed 32,991 full-time and 59,134 part-time employees. The following table shows the number of stores opened, closed and relocated, and the number of stores open at the end of each year, for the past three years. # Stores # Stores #Stores # Stores Opened Opened Closed Relocated Year-end 1998 79 (12) (17) 1,207 1997 164 (a) (94) (b) (25) 1,157 1996 64 ( 3) (22) 1,112 (a) Includes 100 stores acquired from Kash n' Karry (b) Includes 61 Southwest store closings Item 2. Properties. Supermarkets operated by the Company in the southeastern and Mid-Atlantic states average 32,218 square feet in size. The Company's current Food Lion store prototype retail format is a 38,000 square foot model with a deli/bakery department. The current Kash n' Karry store prototype is a 46,000 square foot model. All of the Company's supermarkets are self-service stores which have off- street parking facilities. With the exception of operating 66 owned supermarkets, the Company occupies its various supermarket premises under lease agreements providing for initial terms of up to 30 years, with options generally ranging from five to twenty years. At the end of 1998 the Company had $21.0 million (net book value) in property held for sale. The following table identifies the location and square footage of distribution centers and office space operated by the Company as of January 2, 1999. Location of Property Square Footage Distribution Center #1 Salisbury, NC 1,630,233 Distribution Center #2 Disputanta, VA 1,123,718 Distribution Center #3 Elloree, SC 1,098,612 Distribution Center #4 Dunn, NC 1,224,652 Distribution Center #5 Green Cove Springs, FL 832,109 Distribution Center #6 Clinton, TN 833,042 Distribution Center #7 Greencastle, PA 1,236,124 Distribution Center #8 Plant City, FL 759,546 Corporate Headquarters Salisbury, NC 271,592 9,009,628 -3- Item 3. Legal Proceedings. The Company has had no significant developments related to legal matters since the Item 1 disclosure included in the Company's Form 10-Q for the quarter ended September 12, 1998. Item 4. Submission of Matters to a Vote of Security Holders. This item is not applicable. Executive Officers of the Registrant The names and ages of the current executive officers of the Company and their positions as of March 26, 1999, are set forth below. The footnotes following the table below include the business experience during the past five years for each executive officer who has been employed by the Company for fewer than five years. Unless otherwise indicated by footnote, each of the executive officers served in various managerial capacities with the Company over the past five years. None of the executive officers named below is related to any other executive officer or director by blood, marriage or adoption. Officers serve at the discretion of the Board of Directors. Name and all Positions with Age Year First Year First the Company Held at March Elected Elected to 26, 1999 Officer Present Office Tom E. Smith 57 1974 1981 President and Chief Executive Officer Joseph C. Hall, Jr. 49 1988 1995 Senior Vice President and Chief Operating Officer R. William McCanless 41 1993 1995 Senior Vice President, Chief Administrative Officer and Secretary Pamela K. Kohn 34 1995 1997 Senior Vice President of Merchandising A. Edward Benner, Jr. 57 1980 1996 Vice President and Chief Information Officer -4- Robert J. Brunory 44 1994 1994 Vice President Procurement/Category Management Michael D. Byars 40 1997 1997 Vice President of Operations, Food Lion, Kash n' Karry Division Robert E. Crosslin (1) 44 1997 1997 Vice President of Distribution W. Bruce Dawson 46 1995 1995 Vice President of Operations/ Northern Division Keith M. Gehl 40 1997 1997 Vice President of Real Estate and Store Development Carol M. Herndon 36 1991 1994 Corporate Controller and Director of Accounting Richard A. James 39 1997 1997 Director of Finance and Treasurer L. Darrell Johnson 46 1997 1997 Vice President of Human Resources Laura C. Kendall (2) 47 1997 1997 Vice President of Finance and Chief Financial Officer C. Dave Morgan 48 1997 1997 Vice President of Operations/ Southern Division Elwyn G. Murray, III 32 1998 1998 Vice President of Marketing Lester C. Nail (3) 39 1995 1995 Vice President Legal Affairs and Assistant Secretary Thomas J. Robinson 38 1997 1997 Vice President of Operations/ Central Division Natalie M. Taylor 39 1997 1997 Vice President of Diversity -5- (1) Mr.Crosslin joined Food Lion in October 1996 and served as Corporate Transportation Manager until his promotion to Vice President in May 1998. Prior to joining Food Lion in 1996, Mr. Crosslin served as Director of Fleet Services to Ralphs Grocery Company. (2) Ms. Kendall served as the Chief Financial Officer for F&M Distributors prior to joining Food Lion. From 1995 until March of 1997, she was the presiding officer overseeing the liquidation process for F&M Distributors. (3) Prior to joining Food Lion in 1995, Mr. Nail served as Corporate Counsel to Wal-Mart Stores, Inc. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information pertaining to the Class A and Class B Common Stock price range, dividends and record holders discussed beneath the headings "Market Price of Common Stock" and "Dividends Declared Per Share of Common Stock" in the Annual Report to Shareholders for the year ended January 2, 1999, is hereby incorporated by reference. Item 6. Selected Financial Data. The information set forth beneath the heading "Ten Year Summary of Operations" in the Annual Report to Shareholders for the year ended January 2, 1999, is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information set forth beneath the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Shareholders for the year ended January 2, 1999, is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data. The financial statements, including the accompanying notes and results by quarter, set forth beneath the headings "Consolidated Statements of Income", "Consolidated Balance Sheets", "Consolidated Statements of Cash Flows", "Consolidated Statements of Shareholders' Equity", "Notes to Consolidated Financial Statements" and "Results by Quarter" in the Annual Report to Shareholders for the year ended January 2, 1999, are hereby incorporated by reference. -6- Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. This item is not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. The information pertaining to nominees for election as directors set forth beneath the heading "Election of Directors" in the Proxy Statement for the 1999 Annual Meeting of Shareholders to be held May 6, 1999 is incorporated by reference. Information concerning the Company's executive officers is contained under the heading "Executive Officers of the Registrant" in Part I of this report. Item 11. Executive Compensation. The information pertaining to executive compensation set forth beneath the headings "Executive Compensation" and "Report of the Senior Management Compensation Committee, Stock Option Committee and Board of Directors" in the Proxy Statement for the 1999 Annual Meeting of Shareholders to be held on May 6, 1999, is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information pertaining to security ownership of certain beneficial owners and management set forth beneath the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the 1999 Annual Meeting of Shareholders to be held on May 6, 1999, is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. The information relating to certain relationships and related transactions set forth beneath the headings "Employment Plans and Agreements - Low Interest Loan Plan", "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Proxy Statement for the 1999 Annual Meeting of Shareholders to be held May 6, 1999, is hereby incorporated by reference. -7- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: The following financial statements are incorporated by reference in Item 8 hereof from the Annual Report to Shareholders for the year ended January 2, 1999: ANNUAL REPORT PAGE NO. Consolidated Statements of Income for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 20 Consolidated Balance Sheets, as of January 2, 1999 and January 3, 1998 21 Consolidated Statements of Cash Flows for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 22 Consolidated Statements of Shareholders' Equity for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 23 Notes to Consolidated Financial Statements 24-29 Results by Quarter (unaudited) 31 10-K PAGE NO. 2. Financial Statement Schedules: Report of Independent Accountants 15 All other schedules are omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. -8- With the exception of the financial statements listed in the above index, the information referred to in Items 5, 6, 7 and the supplementary quarterly financial information referred to in Item 8, all of which is included in the 1998 Annual Report to Shareholders of Food Lion, Inc. and incorporated by reference into this Form 10-K Annual Report, the 1998 Annual Report to Shareholders is not to be deemed "filed" as part of this report. 3. Exhibits: Exhibit No. 3(a) Articles of Incorporation, together with all amendments thereto (through May 5, 1988) (incorporated by reference to Exhibit 3(a) of the Company's Annual Report on Form 10-K dated March 24, 1992) 3(b) Bylaws of the Company effective July 3, 1997 4(a) Indenture dated as of August 15, 1991, between the Company and the Bank of New York, Trustee, providing for the issuance of an unlimited amount of Debt Securities in one or more series (incorpo- rated by reference to Exhibit 4(a) of the Company's Annual Report on Form 10-K dated March 24, 1992) 4(b) Form of Food Lion, Inc. Medium Term Note (Global Fixed Rate) (incorporated by reference to Exhibit 4(b) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(a) Low Interest Loan Plan (incorporated by reference to Exhibit 19(a) of the Company's Report on Form 8-K dated October 27, 1986) 10(b) Form of Deferred Compensation Agreement (incorporated by reference to Exhibit 19(b) of the Company's Report on Form 8-K dated October 27, 1986) 10(c) Form of Salary Continuation Agreement (incorporated by reference to Exhibit 19(c) of the Company's report on Form 8-K dated October 27, 1986) 10(d) 1994 Shareholders' Agreement dated as of the 15th day of September 1994 among Etablissements Delhaize Freres et Cie "Le Lion" S.A., Delhaize The Lion America, Inc., and the Company (incorporated by reference to Exhibit 10 of the Company's Report on Form 8-K dated October 7, 1994) -9- 10(e) Proxy Agreement dated January 4, 1991, between Etablissements Delhaize Freres et Cie "Le Lion" S.A. and Delhaize The Lion, America, Inc. (incorporated by reference to Exhibit 10(e) of the Company's Annual Report on Form 10-K dated March 25, 1991) 10(f) Employment Agreement dated August 1, 1991, between the Company and Tom E. Smith (incorporated by reference to Exhibit 10(h) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(g) Stock Purchase Agreement dated June 30, 1981, between the Company and Ralph W. Ketner (incorporated by reference to Exhibit 10(j) of the Company's Annual Report on Form 10-K dated April 1, 1987) 10(h) Amended and Restated Food Lion, Inc. 1983 Employee Stock Option Plan (incorporated by reference to Exhibit 10(k) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(i) 1991 Employee Stock Option Plan of Food Lion, Inc. (incorporated by reference to Exhibit 10(l) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(j) Split Dollar Life Insurance Agreement between the Company and Tom E. Smith (incorporated by reference to Exhibit 10(o) of the Company's Annual Report on Form 10-K dated April 1, 1987) 10(k) Split Dollar Life Insurance Agreement between the Company and Tom E. Smith issued May 25, 1988 (incorporated by reference to Exhibit 10(w) of the Company's Annual Report on Form 10-K dated March 20, 1989) 10(l) Letter Agreement dated May 10, 1990, between the Company and Ralph W. Ketner (incorporated by reference to Exhibit 10(q) of the Company's Annual Report on Form 10-K dated March 25, 1991) 10(m) U.S. Distribution Agreement dated August 20, 1991, between the Company and Goldman, Sachs & Co. and Merrill Lynch & Co. relating to the sale of up to $300,000,000 in principal amount of the Company's Medium-Term Notes (incorporated by reference to Exhibit 10(p) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(n) License Agreement between the Company and Etablissements Delhaize Freres Et Cie "Le Lion" S.A. dated January 1, 1983 (incorporated by reference to Exhibit 10(t) of the Company's Annual Report on Form 10-K dated March 31, 1994) -10- 10(o) 1996 Employee Stock Incentive Plan of Food Lion, Inc. (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated July 30, 1996) 10(p) Key Executive Annual Incentive Bonus Plan (incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q dated July 30, 1996) 10(q) Profit Sharing Restoration Plan effective as of May 4, 1995 (incorporated by reference to Exhibit 10(c) of the Company's 10-Q A dated August 13, 1996) 10(r) Supplemental Executive Retirement Plan effective as of May 4, 1995 (incorporated by reference to Exhibit 10(d) of the Company's 10-Q A dated August 13, 1996) 10(s) Employee Severance Agreement dated September 5, 1996, between the Company and Dan A. Boone (incorporated by reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q dated October 16, 1996) 10(t) Employment Agreement dated as of February 27, 1997, between Joseph C. Hall, Jr. and the Company (incorporated by reference to Exhibit 10(w) of the Company's Annual Report on Form 10-K dated March 27, 1997) 10(u) Employment Agreement dated as of February 27, 1997, between R. William McCanless and the Company (incorporated by reference to Exhibit 10(x) of the Company's Annual Report on Form 10-K dated March 27, 1997) 10(v) Agreement and Plan of Merger dated as of October 31, 1996, among the Company, KK Acquisition Corp. and Kash n' Karry Food Stores, Inc. (incorporated by reference to Exhibit 2 of the Company's Report on Form 8-K dated October 31, 1996) 10(w) Stockholders' Agreement, dated as of October 31, 1996, among the Company, KK Acquisition Corp., Kash n' Karry Food Stores, Inc. and the stockholders of Kash n' Karry Food Stores, Inc. signatory thereto (incorporated by reference to Exhibit 10 of the Company's Report on Form 8-K dated October 31, 1996) 10(x) License Agreement, dated as of June 19, 1997, among the Company, Kash n' Karry Food Stores, Inc., and Etablissements Delhaize Freres Et Cie "Le Lion" S.A. (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated July 25, 1997) -11- 10(y) Food Lion Inc. and The Bank of New York, Trustee, First Supplement Indenture dated as of April 21, 1997 (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated May 2, 1997) 10(z) Underwriting Agreement dated as of April 16, 1997, between Food Lion, Inc. and Salomon Brothers, Inc. for itself and as representative for NationsBanc Capital Markets Inc. (incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q dated May 2, 1997) 10(aa) Deferral Agreement and Election, dated as of December 18, 1997, by and between Tom E. Smith and the Company (incorporated by reference to 10(ac) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ab) Employment Agreement, dated as of October 1, 1997, between Pamela K. Kohn and the Company (incorporated by reference to 10(ad) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ac) Employment Agreement, dated as of October 1, 1997, between A. Edward Benner and the Company (incorporated by reference to 10(ae) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ad) Agreement, dated as of January 4, 1998, between Etablissements Delhaize Freres et Cie "Le Lion" S.A. and the Company (incorporated by reference to 10(af) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ae) Credit Agreement dated as of December 15, 1998, among the Company, the lenders party thereto, and The Chase Manhattan Bank, N.A., as Documentation Agent 11 Computation of Earnings Per Share 13 Annual Report to Shareholders for the year ended January 2, 1999 21 Subsidiaries of Registrant 23 Consent of Independent Accountants 27 Financial Data Schedules 99 Undertaking of the Company to file exhibits pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K (b) Reports on Form 8-K: The Company did not file a report on Form 8-K during the period ended January 2, 1999. -12- Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 30, 1999 By Tom E.Smith Tom E. Smith President, Chief Executive Officer, Principal Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: March 30, 1999 By Tom E. Smith Tom E. Smith President, Chief Executive Officer, Principal Executive Officer and Director Date: March 30, 1999 By Pierre-Olivier Beckers Pierre-Olivier Beckers Director Date: March 21, 1999 By Dr. Jacqueline K. Collamore Dr. Jacqueline K. Collamore Director Date: March 30, 1999 By Jean-Claude Coppieters t' Wallant Jean-Claude Coppieters t' Wallant Director Date: March 19, 1999 By William G. Ferguson William G. Ferguson Director Date: March 19, 1999 By Dr. Bernard Franklin Dr. Bernard Franklin Director Date: March 30, 1999 By Joseph C. Hall Joseph C. Hall Senior Vice President of Operations Director Date: March 30, 1999 By Margaret H. Kluttz Margaret H. Kluttz Director Date: March 30, 1999 By Dominque Raquez Dominque Raquez Director Date: March 30, 1999 By Gui de Vaucleroy Gui de Vaucleroy Director -13- Date: March 30, 1999 By R. William McCanless R. William McCanless Chief Administrative Officer and Secretary Date: March 25, 1999 By Laura Kendall Laura Kendall Vice President of Finance Chief Financial Officer Principal Financial Officer -14- REPORT OF INDEPENDENT ACCOUNTANTS February 10, 1999 To the Shareholders of Food Lion, Inc.: In our opinion, the consolidated financial statements of Food Lion, Inc. and subsidiaries,which financial statements are included on pages 20 through 29 of the 1998 Annual Report to Shareholders of Food Lion, Inc. incorporated by reference herein, present fairly, in all material respects, the financial position of Food Lion, Inc. and subsidiaries at January 2, 1999 and January 3, 1998, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Charlotte, North Carolina -15- EXHIBIT INDEX to ANNUAL REPORT ON FORM 10-K of Food Lion, Inc. For Year Ended January 2, 1999 Sequential Exhibit No. Description Page No. 3(a) Articles of Incorporation, together with all amendments thereto (through May 5, 1988) (incorporated by reference to Exhibit 3(a) of the Company's Annual Report on Form 10-K dated March 24, 1992) 3(b) Bylaws of the Company effective July 3, 1997 20-33 4(a) Indenture dated as of August 15, 1991, between the Company and the Bank of New York, Trustee, providing for the issuance of an unlimited amount of Debt Securities in one or more series (incorporated by reference to Exhibit 4(a) of the Company's Annual Report on Form 10-K dated March 24, 1992) 4(b) Form of Food Lion, Inc. Medium Term Note (Global Fixed Rate) (incorporated by reference to Exhibit 4(b) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(a) Low Interest Loan Plan (incorporated by reference to Exhibit 19(a) of the Company's Report on Form 8-K dated October 27, 1986) 10(b) Form of Deferred Compensation Agreement (incorporated by reference to Exhibit 19(b) of the Company's Report on Form 8-K dated October 27, 1986) 10(c) Form of Salary Continuation Agreement (incorporated by reference to Exhibit 19(c) of the Company's Report on Form 8-K dated October 27, 1986) 10(d) 1994 Shareholders' Agreement dated as of the 15th day of September 1994 among Etablissements Delhaize Freres et Cie "Le Lion" S.A., Delhaize The Lion America, Inc., and the Company (incorporated by reference to Exhibit 10 of the Company's Report on Form 8-K dated October 7, 1994) 10(e) Proxy Agreement dated January 4, 1991, between Etablissements Delhaize Freres et Cie "Le Lion" S.A. and Delhaize The Lion America, Inc. (incorporated by reference to Exhibit 10(e) of the Company's Annual Report on form 10-K dated March 25, 1991) -1- 10(f) Employment Agreement dated August 1, 1991, between the Company and Tom E. Smith (incorporated by reference to Exhibit 10(h) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(g) Stock Purchase Agreement dated June 30, 1981, between the Company and Ralph W. Ketner (incorporated by reference to Exhibit 10(j) of the Company's Annual Report on Form 10-K dated April 1, 1987) 10(h) Amended and Restated Food Lion, Inc. 1983 Employment Stock Option Plan (incorporated by reference to Exhibit 10(k) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(i) 1991 Employee Stock Option Plan of Food Lion, Inc. (incorporated by reference to Exhibit 10(l) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(j) Split Dollar Life Insurance Agreement between the Company and Tom E. Smith (incorporated by reference to Exhibit 10(o) of the Company's Annual Report on Form 10-K dated April 1, 1987) 10(k) Split Dollar Life Insurance Agreement between the Company and Tom E. Smith issued May 25, 1988 (incorporated by reference to Exhibit 10(w) of the Company's Annual report on Form 10-K dated March 20, 1989) 10(l) Letter Agreement dated May 10, 1990. between the Company and Ralph W. Ketner (incorporated by reference to Exhibit 10(q) of the Company's Annual Report on Form 10-K dated March 25, 1991) 10(m) U.S. Distribution Agreement dated August 20, 1991, between the Company and Goldman, Sachs & Co and Merrill Lynch & Co. relating to the sale of up to $300,000,000 in principal amount to the Company's Medium-Term Notes (incorporated by reference to Exhibit 10(p) of the Company's Annual Report on Form 10-K dated March 24, 1992) 10(n) License Agreement between the Company and Etablissements Delhaize Freres Et Cie "Le Lion" S.A. dated January 1, 1983 (incorporated by reference to Exhibit 10(t) of the Company's Annual Report on Form 10-K dated March 31, 1994) 10(o) 1996 Employee Stock Incentive Plan of Food Lion, Inc. (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated July 30, 1996) 10(p) Key Executive Annual Incentive Bonus Plan (incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q dated July 30, 1996) -2- 10(q) Profit Sharing Restoration Plan effective as of May 4, 1995 (incorporated by reference to Exhibit 10(c) of the Company's 10-Q A dated August 13, 1996) 10(r) Supplemental Executive Retirement Plan effective as of May 4, 1995 (incorporated by reference to Exhibit 10(d) of the Company's 10-Q A dated August 13, 1996) 10(s) Employee Severance Agreement dated September 5, 1996, between the Company and Dan A. Boone (incorporated by reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q dated October 16, 1996) 10(t) Employment Agreement dated as of February 27, 1997, between Joseph C. Hall, Jr. and the Company (incorporated by reference to Exhibit 10(w) of the Company's Annual Report on Form 10-K dated March 27, 1997) 10(u) Employment Agreement dated as of February 27, 1997, between R. William McCanless and the Company (incorporated by reference to Exhibit 10(x) of the Company's Annual Report on Form 10-K dated March 27, 1997) 10(v) Agreement and Plan of Merger dated as of October 31, 1996, among the Company, KK Acquisition Corp. and Kash n' Karry Food Stores, Inc. (incorporated by reference to Exhibit 2 of the Company's Report on Form 8-K dated October 31, 1996) 10(w) Stockholders' Agreement, dated as of October 31, 1996, among the Company, KK Acquisition Corp., Kash n' Karry Food Stores, Inc. and the stockholders of Kash n' Karry Food Stores, Inc. signatory thereto (incorporated by reference to Exhibit 10 of the Company's Report on Form 8-K dated October 31, 1996) 10(x) License agreement, dated as of June 19, 1997, among the Company, Kash n' Karry Food Stores, Inc., and Etablissements Delhaize Freres Et Cie "Le Lion" S.A. (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated July 25, 1997) 10(y) Food Lion Inc. and The Bank of New York, Trustee, First Supplement Indenture dated as of April 21, 1997 (incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q dated May 2, 1997) 10(z) Underwriting Agreement dated as of April 16, 1997, between Food Lion, Inc. and Salomon Brothers, Inc. for itself and as representative for NationsBanc Capital Markets Inc. (incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q dated May 2, 1997) -3- 10(aa) Deferral Agreement and Election, dated as of December 18, 1997, by and between Tom E. Smith and the Company (incorporated by reference to Exhibit 10 (ac) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ab) Employment Agreement, dated as of October 1,1997, between Pamela K. Kohn and the Company. (incorporated by reference to Exhibit 10 (ad) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ac) Employment Agreement, dated as of October 1, 1997, between A. Edward Benner and the Company (incorporated by reference to Exhibit 10 (ae) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ad) Agreement, dated as of January 4, 1998, between Etablissements Delhaize Freres et Cie "Le Lion" S.A. and the Company. (incorporated by reference to Exhibit 10 (af) of the Company's Annual Report on Form 10-K dated April 8, 1998) 10(ae) Credit Agreement dated as of December 15, 1998, among the Company, the lenders party thereto, and The Chase Manhattan Bank,as Administrative Agent, and Wachovia Bank, N.A., as Documentation Agent. 34-145 11 Computation of Earnings Per Share 146 13 Annual Report to Shareholders for the year ended January 2, 1999 147-179 21 Subsidiaries of Registrant 180 23 Consent of Independent Accountants 181 27 Financial Data Schedules 182-183 99 Undertaking of the Company to file exhibits pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K 184 (b) Reports on Form 8-K: The Company did not file a report on Form 8-K during the period ended January 2, 1999. -4- EX-3.B 2 BYLAWS OF FOOD LION, INC. BYLAWS OF FOOD LION, INC. ARTICLE 1 Offices Section 1. Principal and Registered Office. The principal office of the corporation shall be located at 2110 Executive Drive, Salisbury, North Carolina, which shall also be the registered office of the corporation. Section 2. Other Offices. The corporation may have offices at such other places, either within or without the State of North Carolina, as the board of directors may from time to time determine. ARTICLE 2 Meetings of Shareholders Section 1. Place of Meeting. Meetings of shareholders shall be held at the principal office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting. Section 2. Annual Meeting. The annual meeting of shareholders shall be held on such date and at such time during the month of May of each year as shall be set by the board of directors, for the purpose of electing directors of the corporation and the transaction of such other business as may be properly brought before the meeting. Section 3. Substitute Annual Meeting. If the annual meeting is not held on the day designated by these bylaws, a substitute annual meeting may be called in accordance with Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings. Special meetings of the shareholders may be called at any time by the president and chief executive officer or by any two members of the board of directors. Section 5. Notice of Meetings. At least 10 days and no more than 60 days prior to any annual or special meeting of the shareholders, the corporation shall notify shareholders of the date, time and place of the meeting and, in the case of a special or substitute annual meeting or where otherwise required by law, shall briefly describe the purpose or purposes of the meeting. Only business within the purpose or purposes described in the notice may be conducted at a special meeting. Unless otherwise required by the articles of incorporation or by law (for example, in the event of a meeting to consider the adoption of a plan of merger or share exchange, a sale of assets other than in the ordinary course of business or a voluntary dissolution), the corporation shall be required to give notice only to shareholders entitled to vote at the meeting. If an annual or special shareholder's meeting is adjourned to a different date, time or place, notice thereof need not be given if the new date, time or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is fixed pursuant to Article 7, Section 5 hereof, notice of the adjourned meeting shall be given to persons who are shareholders as of the new record date. It shall be the primary responsibility of the secretary to give the notice, but notice may be given by or at the direction of the president and chief executive officer or other person or persons calling the meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail with postage thereon prepaid, correctly addressed to the shareholder's address shown in the corporation's current record of shareholders. Section 6. Advance Notice of Shareholder Proposals. No business shall be transacted at a meeting of shareholders, except such business as shall be (a) specified in the notice of meeting given as provided in Section 5 of this Article 2, (b) otherwise brought before the meeting by or at the direction of the board of directors, or (c) otherwise brought before the meeting by a shareholder of record entitled to vote at the meeting, in compliance with the procedure set forth in this Section 6. For business to be brought before a meeting by a shareholder pursuant to (c) above, the shareholder must have given timely notice in writing to the Secretary. To be timely, a shareholder's notice must be delivered to, or mailed to and received by, the Secretary of the corporation not less than 10 days nor more than 60 days prior to the meeting; provided, however, that if fewer than 21 days' notice of the meeting is given to shareholders, such written notice shall be received not later than the close of the tenth day following the date on which notice of the meeting was mailed to shareholders. Notwithstanding the foregoing, any shareholder who wishes the board of directors to consider taking a position with respect to the matter must deliver such notice to, or mail it so that it is received by, the Secretary of the corporation not less than 90 nor more than 150 days prior to the meeting. Nothing in this Section 6 shall require the board of directors to recommend for adoption by the shareholders, or give the shareholders notice of, any matter of which notice is provided to the corporation pursuant to this Section or otherwise. Notice of actions to be brought before the meeting pursuant to (c) above shall set forth as to each matter the shareholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting, (ii) the name and address, as they appear on the corporation's books, of each shareholder proposing such business, (iii) the classes and number of shares of the corporation that are owned of record and beneficially by such shareholder of the corporation. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the provisions set forth in this Section 6, except as otherwise may be required by law. Nothing in this Section 6 shall be deemed to restrict, expand or otherwise affect any rights or obligations of any party under Rule 14a- 8 of the Securities and Exchange Commission or any successor provision to such rule. If the chairman of the meeting determines that any business was not properly brought before the meeting in accordance with provisions prescribed by these bylaws, he shall so declare to the meeting, and to the extent permitted by law any such business not properly brought before the meeting shall not be transacted. Section 7. Quorum. A majority of the votes entitled to be cast by a voting group on a matter, represented in person or by proxy at a meeting of shareholders, shall constitute a quorum for that voting group for any action on that matter, unless quorum requirements are otherwise fixed by a court of competent jurisdiction acting pursuant to Section 55-7-03 of the General Statutes of North Carolina. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and any adjournment thereof, unless a new record date is or must be set for the adjournment. Action may be taken by a voting group at any meeting at which a quorum of that voting group is represented, regardless of whether action is taken at that meeting by any other voting group. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the shares voting on the motion to adjourn. Section 8. Shareholders' List. After a record date is fixed for a meeting, the secretary of the corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of the shareholders' meeting. Such list shall be arranged by voting group (and within each voting group by class or series of shares) and shall show the address of and number of shares held by each shareholder. The shareholder's list shall be made available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's principal office or at such other place identified in the meeting notice and the city where the meeting will be held. The corporation shall make the shareholders' list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment thereof. Section 9. Voting of Shares. Except as otherwise provided by the articles of incorporation, each outstanding share of voting capital stock of the corporation shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders. Action on a matter by a voting group for which a quorum is present is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the vote of a greater number is required by law or by the articles of incorporation. Voting on all matters shall be by voice vote or by a show of hands, unless the holders of one-tenth of the shares represented at the meeting shall demand a ballot vote on a particular matter. Absent special circumstances, the shares of the corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation, except that this provision shall not limit the power of the corporation to vote shares held by it in a fiduciary capacity. Section 10. Proxies. Shares may be voted either in person or by a proxy who has been appointed by the shareholder by signing an appointment form, either personally or by his duly authorized attorney- in-fact. An appointment of proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. An appointment of proxy is valid for 11 months unless a different period is expressly provided in the appointment form. Section 11. Action Without Meeting. Any action which the shareholders could take at a meeting may be taken without a meeting if one or more written consents, setting forth the action taken, shall be signed, before or after such action, by all the shareholders who would be entitled to vote upon the action at a meeting. The consent shall be delivered to the corporation for inclusion in the minutes or filing with the corporate records. The corporation must give its nonvoting shareholders written notice of the proposed action at least 10 days before the action is taken, which notice must contain or be accompanied by the same material that would have been required by law to be sent to nonvoting shareholders in a notice of meeting at which the proposed action would have been submitted to the shareholders for action. ARTICLE 3 Board of Directors Section 1. General Powers. The business and affairs of the corporation shall be managed under the direction of the board of directors except as otherwise provided by the articles of incorporation or by a valid shareholders' agreement. Section 2. Number, Term and Qualification. The number of directors of the corporation shall be not less than eight persons nor more than ten persons, with the exact number of directors within the minimum and maximum to be established from time to time by the shareholders or the board of directors; but, in the absence of such action, the number of directors elected at the annual meeting of shareholders, unless the number is previously changed by action of the shareholders or the board of directors. Only shareholders may change the range for the size of the board of directors or change from a variable range to a fixed size board of directors. Each director shall hold office until the next annual meeting of the shareholders and until his successor is elected and qualifies, until there is a decrease in the number of directors or until his earlier death, resignation, removal or disqualification. Directors need not be residents of the State of North Carolina or shareholders of the corporation unless the articles of incorporation so provide. No person after having attained the age of 70 years shall be allowed to run for election, reelection or re-appointment to the board of directors, excepting, however, that such retirement age shall not apply to directors over the age of 65 years who were serving on such board on July 3, 1997. Section 3. Nomination of Directors. Only persons who are nominated in accordance with the provisions set forth in these bylaws shall be eligible to be elected as directors at the annual or special meeting of shareholders. Nomination for election to the board of directors shall be made or approved by the board of directors. In addition, nomination for election of any person to the board of directors may be made by a shareholder if written notice of the nomination of such person shall have been delivered to the Secretary of the corporation at the principal office of the corporation not less than 10 days nor more than 60 days prior to any meeting of the shareholders called for the election of directors; provided, however, that if fewer than 21 days' notice of the meeting is given to shareholders, such written notice shall be received not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders. Notwithstanding the foregoing, any shareholder who wishes the board of directors or a duly authorized committee of the board of directors to consider nominating for election to the board of directors a person recommended by a shareholder must deliver such notice to, or mail it so that it is received by, the Secretary of the corporation not less than 90 nor more than 150 days prior to the meeting. Any notice provided pursuant to this Section shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission if the nominee had been nominated by the board of directors; and (e) the written consent of each nominee to serve as a director of the corporation if so elected. Nothing in this Section shall require the board of directors to nominate or approve, as one of its nominees, any person recommended to be so nominated by a shareholder or to give the shareholders notice of any proposed nomination by a shareholder. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 4. Election. Except as provided in Section 6 of this article III (vacancies), the directors shall be elected at the annual meeting of shareholders. Those persons who receive the highest number of votes at a meeting at which a quorum is present shall be deemed to have been elected. Section 5. Removal. Directors may be removed from office with or without cause (unless the articles of incorporation provide that directors may be removed only for cause), provided the notice of the shareholders' meeting at which such action is to be taken states that a purpose of the meeting is removal of the director and the number of votes cast to remove the director exceeds the number of votes cast not to remove him. Section 6. Vacancies. Except as otherwise provided in the articles of incorporation, a vacancy occurring in the board of directors, including, without limitation, a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, shall be filled by an affirmative vote of at least 70% of the remaining directors in favor of a nominee selected by the Nominating Committee of the board of directors, in accordance with the procedures set forth in Article 5, Section 2, below. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Section 7. Compensation. The board of directors may compensate directors for their services as such and may provide for the payment of any or all expenses incurred by directors in attending regular and special meetings of the board of directors. ARTICLE 4 Meetings of Directors Section 1. Annual and Regular Meetings. The annual meeting of the board of directors shall be held immediately following the annual meeting of the shareholders. The board of directors may by resolution provide for the holding of regular meetings of the board on specified dates and at specified times. Notice of regular meetings held at the principal office of the corporation and at the usual scheduled time shall not be required. If any date for which a regular meeting is scheduled shall be a legal holiday, the meeting shall be held on a date designated in the notice of the meeting, if any, during either the same week in which the regularly scheduled date falls or during the preceding or following week. Regular meetings of the board shall be held at the principal office of the corporation or at such other place as may be designated in the notice of the meeting. Section 2. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president and chief executive officer or any two directors. Such meetings may be held at the time and place designated in the notice of the meeting. Section 3. Notice of Meetings. Unless the articles of incorporation provide otherwise, the annual and regular meetings of the board of directors may be held without notice of the date, time or place. However, the president and chief executive officer or secretary shall provide each director with a written agenda of the items to be discussed at such meetings at least seven days prior thereto. Any person or persons calling a special meeting shall give notice by any usual means of communication to be sent at least seven days before the meeting if notice is sent by means of telephone, telecopy or personal delivery and at least ten days before the meeting if notice is sent by mail. A director's attendance at, or participation in, a meeting for which notice is required shall constitute a waiver of notice, unless the director at the beginning of the meeting (or promptly upon arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote or assent to action taken at the meeting. Section 4. Quorum. Except as otherwise provided in the articles of incorporation, a majority of the directors in office shall constitute a quorum for the transaction of business at a meeting of the board of directors. Section 5. Manner of Acting. Except as otherwise provided in the articles of incorporation or these bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 6. Special Vote. The board of directors may not, without an affirmative vote of at least 70% of the number of directors fixed by these bylaws ("Special Vote"), be empowered to authorize the corporation to: (a) Approve the nomination of any person or persons for election to the board of directors or elect a chief executive officer other than Tom E. Smith; (b) Authorize any contract involving payment by the corporation of cash or property valued in excess of $500,000, including, without limitation, the purchase, sale or leasing of property or the incurring of indebtedness, except transactions relating to the leasing or construction of stores, warehouses and related facilities or any other transaction in the ordinary course of business; (c) Approve or authorize capital expenditures of more than $500,000 in any one instance or $1,000,000 in the aggregate in any fiscal year, except expenditures relating to the leasing or construction of stores, warehouses and related facilities or any other transaction in the ordinary course of business; (d) Authorize the issuance or sale of stock or other securities of the corporation or any subsidiary of the corporation, or options or warrants or obligations convertible into such stock or securities, except the issuance of stock options or stock or both, as the case may be, pursuant to the corporation's 1981 Employee Stock Option Plan, 1983 Employee Stock Option Plan, 1991 Employee Stock Option Plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan and other employee benefit plans approved by the board of directors; (e) Sell or otherwise dispose of a substantial part of the corporation's assets other than in the ordinary course of business; (f) Amend the charter or the bylaws of the corporation; or (g) Approve for submission to the shareholders of the corporation for their approval a proposal for the amendment of the corporation's charter or the merger or consolidation of the corporation with or into any other corporation or the reorganization, recapitalization or liquidation of the corporation; Any Special Vote approving any such action may specify other limitations which shall not be exceeded without a further Special Vote. Section 7. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken is deemed to have assented to the action taken unless he objects at the beginning of the meeting (or promptly upon arrival) to holding, or transacting business at, the meeting, or unless his dissent or abstention is entered in the minutes of the meeting or unless he shall file written notice of his dissent or abstention to such action with the presiding officer of the meeting before its adjournment or with the corporation immediately after adjournment of the meeting. The right of dissent or abstention shall not apply to a director who voted in favor of such action. Section 8. Action Without Meeting. Unless otherwise provided in the articles of incorporation, action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if the action is taken by all members of the board. The action must be evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and included in the minutes or filed with the corporate records. Action taken without a meeting is effective when the last director signs the consent, unless the consent specifies a different effective date. Section 9. Meeting by Communications Device. Unless otherwise provided in the articles of incorporation, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. Section 10. Minutes of Meeting of the Board of Directors. Minutes of all meetings of the board of directors shall be furnished to all directors promptly after such meeting. ARTICLE 5 Committees Section 1. General. The board of directors may create, by the affirmative vote of at least 70 % of the number of directors then serving, one or more committees not otherwise provided for by these bylaws. Such committees shall consist of two or more directors appointed and removable by the affirmative vote of at least 70% of the number of directors then serving. Such committees may meet at stated times, or on notice to all by any of their own number. The board of directors may by resolution provide that during intervals between meetings of the board of directors, the committees shall have and may exercise the powers of the board in the management of the business and affairs of the corporation, except that the committees shall not have authority to: (a) Authorize distributions; (b) Approve or propose to shareholders action required to be approved by shareholders; (c) Fill vacancies on the board of directors or on any of its committees; (d) Amend the articles of incorporation; (e) Adopt, amend or repeal the bylaws; (f) Approve a plan or merger not requiring shareholder approval; (g) Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; or (h) Authorize or approve the issuance, sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. Section 2. Nominating Committee. There shall be a Nominating Committee of the board of directors, which shall consist of three directors, one of whom shall be designated by Etablissements Delhaize Freres et Cie "Le Lion" S.A. ("Delhaize") and/or Delhaize the Lion America, Inc., one of whom shall be the Chief Executive Officer of the Company or his designee from among the members of the board of directors of the Company, and one of whom shall be an independent director. The Nominating Committee shall propose to the board of directors (a) the slate of directors to be submitted to the shareholders for election at the annual meeting of shareholders or at any meeting of the shareholders at which a director or directors are to be elected, and (b) persons to fill any vacancies that may arise from time to time on the board of directors. The slate of directors proposed by the Nominating Committee shall consist of ten persons, four of whom shall be proposed by the Chief Executive Officer of Delhaize (the "Delhaize Designees"), two of whom shall be proposed by the Chief Executive Officer of the Company or his representative on the Nominating Committee (the "CEO Designees") and four of whom shall be independent directors. In the event of a vacancy on the board of directors, the Nominating Committee shall propose to the board of directors an appropriate person to fill such vacancy such that the foregoing ratio of Delhaize Designees, CEO Designees and independent directors is regained. Thus, if a Delhaize Designee ceases to be a director, the vacancy left thereby shall be filled by a new Delhaize Designee, if a CEO Designee ceases to be a director, the vacancy left thereby shall be filled by a new CEO Designee, and if an independent director ceases to be a director, the vacancy left thereby shall be filled by a new independent director. The Nominating Committee shall recommend its slate of directors or any individual nominee to the board of directors of the Company, which shall approve such nominations by Special Vote. If the board of directors does not approve a slate of directors or any individual nominee proposed by the Nominating Committee, the Nominating Committee shall meet to propose another slate of directors or nominee acceptable to the board of directors. The Nominating Committee shall meet at least (a) annually, prior to the annual meeting of shareholders, (b) prior to any special meeting of shareholders called for the purpose of electing one or more directors, (c) within thirty days' notice of any vacancy occurring on the board of directors, and (d) at any time that it is determined that the composition of the Company's board of directors does not comply with any laws or rules that apply to the Company, including the rules of the National Association of Securities Dealers or any national securities exchange on which the Company's securities are listed. Meetings of the Nominating Committee shall be held at such place as is fixed by the chairman thereof in the notice of the meeting. The provisions of Article 4 governing action without a meeting, notice, waiver of notice and quorum requirements shall apply to the Nominating Committee. All decisions of the Nominating Committee shall require the affirmative vote of at least two members. Section 3. Meetings. Except as otherwise provided in these bylaws, the provisions of Article 4 governing meetings of the board of directors, action without meeting, notice, waiver of notice, presumption of assent and quorum and voting requirements shall apply to the committees of the board and its members. Section 4. Minutes. The committees shall keep minutes of their proceedings and documentation of their decisions and shall transmit copies thereof and report thereon to the board of directors at or before the next meeting of the board. ARTICLE 6 Officers Section 1. Titles. The officers of the corporation shall be a chairman of the board, a president and chief executive officer, a secretary and a treasurer. The board of directors or the president and chief executive officer (if authorized by the board) may appoint one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers as shall be deemed necessary. The additional officers shall have the authority and perform the duties as from time to time may be prescribed by the board of directors or by direction of the president and chief executive officer (if authorized by the board of directors to prescribe the authority and duties of other officers). Any two or more offices may be held by the same individual, but no officer may act in more than one capacity where action of two or more officers is required. Section 2. Election; Appointment. The officers of the corporation shall be elected from time to time by the board of directors or appointed from time to time by the president and chief executive officer (to the extent that the president and chief executive officer is authorized by the board to appoint officers). Section 3. Removal. Any officer may be removed by the board at any time with or without cause whenever in its judgment the best interests of the corporation will be served, but removal shall not itself affect the officer's contract rights, if any, with the corporation. Section 4. Vacancies. Vacancies among the officers may be filled and new officers may be created and filled by the board of directors, or by the president and chief executive officer (to the extent authorized by the board). Section 5. Compensation. Except as otherwise provided in these bylaws, the compensation of the officers shall be fixed by the board of directors. Section 6. Chairman and Vice Chairman of the Board of Directors. The chairman of the board of directors shall preside at meetings of the shareholders and the board of directors and shall have such other authority and perform such other duties as the board of directors shall designate. The vice chairman, if elected, shall preside at meetings of the board in the absence of the chairman and shall have such other authority and perform such other duties as the board of directors shall designate. Section 7. President and Chief Executive Officer. In the absence of the chairman of the board, the president and chief executive officer shall preside at all meetings of the shareholders and the board of directors. Subject to the board of directors, he shall be the principal executive officer of the corporation and shall have general charge of the business of the corporation; he shall keep the board of directors fully informed of the business of the corporation; he may sign and execute all authorized bonds, contracts, or other obligations in the name of, and on behalf of, the corporation, and with the secretary or assistant secretary, if one be elected, may sign all certificates of stock, and without further authorization than these presents, may sign all checks or drafts upon funds of this corporation, in its name and on its behalf, and any bank or depository in which funds of the corporation shall be deposited shall be fully and conclusively protected in honoring any checks or drafts on behalf of this corporation, signed by the president and chief executive officer. Subject to the limitations of Section 6(e) of Article 4 of these bylaws, he shall have the power to fix the salaries of all other officers, agents and employees of the corporation, except the chairman and vice presidents (including senior vice presidents, if any); and shall have the power to employ and discharge all agents and employees of the corporation, subject to the control of the board of directors, except the chairman and vice presidents. He shall generally conduct the affairs of the corporation and shall do and perform such other duties as, from time to time, may be assigned to him by the board of directors or by these bylaws. Section 8. Vice Presidents. The vice presidents shall perform such duties as from time to time may be assigned to them by the chairman of the board or the president and chief executive officer, the board of directors or by these bylaws. Section 9. Secretary. The secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and of the board of directors and shall give all notices required by law and by these bylaws. The secretary shall have general charge of the corporate books and records and shall have the responsibility and authority to maintain and authenticate such books and records. The secretary shall have general charge of the corporate seal and shall affix the corporate seal to any lawfully executed instrument requiring it. The secretary shall have general charge of the stock transfer books of the corporation and shall keep at the principal office of the corporation a record of shareholders, showing the name and address of each shareholder and the number and class of shares held by each. The secretary shall sign such instruments as may require the signature of the secretary, and in general shall perform the duties incident to the office of secretary and such other duties as may be assigned from time to time by the board of directors or the president and chief executive officer (if authorized by the board of directors to prescribe the authority and duties of other officers). Section 10. Assistant Secretaries. Each assistant secretary shall have such powers and perform such duties as may be assigned by the board of directors or the president and chief executive officer (if authorized by the board of directors to prescribe the authority and duties of other officers), and the assistant secretaries shall exercise the powers of the secretary during that officer's absence or inability to act. Section 11. Treasurer. The treasurer shall have custody of all funds and securities belonging to the corporation and shall receive, deposit or disburse the same under the direction of the board of directors. The treasurer shall keep full and accurate accounts of the finances of the corporation and shall cause a true statement of the assets and liabilities of the corporation as of the close of each fiscal year and of the results of its operations and of changes in surplus, all in reasonable detail, to be made and filed at the principal office of the corporation within four months after the end of the fiscal year. The statement shall be available for inspection by any shareholder for a period of ten years, and the treasurer shall mail or otherwise deliver a copy of the latest statement to any shareholder upon written request. The treasurer shall in general perform all duties incident to the office and such other duties as may be assigned from time to time by the board of directors or the president and chief executive officer (if authorized by the board of directors to prescribe the authority and duties of other officers). Section 12. Assistant Treasurers. Each assistant treasurer shall have such powers and perform such duties as may be assigned by the board of directors or the president and chief executive officer (if authorized by the board of directors to prescribe the authority and duties of other officers), and the assistant treasurers shall exercise the powers of the treasurer during that officer's absence or inability to act. Section 13. Voting Upon Stocks. Unless otherwise ordered by the board of directors, the president and chief executive officer shall have full power and authority in behalf of the corporation to attend, act and vote at meetings of the shareholders of any corporation in which this corporation may hold stock, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as the owner, the corporation might have possessed and exercised if present. The board of directors may by resolution from time to time confer such power and authority upon any other person or persons. ARTICLE 7 Capital Stock Section 1. Certificates. Shares of the capital stock of the corporation shall be represented by certificates. The name and address of the persons to whom shares of capital stock of the corporation are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the corporation. Certificates for shares of the capital stock of the corporation shall be in such form not inconsistent with the articles of incorporation of the corporation as shall be approved by the board of directors. Each certificate shall be signed (either manually or by facsimile) by (a) the president and chief executive officer or any vice president and by the secretary, assistant secretary, treasurer or assistant treasurer or (b) any two officers designated by the board of directors. Each certificate may be sealed with the seal of the corporation or a facsimile thereof. Section 2. Transfer of Shares. Transfer of shares shall be made on the stock transfer records of the corporation, and transfers shall be made only upon surrender of the certificate for the shares sought to be transferred by the recordholder or by a duly authorized agent, transferee or legal representative. All certificates surrendered for transfer or reissue shall be canceled before new certificates for the shares shall be issued. Section 3. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents and one or more registrars of transfers and may require all stock certificates to be signed or countersigned by the transfer agent and registered by the registrar of transfers. Section 4. Regulations. The board of directors may make rules and regulations as it deems expedient concerning the issue, transfer and registration of shares of capital stock of the corporation. Section 5. Fixing Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the board of directors may fix in advance a date as the record date for the determination of shareholders. The record date shall not be more than 70 days before the meeting or action requiring a determination of shareholders. A determination of shareholders entitled to notice of or to vote at the shareholders' meeting shall be effective for any adjournment of the meeting unless the board of directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed for the determination of shareholders, the record date shall be the day the notice of the meeting is mailed or the day the action requiring a determination of shareholders is taken. If no record date is fixed for action without a meeting, the record date for determining shareholders entitled to take action without a meeting shall be the date the first shareholder signs a consent to the action taken. Section 6. Lost Certificates. The board of directors must authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken, upon receipt of (a) an affidavit from the person explaining the loss, destruction or wrongful taking, and (b) a bond from the claimant in a sum as the corporation may reasonably direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost, destroyed or wrongfully taken. The board of directors may, in its discretion, waive the affidavit and bond and authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or wrongfully taken. ARTICLE 8 Indemnification of Officers and Directors Section 1. Indemnification Provisions. Any person who at any time serves or has served as a director or officer of the corporation or of any wholly owned subsidiary of the corporation, or in such capacity at the request of the corporation for any other foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under any employee benefit plan of the corporation or of any wholly owned subsidiary thereof (a "Claimant"), shall have the right to be indemnified and held harmless by the corporation to the fullest extent from time to time permitted by law against all liabilities and litigation expenses (as hereinafter defined) in the event a claim shall be made or threatened against that person in, or that person is made or threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether or not brought by or on behalf of the corporation, including all appeals therefrom (a "proceeding"), arising out of that person's status as such or that person's activities in any such capacity; provided, that such indemnification shall not be effective with respect to (a) that portion of any liabilities or litigation expenses with respect to which the Claimant is entitled to receive payment under any insurance policy or (b) any liabilities or litigation expenses incurred on account of any of the Claimant's activities which were at the time taken known or believed by the Claimant to be clearly in conflict with the best interests of the corporation. Section 2. Definitions. As used in this Article, (a) "liabilities" shall include, without limitation, (1) payments in satisfaction of any judgment, money decree, excise tax, fine or penalty for which the Claimant had become liable in any proceeding and (2) payments in settlement of any such proceeding subject, however, to Section 3 of this Article 8; (b) "litigation expenses" shall include, without limitation, (1) reasonable costs and expenses and attorneys' fees and expenses actually incurred by the Claimant in connection with any proceeding and (2) reasonable costs and expenses and attorneys' fees and expenses in connection with the enforcement of rights to the indemnification granted hereby or by applicable law, if such enforcement is successful in whole or in part; and (c) "disinterested directors" shall mean directors who are not party to the proceeding in question. Section 3. Settlements. The corporation shall not be liable to indemnify the Claimant for any amounts paid in settlement of any proceeding effected without the corporation's written consent. The corporation will not unreasonably withhold its consent to any proposed settlement. Section 4. Litigation Expense Advances. (a) Except as provided in subsection (b) below, any litigation expenses shall be advanced to any Claimant within 30 days of receipt by the secretary of the corporation of a demand therefor, together with an undertaking by or on behalf of the Claimant to repay to the corporation such amount unless it is ultimately determined that Claimant is entitled to be indemnified by the corporation against such expenses. The secretary shall promptly forward notice of the demand and undertaking immediately to all directors of the corporation. (b) Within 10 days after mailing of notice to the directors pursuant to subsection (a) above, any disinterested director may, if desired, call a meeting of all disinterested directors to review the reasonableness of the expenses so requested. No advance shall be made if a majority of the disinterested directors affirmatively determines that the item of expense is unreasonable in amount; but if the disinterested directors determine that a portion of the expense item is reasonable, the corporation shall advance such portion. Section 5. Approval of Indemnification Payments. Except as provided in Section 4 of this Article, the board of directors of the corporation shall take all such action as may be necessary and appropriate to authorize the corporation to pay the indemnification required by Section 1 of this Article, including, without limitation, making a good faith evaluation of the manner in which the Claimant acted and of the reasonable amount of indemnity due the Claimant. In taking any such action, any Claimant who is a director of the corporation shall not be entitled to vote on any matter concerning such Claimant's right to indemnification. Section 6. Suits by Claimant. No Claimant shall be entitled to bring suit against the corporation to enforce his rights under this Article until sixty days after a written claim has been received by the corporation, together with any undertaking to repay as required by Section 4 of this Article. It shall be a defense to any such action that the Claimant's liabilities or litigation expenses were incurred on account of activities described in clause (b) of Section 1, but the burden of proving this defense shall be on the corporation. Neither the failure of the corporation to have made a determination prior to the commencement of the action to the effect that indemnification of the Claimant is proper in the circumstances, nor an actual determination by the corporation that the Claimant had not met the standard of conduct described in clause (b) of Section 1, shall be a defense to the action or create a presumption that the Claimant has not met the applicable standard of conduct. Section 7. Consideration; Personal Representatives and Other Remedies. Any person who during such time as this Article or corresponding provisions of predecessor bylaws is or has been in effect serves or has served in any of the aforesaid capacities for or on behalf of the corporation, shall be deemed to be doing so or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein or therein. The right of indemnification provided herein or therein shall inure to the benefit of the legal representatives of any person who qualifies or would qualify as a Claimant hereunder, and the right shall not be exclusive of any other rights to which the person or legal representative may be entitled apart from this Article. Section 8. Scope of Indemnification Rights. The rights granted herein shall not be limited by the provisions of Section 55-8- 51 of the General Statutes of North Carolina or any successor statute. ARTICLE 9 General Provisions Section 1. Dividends and other Distributions. The board of directors may from time to time declare, and the corporation may pay or make, dividends and other distributions with respect to its outstanding shares in the manner and upon the terms and conditions provided by law. Section 2. Seal. The seal of the corporation shall consist of two concentric circles between which is the name of the corporation and in the center of which is inscribed SEAL; and such seal as is impressed in the margin hereof is hereby adopted as the corporate seal of the corporation. Section 3. Waiver of Notice. Whenever notice is required to be given to a shareholder, director or other person under the provisions of these bylaws, the articles of incorporation or by applicable law, a waiver in writing signed by the person or persons entitled to the notice, whether before or after the date and time stated in the notice and delivered to the corporation, shall be equivalent to giving the notice. Section 4. Checks. All checks, drafts or orders for the payment of money shall be signed by the officer or officers or other individuals that the board of directors may from time to time designate. Section 5. Contracts. The board of directors may authorize any officer or officers, agent or agents to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be generally or confined to specific instances. Section 6. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such depositories as the board of directors may select. Section 7. Bond. The board of directors may by resolution require any or all officers, agents and employees of the corporation to give bond to the corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the board. Section 8. Fiscal Year. The fiscal year of the corporation shall be fixed by the board of directors. Section 9. Amendments. Unless otherwise provided in the articles of incorporation or a bylaw adopted by the shareholders or by law, these bylaws may be amended or repealed by the board of directors in accordance with the special voting provisions contained in Article 4, Section 6, except that a bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board of directors if neither the articles of incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend or repeal that particular bylaw or the bylaws generally. These bylaws may also be amended or repealed by the board of directors. A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended or repealed (a) if originally adopted by the shareholders, only by the shareholders, unless such bylaw as originally adopted by the shareholders provides that such bylaw may be amended or repealed by the board of directors of (b) if originally adopted by the board of directors, either by the shareholders or by the board of directors. A bylaw that fixes a greater quorum or voting requirement may not be adopted by the board of directors by a vote less than a majority of the directors then in office and may not itself be amended by a quorum or vote of the directors less than a quorum or vote prescribed in such bylaw or prescribed by the shareholders. THIS IS TO CERTIFY that the above bylaws of Food Lion, Inc. were duly adopted by the board of directors of the corporation, effective May 4, 1995, and duly amended by the board of directors of the corporation, effective July 3, 1997, all by action taken at a meeting of the board of directors in accordance with Section 55-8-2 of the General Statutes of North Carolina. This 3rd day of July, 1997. Bill McCanless Assistant Secretary [Corporate Seal] EX-10.AE 3 EXECUTION COPY CREDIT AGREEMENT dated as of December 14, 1998 among FOOD LION, INC., The Lenders Party Hereto, THE CHASE MANHATTAN BANK, as Administrative Agent, and WACHOVIA BANK, N.A., as Documentation Agent $625,000,000 364-DAY REVOLVING CREDIT FACILITY AND COMPETITIVE ADVANCE FACILITY __________________________________ CHASE SECURITIES INC., as Lead Arranger and Book Manager Index Page 1 ABR 1, 2, 12, 21, 22, 24-29 Adjusted LIBO Rate 1, 9, 18, 19, 28-31 Administrative Agent 1, 3, 10, 13, 16, 18-29, 31, 32, 34, 35, 38-43, 48, 49, 51-60, 9 Administrative Questionnaire 1, 54, 57 Affiliate 1, 21, 34, 42, 47, 51, 53, 55, 56, 60 Alternate Base Rate 1, 19, 28, 29 Amortization 1 Applicable Percentage 2, 55 Applicable Rate 2, 28 Assessment Rate 3 Assignment and Acceptance 3, 5, 13, 56, 57 Availability Period 3, 20, 22, 29 Base CD Rate 3, 18 Board 3, 18, 19, 38, 43 Borrower 1-3, 5-14, 16, 18-32, 34-39, 41-44, 46-60 Borrowing 1, 3, 5, 9, 12, 13, 19-27, 29, 38, 40 Borrowing Request 3, 21, 22, 24, 29 Business Day 3, 10, 13, 19, 21-23, 25-27, 33 Capital Lease Obligations 4, 8, 12 Capital Stock 4, 7, 18 Capitalized Lease 4, 15, 16 Change in Control 4, 51 Change in Law 5, 30 Class 5, 19, 21, 27 Code 5, 9, 16 Commitment 2, 3, 5, 6, 14, 17, 20-22, 26-29, 40, 41, 44, 51, 54, 56-58, 61 Competitive Bid 5, 10, 14, 20, 22, 23, 31 Competitive Bid Rate 5, 23 Competitive Bid Request 6, 12, 22-24 Competitive Loan 6, 9, 10, 14, 20, 22, 23, 27, 31 Consolidated 6 Consolidated Debt 6, 7, 48 Consolidated Fixed Charges 6, 48 Consolidated Interest Expense 6 Consolidated Net Income 6, 7, 47 Consolidated Net Worth 7 Consolidated Subsidiary 1, 4, 6, 7, 15-17 Consolidated Total Assets 7, 48 Consolidated Total Capitalization 7, 48 Contractual Obligation 8, 38, 43 Control 1, 5, 8 Controlled 1, 8, 18 Controlling 8 Debt 6, 8, 26 Default 8, 37, 40-42, 46, 51, 52, 54, 58 Delhaize 5, 8 Depreciation 8 Detla 5, 8 Disclosed Matters 8, 37 Documentation Agent 1, 8, 53, 1 Dollars 3, 8, 18, 33 Effective Date 3, 8, 39, 40, 62 Environmental Law 9, 11, 37 Environmental Liability 9, 37, 55 ERISA 9, 15, 16, 19, 37 ERISA Affiliate 9, 16 ERISA Event 9, 37, 42, 50 Eurodollar 9, 10, 12, 13, 18, 19, 25, 26 Event of Default 8, 10, 26, 31, 56, 59 Excluded Taxes 10, 12 Federal Funds Effective Rate 1, 10, 24, 34, 61 Financial Officer 10, 40-42, 61, 62 Fiscal Quarter 7, 10, 47, 48 Fiscal Year 10 Fixed Rate 5, 10, 19, 28 Fixed Rate Loan 10, 12, 21, 28, 30, 31 Foreign Lender 10, 11, 32, 57 GAAP 1, 4, 7, 8, 11, 18, 20, 36, 41, 43 Governmental Authority 5, 9, 11, 16, 17, 19, 32, 34-37, 42, 43 Guarantee 11, 12, 46, 47 Guarantor 11, 16, 39, 51, 61, 62 Hazardous Materials 9, 11, 55 Hedging Agreement 11, 14, 46, 47 Indebtedness 11, 12, 14, 45, 47, 50 Indemnified Taxes 12, 31, 32 Index Debt 2, 12 Interest Election Request 12, 25, 26, 29 Interest Payment Date 12, 29 Interest Period 1, 3, 12, 13, 21-23, 25-29, 31 Investment 6, 37, 46 Lenders 1-3, 13, 14, 20, 23-30, 33-36, 38-41, 44, 46, 48, 51-54, 56, 57, 60, 62, 1 LIBO Rate 1, 9, 13, 14, 19, 28, 29 Lien 8, 12, 13, 15, 36, 44, 45 Loans 1, 5, 9, 13, 14, 18-20, 23-30, 34, 35, 39, 40, 46, 51, 55-58, 61 LTF 14 Majority Lenders 14, 20, 26, 29, 39, 50-52, 54 Margin 5, 14, 28 Material Adverse Effect 14, 35-38, 42, 43, 50 Material Indebtedness 14, 49, 50 Maturity Date 3, 14, 16, 21, 26 Minority Interests 6, 15 Moody's 2, 4, 15 Multiemployer Plan 9, 15, 16, 19 Operating Lease 15, 16 Other Taxes 15, 31, 32 PBGC 9, 15 Permitted Encumbrances 15, 44 Permitted Investments 4, 46 Person 1, 4, 5, 8, 11-13, 16-18, 20, 33, 36, 44-47, 52, 55-57, 60 Plan 9, 16, 37, 38 Prime Rate 1, 16, 29 Redeemable Preferred Stock 8, 16, 18 Register 16, 57 Related Parties 16, 52, 56 Rentals 6, 16 Requirement of Law 17, 38 Revolving Credit Exposure 5, 14, 17, 20, 22, 26, 28 Revolving Loan 3, 5, 17, 19, 20, 26, 33, 34 S&P 2, 4, 17 Solvent 17, 38 Statutory Reserve Rate 1, 3, 18 Stockholder's Equity 7, 18 Subsidiary 7, 9, 14, 16, 18, 19, 34, 37, 42-51 Subsidiary Guarantee 16, 39, 61, 62 Taxes 19, 31, 37 Three-Month Secondary CD Rate 3, 19 Transactions 19, 35-37, 39, 47, 55, 59, 61, 62, 10 Type 3, 19, 21, 22, 24, 25, 27, 30 Withdrawal Liability 9, 19 Table of Contents Page ARTICLE I Definitions 1 SECTION 1.1 Defined Terms 1 SECTION 1.2 Classification of Loans and Borrowings 19 SECTION 1.3 Terms Generally 19 SECTION 1.4 Accounting Terms; GAAP 20 ARTICLE II The Credits 20 SECTION 2.1 Commitments 20 SECTION 2.2 Loans and Borrowings 20 SECTION 2.3 Requests for Revolving Borrowings 21 SECTION 2.4 Competitive Bid Procedure 22 SECTION 2.5 Funding of Borrowings 24 SECTION 2.6 Interest Elections 24 SECTION 2.7 Termination and Reduction of Commitments 26 SECTION 2.8 Repayment of Loans; Evidence of Debt 26 SECTION 2.9 Prepayment of Loans 27 SECTION 2.10 Fees 28 SECTION 2.11 Interest 28 SECTION 2.12 Alternate Rate of Interest 29 SECTION 2.13 Increased Costs 30 SECTION 2.14 Break Funding Payments 31 SECTION 2.15 Taxes 31 SECTION 2.16 Payments Generally; Pro Rata Treatment; Sharing of Set-offs 33 SECTION 2.17 Mitigation Obligations; Replacement of Lenders 34 ARTICLE III Representations and Warranties 35 SECTION 3.1 Organization; Powers 35 SECTION 3.2 Authorization; Enforceability 35 SECTION 3.3 Governmental Approvals; No Conflicts 36 SECTION 3.4 Financial Condition; No Material Adverse Change 36 SECTION 3.5 Properties 36 SECTION 3.6 Litigation and Environmental Matters 36 SECTION 3.7 Compliance with Laws and Agreements 37 SECTION 3.8 Investment and Holding Company Status 37 SECTION 3.9 Taxes 37 SECTION 3.10 ERISA 37 SECTION 3.11 Disclosure 38 SECTION 3.12 Margin Stock 38 SECTION 3.13 No Burdensome Restrictions 38 SECTION 3.14 Subsidiaries 38 SECTION 3.15 Solvency 38 SECTION 3.16 Year 2000 Matters 38 ARTICLE IV Conditions to Funding 39 SECTION 4.1 Effective Date 39 SECTION 4.2 Each Credit Event 40 ARTICLE V Affirmative Covenants 41 SECTION 5.1 Financial Statements and Other Information 41 SECTION 5.2 Notices of Material Events 42 SECTION 5.3 Existence; Conduct of Business 43 SECTION 5.4 Payment of Obligations 43 SECTION 5.5 Maintenance of Properties; Insurance 43 SECTION 5.6 Books and Records; Inspection Rights 43 SECTION 5.7 Compliance with Laws and Material Contractual Obligations 43 SECTION 5.8 Use of Proceeds 43 SECTION 5.9 Additional Related Guarantees 44 SECTION 5.10 Change in Ratings 44 ARTICLE VI Negative Covenants 44 SECTION 6.1 Liens 44 SECTION 6.1A Indebtedness 45 SECTION 6.2 Fundamental Changes 46 SECTION 6.3 Investments, Loans, Advances, Guarantees and Acquisitions; Hedging Agreements 46 SECTION 6.4 Transactions with Affiliates 47 SECTION 6.5 Reserved 47 SECTION 6.6 Fixed Charges Coverage 47 SECTION 6.7 Ratio of Consolidated Debt to Consolidated Total Capitalization 48 SECTION 6.8 Limitation on Sales of Assets 48 SECTION 6.9 Activities of Holdings 49 ARTICLE VII Events of Default 49 ARTICLE VIII The Administrative Agent 51 ARTICLE IX Miscellaneous 53 SECTION 9.1 Notices 53 SECTION 9.2 Waivers; Amendments 54 SECTION 9.3 Expenses; Indemnity; Damage Waiver 54 SECTION 9.4 Successors and Assigns 56 SECTION 9.5 Survival 58 SECTION 9.6 Counterparts; Integration; Effectiveness 58 SECTION 9.7 Severability 58 SECTION 9.8 Right of Setoff 59 SECTION 9.9 Governing Law; Jurisdiction; Consent to Service of Process 59 SECTION 9.10 WAIVER OF JURY TRIAL 59 SECTION 9.11 Headings 60 SECTION 9.12 Confidentiality 60 SECTION 9.13 Interest Rate Limitation 60 ARTICLE X Provisions Relating to the Reorganization 61 SECTION 10.1 Consent to Reorganization 61 SECTION 10.2 Consent to Assumption 61 SCHEDULES: Schedule 2.1 Commitments Schedule 3.6 Disclosed Matters Schedule 3.14 Subsidiaries Schedule 6.1 Existing Liens EXHIBITS: Exhibit A Form of Assignment and Acceptance Exhibit B Form of Opinion of Borrower's Counsel Exhibit C Form of Related Guarantee CREDIT AGREEMENT dated as of December 14, 1998, among FOOD LION, INC., the LENDERS party hereto, THE CHASE MANHATTAN BANK, as Administrative Agent, and WACHOVIA BANK, N.A., as Documentation Agent. The parties hereto agree as follows: ARTICLE I Definitions 1.1 SECTION Defined Terms . As used in this Agreement, the following terms have the meanings specified below: " ABR", when used in reference to any Loan or Borrowing , refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. " Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. " Administrative Agent" means The Chase Manhattan Bank, in its capacity as administrative agent for the Lenders hereunder. " Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. " Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. " Alternate Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus .5% of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. " Amortization" means for any period the sum of all amortization expenses of the Parent and its Consolidated Subsidiaries for such period, as determined in accordance with GAAP. " Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. " Applicable Rate" means, for any day, with respect to any ABR Loan or Eurodollar Revolving Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "ABR Spread", "Eurodollar Spread" or "Facility Fee Rate", as the case may be, based upon the ratings by Moody's and S&P, respectively, applicable on such date to the Index Debt: S&P/ Moody's ABR Eurodollar Facility Fee Index Debt Spread Spread Rate Ratings: Category 1 A-/A3 or higher .00% .41% .09% Category 2 BBB+/Baa1 .00% .50% .125% Category 3 BBB/Baa2 .00% .60% .15% Category 4 BBB-/Baa3 .00% .70% .175% Category 5 BB+/Ba1 or .00% .80% .20% lower For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in Category 5; (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall fall within different Categories, the Applicable Rate shall be based on the higher of the two ratings unless one of the two ratings is two or more Categories lower than the other, in which case the Applicable Rate shall be determined by reference to the Category next below that of the higher of the two ratings; and (iii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency, provided, that notwithstanding any other provision set forth in this Agreement, (x) during any period in which the ratings established or deemed to have been established by Moody's and S&P for the Borrower's senior, unsecured, short-term indebtedness for borrowed money (including, without limitation, commercial paper) shall fall below P-2 as rated by Moody's or A-2 as rated by S&P or (y) if either Moody's or S&P shall not have in effect a rating for such indebtedness, the Applicable Rate for Category 5 ratings shall apply. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. " Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.4), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Assumption" means the assumption by Holdings, and the transfer and assignment by Food Lion of all of its rights and obligations as Borrower hereunder. " Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. " Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. As used in this definition, " Assessment Rate" means, for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in Dollars at the offices of such member in the United States; provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Lenders. " Board" means the Board of Governors of the Federal Reserve System of the United States of America. " Borrower" means, prior to the Assumption, Food Lion, and thereafter, Holdings. " Borrowing" means (a) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect or (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect. " Borrowing Request" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.3. " Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in Dollar deposits in the London interbank market. " Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. " Capital Stock" means any capital stock of the Parent or any Consolidated Subsidiary (to the extent issued to a Person other than the Parent), whether common or preferred. " Capitalized Lease" means any lease which is required to be capitalized on a consolidated balance sheet of the lessee and its subsidiaries in accordance with GAAP. " Cash Equivalents" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of at least P-1 by Moody's or A-1 by S&P ; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $250,000,000; (d) investments consisting of cash deposits in operating accounts maintained by the Parent or any Subsidiary; and (e) repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above. " Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) other than Delhaize and Detla, of shares representing more than 15% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Parent; (b) the failure of Delhaize and Detla to own, directly or indirectly, beneficially or of record, shares representing more than a majority of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Parent; (c) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Parent by Persons who were neither (i) nominated by the board of directors of the Parent nor (ii) appointed by directors so nominated nor (iii) were members of the board of directors of Food Lion prior to the Reorganization and become members of the board of directors of Holdings contemporaneously with, or immediately following the consummation of, the Reorganization; or (d) the acquisition of direct or indirect Control of the Parent by any Person or group other than Delhaize or Detla. " Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Charges" has the meaning set forth in Section 9.13. " Class", when used in reference to any Loan or Borrowing , refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Competitive Loans. " Code" means the Internal Revenue Code of 1986, as amended from time to time. " Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.7 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.4. The initial amount of each Lender's Commitment is set forth on Schedule 2.1, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. " Competitive Bid" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.4. " Competitive Bid Rate" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. " Competitive Bid Request" means a request by the Borrower for Competitive Bids in accordance with Section 2.4. "Competitive Borrowing" means a Borrowing made pursuant to Section 2.4. " Competitive Loan" means a Loan made under the Commitments pursuant to . " Consolidated" means, when used in connection with any defined term, and not otherwise defined, such term as it applies to the Parent and its Subsidiaries on a consolidated basis, after eliminating all intercompany items. " Consolidated Debt" means at any date the Debt of the Parent and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. " Consolidated Fixed Charges" for any period means, without duplication, on a consolidated basis the sum of (i) all Rentals payable during such period by the Parent and its Consolidated Subsidiaries, and (ii) Consolidated Interest Expense for such period. " Consolidated Interest Expense" for any period means interest, whether expensed or capitalized, in respect of Debt of the Parent or any of its Consolidated Subsidiaries outstanding during such period. " Consolidated Net Income" for any period means the gross revenues of the Parent and its Consolidated Subsidiaries for such period less all expenses and other proper charges (including taxes on income), determined on a consolidated basis after eliminating earnings or losses attributable to outstanding Minority Interests, but excluding in any event: (a) any unusual or extraordinary gains or losses on the sale or other disposition of investments (excluding Cash Equivalents) or fixed or capital assets, and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; (b) the proceeds of any life insurance policy; (c) net earnings and losses of any Consolidated Subsidiary accrued prior to the date it became a Consolidated Subsidiary; (d) net earnings and losses of any corporation (other than a Consolidated Subsidiary), substantially all the assets of which have been acquired in any manner by the Parent or any Consolidated Subsidiary, realized by such corporation prior to the date of such acquisition; (e) net earnings and losses of any corporation (other than a Consolidated Subsidiary) with which the Parent or a Consolidated Subsidiary shall have consolidated or which shall have merged into or with the Parent or a Consolidated Subsidiary prior to the date of such consolidation or merger; (f) net earnings and losses of any business entity (other than a Consolidated Subsidiary) in which the Parent or any Consolidated Subsidiary has an ownership interest unless such net earnings shall have actually been received by the Parent or such Consolidated Subsidiary in the form of cash distributions; (g) any portion of the net earnings and losses of any Consolidated Subsidiary which for any reason is unavailable for payment of dividends to the Parent or any other Consolidated Subsidiary; (h) earnings resulting from any reappraisal, revaluation or write-up of assets; (i) any deferred or other credit representing any excess of the equity in any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; (j) any gain arising from the acquisition of any Capital Stock; (k) any reversal of any contingency reserve except to the extent that provision for such contingency reserve shall have been made from income arising during such period; provided, however, that any reversal of a contingency reserve from a prior period shall only be excluded from Consolidated Net Income to the extent that the aggregate amount of such reversals exceeds $10,000,000 during the immediately preceding four Fiscal Quarters; and (l) any other unusual or extraordinary gain or loss. " Consolidated Net Worth" means, as of the date of any determination thereof, Stockholder's Equity. " Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of the Parent in its consolidated financial statements as of such date. " Consolidated Total Assets" means at any time the total assets of the Parent and its Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of the Parent and its Consolidated Subsidiaries. " Consolidated Total Capitalization" means as of the date of any determination thereof, the sum of (a) Consolidated Net Worth and (b) Consolidated Debt. " Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. " Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. " Controlling" and " Controlled" have meanings correlative thereto. " Debt" of any Person means at any date, without duplication, all obligations of such Person for borrowed money, all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and accrued expenses arising in the ordinary course of business, all Capital Lease Obligations, all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), all obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and all Debt of others Guaranteed by such Person. " Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. " Delhaize" means Etablissements Delhaize Freres et Cie "Le Lion" S.A., a Belgian corporation. " Depreciation" means for any period the sum of all depreciation expenses of the Parent and its Consolidated Subsidiaries for such period, as determined in accordance with GAAP. " Detla" means Delhaize The Lion America, Inc., a Delaware corporation. " Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed on Schedule 3.6. " Documentation Agent" means Wachovia Bank, N.A., in its capacity as documentation agent hereunder. " Dollars" or "$" refers to lawful money of the United States of America. " Effective Date" means the date on which the conditions specified in Section 4.1 are satisfied (or waived in accordance with Section 9.2). " Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or health and safety matters. " Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Parent or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. " ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. " ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Parent, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. " ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Parent or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Parent or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Parent or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Parent or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Parent or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. " Eurodollar", when used in reference to any Loan or Borrowing , refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the case of a Competitive Loan, the LIBO Rate). " Event of Default" has the meaning assigned to such term in Article VII. " Excluded Taxes" means, with respect to the Administrative Agent , any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.17(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.15(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.15(a). "Existing Public Debt" means Food Lion's $150,000,000 aggregate principal amount of 7.55% Notes due 2007 and its $150,000,000 aggregate principal amount of 8.05% Notes due 2027. " Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. " Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Parent. " Fiscal Quarter" means any fiscal quarter of the Parent. " Fiscal Year" means any fiscal year of the Parent. " Fixed Rate" means, with respect to any Competitive Loan (other than a Eurodollar Competitive Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid . " Fixed Rate Loan" means a Competitive Loan bearing interest at a Fixed Rate. " Food Lion" means Food Lion, Inc., a North Carolina corporation. " Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which the Parent is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. " GAAP" means generally accepted accounting principles in the United States of America. " Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. " Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. " Guarantor" means, at the date of any determination thereof, each Person that has guaranteed the obligations of the Borrower hereunder. " Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. " Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Holdings" means a newly formed North Carolina corporation into which FLI Holding will merge in connection with the Reorganization. " Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid (excluding current accounts payable incurred in the ordinary course of business), (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. " Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnitee" has the meaning set forth in Section 9.3(b). " Index Debt" means senior, unsecured, long-term indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person (other than Subsidiaries) or subject to any other credit enhancement. "Information" has the meaning set forth in Section 9.12. " Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.6. " Interest Payment Date" means (a) with respect to any ABR Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Borrowing. " Interest Period" means (a) with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect and (b) with respect to any Fixed Rate Borrowing, the period (which shall not be less than seven days or more than 360 days) commencing on the date of such Borrowing and ending on the date specified in the applicable Competitive Bid Request; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. " Lenders" means the Persons listed on Schedule 2.1 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance , other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. " LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the " LIBO Rate" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which Dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. " Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset and (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset. " Loans" means the loans made by the Lenders to the Borrower pursuant to this Agreement. " LTF Credit Agreement" means the Credit Agreement, dated as of December 16, 1996, among Food Lion, the lenders party thereto, the administrative agent thereunder and the documentation agent thereunder, as amended by the First Amendment, dated as of December 15, 1997, among Food Lion, the lenders party thereto, the administrative agent thereunder and the documentation agent thereunder. " Majority Lenders" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time; provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Majority Lenders. " Margin" means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid . "Material Adverse Change" means any event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect. " Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Parent and the Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under this Agreement or (c) the rights of or benefits available to the Lenders under this Agreement. " Material Indebtedness" means Indebtedness, or obligations in respect of one or more Hedging Agreements, of any one or more of the Parent and its Subsidiaries in an aggregate principal amount exceeding $20,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Parent or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Parent or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. " Maturity Date" means December 13, 1999. "Maximum Rate" has the meaning set forth in Section 9.13. "Medium Term Notes" means the medium term notes of Food Lion having interest rates ranging from 8.32% to 8.73% with due dates ranging from 1999 to 2006 and having an aggregate principal balance of $153,300,000. " Minority Interests" means any shares of stock of any class of a Consolidated Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Parent and/or one or more of its Consolidated Subsidiaries. " Moody's" means Moody's Investors Service, Inc. " Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "1997 Credit Agreement" means the Credit Agreement, dated as of December 15, 1997, among Food Lion, the lenders party thereto, the administrative agent thereunder and the documentation agent thereunder. " Operating Lease" means any lease other than a Capitalized Lease. " Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Parent" means, prior to the Reorganization, Food Lion, and thereafter, Holdings. "Participant" has the meaning set forth in Section 9.4(e). " PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. " Permitted Encumbrances" means: (a) Liens imposed by law for taxes, assessments and other governmental charges that are not yet due or are being contested in compliance with Section 5.4; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's, landlords' and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.4; (c) Liens granted to a landlord pursuant to a lease to secure the obligations of the lessee under such lease which apply only to property or assets of the lessee located at the leased premises; (d) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (e) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; and (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary. " Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. " Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Parent or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. " Prime Rate" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. " Redeemable Preferred Stock" of any Person means any preferred stock issued by such Person which is at any time prior to the Maturity Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. " Register" has the meaning set forth in Section 9.4(c). " Related Guarantee" means a guarantee, in substantially the form of Exhibit C, made by a Person in favor of the Administrative Agent , as the same may be amended, supplemented or otherwise modified from time to time. " Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. " Rentals" means and includes as of the date of any determination thereof all fixed payments (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Borrower or a Consolidated Subsidiary, as lessee or sublessee under an Operating Lease or Capitalized Lease of real or personal property, but shall be exclusive of any amounts required to be paid by the Borrower or a Consolidated Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under any so-called "percentage leases" shall be computed solely on the basis of the minimum rents, if any, required to be paid by the lessee regardless of sales volume or gross revenues. "Reorganization" means the collective reference to the following series of related transactions: A subsidiary of Food Lion, FLI Holding Corp., a Delaware corporation ("FLI Holding"), will be merged into Holdings. After such merger, the existing shareholders of Food Lion will exchange their shares of capital stock of Food Lion for shares of capital stock of Holdings pursuant to which they will become owners of all of the outstanding shares of capital stock of Holdings, and Food Lion will issue shares of its capital stock to Holdings pursuant to which it will become a direct, wholly owned subsidiary of Holdings. Prior to the consummation of the share exchange as described above, Food Lion will contribute its direct, wholly owned subsidiary, Risk Management Services, Inc., a North Carolina corporation ("RMS") to either FLI Holding or Holdings, making it a direct, wholly owned subsidiary thereof. Upon consummation of such merger and share exchange, each of Food Lion, Kash n' Karry Food Stores, Inc., a Delaware corporation ("Kash n' Karry"), RMS, FL Food Lion, Inc., a Florida corporation ("FL Food Lion") and Barnwell, Inc., a Delaware corporation ("Barnwell") will be direct, wholly owned subsidiaries of Holdings. " Requirement of Law" means, as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Revolving Borrowing" means a Borrowing made pursuant to Section 2.3. " Revolving Credit Exposure" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans at such time. " Revolving Loan" means a Loan made under the Commitments pursuant to Section 2.3. " S&P" means Standard & Poor's. " Solvent", when used with respect to any Person, means that, as of any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person and its subsidiaries, taken as a whole, will, as of such date, exceed the amount that will be required to pay all "liabilities of such Person and its subsidiaries, taken as a whole, contingent or otherwise", as of such date (as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors) as such debts become absolute and matured, (b) such Person and its subsidiaries, taken as a whole, will not have, as of such date, an unreasonably small amount of capital with which to conduct their businesses, taking into account the particular capital requirements of such Person and its projected capital requirements and availability and (c) such Person and its subsidiaries, taken as a whole, will be able to pay their debts as they mature, taking into account the timing of and amounts of cash to be received by such Person and its subsidiaries, taken as a whole, and the timing of and amounts of cash to be payable on or in respect of indebtedness of such Person and its subsidiaries, taken as a whole. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal or equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. " Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in Dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted LIBO Rate , for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. " Stockholder's Equity" means, at any time, the shareholders' equity of the Parent and its Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Parent and its Consolidated Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable Preferred Stock of the Parent or any of its Consolidated Subsidiaries. Shareholders' equity shall include, but not be limited to (i) the par or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and (iv) various deductions such as (A) purchases of treasury stock, (B) valuation allowances, (C) receivables due from an employee stock ownership plan, (D) employee stock ownership plan debt guarantees, and (E) translation adjustments for foreign currency transactions. " subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held by such Person or one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person. " Subsidiary" means any subsidiary of the Parent. " Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. " Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. " Transactions" means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof. " Type", when used in reference to any Loan or Borrowing , refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate , the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate. " Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. 1.2 SECTION Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a " Revolving Loan") or by Type (e.g., a " Eurodollar Loan") or by Class and Type (e.g., a " Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a " Eurodollar Borrowing") or by Class and Type (e.g., a " Eurodollar Revolving Borrowing"). 1.3 SECTION Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. 1.4 SECTION Accounting Terms; GAAP . Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Parent notifies the Administrative Agent that the Parent requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Parent that the Majority Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. II ARTICLE The Credits 2.1 SECTION Commitments. Subject to the terms and conditions set forth herein, each Lender with a Commitment agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (i) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (ii) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. 2.2 SECTION Loans and Borrowings. Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.4. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.12, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing , such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000 (or, if less, the unused portion of the related Commitments). Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of 10 Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. 2.3 SECTION Requests for Revolving Borrowings . To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.2: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.5. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. 2.4 SECTION Competitive Bid Procedure . Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans with specified maturities ranging from seven to 360 days; provided that the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time shall not exceed the total Commitments. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that the Borrower may submit up to (but not more than) five Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.2: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing , which shall be a Business Day; (iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower 's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.5. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent , whether and to what extent it has decided to accept or reject each Competitive Bid , in the case of a Eurodollar Competitive Borrowing , not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; provided that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. 2.5 SECTION Funding of Borrowings. Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request or Competitive Bid Request. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. 2.6 SECTION Interest Elections. Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.3 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.2: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Majority Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. 2.7 SECTION Termination and Reduction of Commitments. Unless previously terminated, the Commitments shall terminate on the Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of any Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Borrower shall not terminate or reduce any Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.9, the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. 2.8 SECTION Repayment of Loans; Evidence of Debt. The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender with a Commitment the then unpaid principal amount of such Lender's Revolving Loans on the Maturity Date and (ii) to the Administrative Agent for the account of the relevant Lender the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.4) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). 2.9 SECTION Prepayment of Loans.(a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; provided that the Borrower shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.7, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.7. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.2. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11. 2.10 SECTION Fees. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the date hereof to but excluding the date on which such Commitment terminates; provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender's Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (c) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility fees, to the Lenders. Fees paid shall not be refundable under any circumstances. 2.11 SECTION Interest. The Loans comprising each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Eurodollar Revolving Loan, the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, or (ii) in the case of a Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided above. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Commitments. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent , and such determination shall be conclusive absent manifest error. 2.12 SECTION Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing : (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Majority Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the Borrower for a Eurodollar Competitive Borrowing shall be ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowing, then the other Types of Borrowing shall be permitted. 2.13 SECTION Increased Costs. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate ); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender or any participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender, to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 15 days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than ninety days prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the ninety-day period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. 2.14 SECTION Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow any Eurodollar Loan, convert any ABR Loan into a Eurodollar Loan, continue any Eurodollar Loan or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.9(b) and is revoked in accordance herewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.17, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for Dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 15 days after receipt thereof. 2.15 SECTION Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. The Borrower shall not be obligated to make any payments to a Foreign Lender pursuant to Section 2.15(a) to the extent that such Indemnified Taxes or Other Taxes became payable as a consequence of such Foreign Lender having failed to comply with this Section 2.15(e). (f) If any Lender shall become aware that it is entitled to receive a refund or credit (such credit to include any increase in any foreign tax credit) as a result of Indemnified Taxes (including any penalties or interest with respect thereto) as to which it has been indemnified by the Borrower pursuant to this Section 2.15, it shall promptly notify the Borrower of the availability of such refund or credit and shall, within 30 days after receipt of a request by the Borrower, apply for such refund or credit at the Borrower's expense, and in the case of any application for such refund or credit by the Borrower, shall, if legally able to do so, deliver to the Borrower such certificates, forms or other documentation as may be reasonably necessary to assist the Borrower in such application. If any Lender receives a refund or credit (such credit to include any increase in any foreign tax credit) in respect to any Indemnified Taxes as to which it has been indemnified by the Borrower pursuant to this Section 2.15, it shall promptly notify the Borrower of such refund or credit and shall, within 30 days after receipt of such refund or the benefit of such credit (such benefit to include any reduction of the taxes for which any Lender would otherwise be liable due to any increase in any foreign tax credit available to such Lender, repay the amount of such refund or benefit of such credit (with respect to the credit, as determined by the Lender in its sole judgment) to the Borrower (to the extent of amounts that have been paid by the Borrower under this Section 2.15 with respect to Indemnified Taxes giving rise to such refund or credit), plus any interest received with respect thereto, net of all reasonable out- of-pocket expenses of such Lender and without interest (other than interest actually received from the relevant taxing authority or other Governmental Authority with respect to such refund or credit); provided, however, that the Borrower, upon the request of such Lender, agrees to return the amount of such refund or benefit of such credit (plus interest) to such Lender in the event such Lender is required to repay the amount of such refund or benefit of such credit to the relevant taxing authority or other Governmental Authority. 2.16 SECTION Payments Generally; Pro Rata Treatment; Sharing of Set-offs.(a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees, or under Section 2.13, 2.14 or 2.15, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except that payments pursuant to Sections 2.13, 2.14, 2.15 and 9.3 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in Dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.5(b) or 2.16(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. 2.17 SECTION Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, or to file any certificate or document reasonably requested by the Borrower, if, in the judgment of such Lender, such designation or assignment or filing (i) would eliminate or reduce amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent , require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.4), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.13 or payments required to be made pursuant to Section 2.15, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. A Lender shall not be required to pay any fee to the Administrative Agent in connection with such assignment and delegation (any such fee to be paid by the Borrower or the assignee). ARTICLE III Representations and Warranties The Borrower represents and warrants to the Lenders that: 3.1 SECTION Organization; Powers. Each of the Parent and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. 3.2 SECTION Authorization; Enforceability. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. Each of this Agreement and the other documents executed and delivered in connection with the Transactions, has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 3.3 SECTION Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets other than defaults or violations for which consents or waivers have been obtained or which defaults or violations, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, (d) will not give rise to a right under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets to require any payment to be made by the Borrower or any of its Subsidiaries other than any payments contemplated to be made in connection with the Transactions, and (e) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 3.4 SECTION Financial Condition; No Material Adverse Change. Food Lion has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the Fiscal Year ended January 3, 1998, reported on by Coopers & Lybrand L.L.P., independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the Fiscal Year ended September 12, 1998, certified by its Financial Officer. Such financial statements present fairly, in all material respects, the financial condition and results of operations and cash flows of Food Lion and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) Since January 3, 1998, there has been no Material Adverse Change in the business, assets, operations, prospects or condition, financial or otherwise, of the Parent and its Subsidiaries, taken as a whole. 3.5 SECTION Properties. (a) Each of the Parent and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes and except as may be permitted pursuant to Section 6.1. (b) Each of the Parent and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Parent and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 3.6 SECTION Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Parent, threatened against or affecting the Parent or any of its Subsidiaries or that involve this Agreement or the Transactions as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters). (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Parent nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. 3.7 SECTION Compliance with Laws and Agreements. Each of the Parent and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. 3.8 SECTION Investment and Holding Company Status. Neither the Parent nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 3.9 SECTION Taxes. Each of the Parent and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Parent or such Subsidiary, as applicable, has set aside on its books reserves as and to the extent required by GAAP or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 3.10 SECTION ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $2,500,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $5,000,000 the fair market value of the assets of all such underfunded Plans. 3.11 SECTION Disclosure. The Parent has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to its knowledge to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Parent to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Parent represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. Any forward looking statements contained therein are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated. Future events and actual results, financial and otherwise, could differ materially from those set forth therein or contemplated by the forward looking statements contained therein. 3.12 SECTION Margin Stock. Not more than 25% of the consolidated assets of the Parent consists of "margin stock" within the meaning of such term under Regulation G or Regulation U of the Board of Governors of the Federal Reserve System. 3.13 SECTION No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Parent or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 3.14 SECTION Subsidiaries. Schedule 3.14 sets forth all of the Subsidiaries of the Parent at the date hereof. 3.15 SECTION Solvency. As of the date hereof and on the occasion of any Borrowing , the Borrower is Solvent. 3.16 SECTION 3.16 Year 2000 Matters. Any reprogramming required to permit the proper functioning (but only to the extent that such functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000 of computer systems and other equipment containing embedded microchips, in either case owned or operated by the Parent or any of its Subsidiaries will be substantially completed by June 30, 1999. The costs to the Parent and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing and for the other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing embedded microchips due to the occurrence of the year 2000 could not reasonably be expected to result in a Default or Event of Default or to have a Material Adverse Effect. Except for any reprogramming referred to above, the computer systems of the Parent and its Subsidiaries are and, with ordinary course of upgrading and maintenance, will continue for the term of this Agreement to be sufficient for the conduct of their business as currently conducted. ARTICLE IV Conditions to Funding 4.1 SECTION Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.2): (a) The Administrative Agent shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Administrative Agent shall have received from each Subsidiary either (i) a counterpart of the Related Guarantee signed on behalf of such Subsidiary or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of the Related Guarantee) that each Subsidiary has signed a counterpart of the Related Guarantee. (c) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Majority Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (d) The Administrative Agent shall have received such other legal opinions, documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Parent, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (e) All governmental and third party approvals necessary in connection with the Transactions and the continuing operations of the Borrower and its Subsidiaries shall have been obtained and be in full force and effect. (f) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.2. (g) The Lenders and the Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (h) All loans, extensions of credit and other amounts outstanding under, and in respect of the LTF Credit Agreement and the 1997 Credit Agreement, shall have been, or shall contemporaneous with the effectiveness of this Agreement, be repaid in full, and any and all commitments to provide any loans, extensions of credit or any other amounts under the LTF Credit Agreement or the 1997 Credit Agreement shall have been contemporaneously permanently terminated and the Administrative Agent shall have received satisfactory evidence of such repayment and termination on the Effective Date. (i) There shall be no actions, suits or proceedings by or before any arbitrator or Governmental Authority, or any other legal or regulatory developments pending against or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries or which involve this Agreement or the Transactions, which, in the reasonable judgment of the Administrative Agent, may prohibit or impose burdensome conditions on the Transactions contemplated hereby. The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.2) at or prior to 3:00 p.m., New York City time, on February 28, 1999 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). 4.2 SECTION Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in this Agreement shall be true and correct on and as of the date of such Borrowing, including, without limitation, the representations and warranties set forth in Sections 3.4 and 3.6, except to the extent such representations and warranties expressly relate to an earlier date. (b) At the time of and immediately after giving effect to such Borrowing, no Default or Event of Default shall have occurred and be continuing. Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Parent covenants and agrees with the Lenders that: 5.1 SECTION Financial Statements and Other Information. The Parent will furnish to the Administrative Agent and each Lender: (a) within 105 days after the end of each Fiscal Year, its audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported on by PricewaterhouseCoopers or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Parent and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; (b) within 60 days after the end of each of the first three fiscal quarters of each Fiscal Year, its consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the Fiscal Year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous Fiscal Year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Parent and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Parent (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations of the financial covenants set forth in Sections 6.1A, 6.6 and 6.7 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.4 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed (excluding exhibits) by the Parent or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Parent to its shareholders generally, as the case may be; and (f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Parent or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender through the Administrative Agent may reasonably request. 5.2 SECTION Notices of Material Events. The Parent will furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Parent or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Parent and its Subsidiaries in an aggregate amount exceeding $20,000,000 subsequent to the date hereof; and (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Parent setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. 5.3 SECTION Existence; Conduct of Business. The Parent will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of the business of the Parent and its Subsidiaries taken as a whole except to that extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.2. 5.4 SECTION Payment of Obligations. The Parent will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Parent or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. 5.5 SECTION Maintenance of Properties; Insurance. The Parent will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in adequate working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. 5.6 SECTION Books and Records; Inspection Rights. The Parent will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Parent will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. 5.7 SECTION Compliance with Laws and Material Contractual Obligations. The Parent will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property and all material Contractual Obligations, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; provided that the foregoing shall not be construed to prevent the Parent or any such Subsidiary from contesting any of the same by appropriate proceedings. 5.8 SECTION Use of Proceeds. The proceeds of the Loans will be used only for general corporate purposes of the Parent and its Subsidiaries, including as credit support for the Parent's commercial paper programs. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board , including Regulations G, U and X. 5.9 SECTION Additional Related Guarantees. With respect to any new Subsidiary created or acquired after the Effective Date by the Parent, such Subsidiary will promptly deliver to the Administrative Agent (a) an executed Related Guarantee signed on behalf of such Subsidiary in favor of the Administrative Agent and (b) such legal opinions, documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of such Subsidiary, the authorization of the Related Guarantee delivered by such Subsidiary and any other legal matters relating to such Subsidiary, all in form and substance satisfactory to the Administrative Agent and its counsel. 5.10 SECTION Change in Ratings. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of any change in ratings established or deemed to have been established by Moody's and S&P for any of its indebtedness for borrowed money, including, without limitation, the Index Debt or its senior, unsecured, short-term indebtedness for borrowed money (including, without limitation, commercial paper). ARTICLE VI Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Parent covenants and agrees with the Lenders that: 6.1 SECTION Liens. The Parent will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Parent or any Subsidiary existing on the date hereof and set forth on Schedule 6.1 or resulting from operating leases existing on the date hereof being reclassified as capital leases in accordance with GAAP; provided that (i) such Lien shall not apply to any other property or asset (other than accessions, modifications and proceeds thereof) of the Parent or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Parent or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets (other than accessions, modifications and proceeds thereof) of the Parent or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (d) Liens on fixed or capital assets acquired, constructed or improved by the Parent or any Subsidiary; provided that (i) such security interests and the Indebtedness secured thereby are incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement, (ii) the Indebtedness secured thereby does not exceed 100% of the cost of acquiring, constructing or improving such fixed or capital assets and (iii) such security interests shall not apply to any other property or assets (other than accessions, modifications and proceeds thereof) of the Parent or any Subsidiary; and (e) Liens not otherwise permitted pursuant to this Section 6.1 securing Indebtedness of the Parent or any Subsidiary (not otherwise prohibited hereunder) in an aggregate principal amount not exceeding $20,000,000 at any time outstanding. SECTION 6.1A Indebtedness . After the Assumption, the Borrower will not permit any Subsidiary to create, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except to the extent otherwise permitted hereunder: (a) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted under Section 6.1(b); (b) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted under Section 6.1(c) and 6.1(d) in an aggregate principal amount not to exceed $200,000,000 at any one time outstanding; (c) Indebtedness of any Subsidiary to the Borrower or any other Person that is a Guarantor; (d) Related Guarantees by any Subsidiary for the obligations hereunder or Guarantees of any Subsidiary for the Debt of the Parent; (e) Existing Public Debt plus Medium Term Notes in an aggregate principal amount not to exceed $125,000,000; and (f) additional Indebtedness of the Subsidiaries in an aggregate principal amount (for all Subsidiaries) not to exceed $20,000,000 at any one time outstanding, provided that each such Subsidiary has or shall have executed a Related Guarantee. 6.2 SECTION Fundamental Changes. The Parent will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of the assets of the Parent and its Subsidiaries taken as a whole (whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) the Borrower may merge into any other Person in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into the Parent in a transaction in which the Parent is the surviving corporation, (iii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iv) any Subsidiary may merge into any other Person in a transaction in which the surviving entity is a Subsidiary or in a transaction permitted by Section 6.8 and in which the surviving Person is not a Subsidiary, (v) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary or in a transaction not constituting all or substantially all of the assets of the Borrower and its Subsidiaries taken as a whole and which is permitted by Section 6.8 and (vi) any Subsidiary (other than the Borrower) may liquidate or dissolve if the Parent determines in good faith that such liquidation or dissolution is in the best interests of the Parent and is not materially disadvantageous to the Lenders; provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.3. (b) The Parent will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Parent and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related or incidental thereto. 6.3 SECTION Investments,Loans, Advances, Guarantees and Acquisitions; Hedging Agreements. (a) The Parent will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (i) Cash Equivalents; (ii) extensions of trade credit in the ordinary course of business; (iii) investments arising from the settlement of debts or as a result of bankruptcy or insolvency proceedings or as a result of enforcement proceedings; (iv) investments of the Parent and the Subsidiaries existing on the date hereof; (v) investments by the Parent existing on the date hereof in the capital stock of its Subsidiaries; (vi) loans, advances and other investments made by the Parent to or in any Subsidiary and made by any Subsidiary to or in the Parent or any other Subsidiary, provided that in each case such Subsidiary (or any other Person that is a Guarantor) executes and delivers a guarantee of the Borrower's obligations hereunder in favor of the Administrative Agent in substantially the form of Exhibit C; (vii) Guarantees to the extent that the resulting Debt would be permitted by Section 6.7 and, if applicable, Section 6.1A; (viii) acquisitions of a Person or the assets of a Person constituting a business unit in the same line of business conducted by the Parent on the date hereof in an aggregate amount not to exceed $400,000,000 over the term of this Agreement; provided however, acquisitions of equity interests in a Person which does not result in such Person constituting a Subsidiary shall not exceed an aggregate amount of $100,000,000; and (ix) investments not otherwise permitted pursuant to this Section 6.3 in an aggregate amount not to exceed $10,000,000 at any time outstanding. (b) The Parent will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Parent or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. 6.4 SECTION Transactions with Affiliates. The Parent will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Parent or such Subsidiary than could be obtained on an arm's- length basis from unrelated third parties and (b) transactions between or among the Parent and its wholly owned Subsidiaries not involving any other Affiliate. 6.5 SECTION Reserved. 6.6 SECTION Fixed Charges Coverage. At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending January 2, 1999, the ratio of (x) the sum of Consolidated Net Income plus, in each case to the extent deducted in determining such Consolidated Net Income and without duplication, Consolidated Depreciation expenses of the Borrower, Consolidated Amortization expenses of the Borrower, all federal, state, local and foreign income taxes of the Parent and its Consolidated Subsidiaries and (v) Consolidated Fixed Charges for the period of four Fiscal Quarters then ended to (y) Consolidated Fixed Charges for such period, shall not have been less than 2.25 to 1.00. 6.7 SECTION Ratio of Consolidated Debt to Consolidated Total Capitalization. The ratio of Consolidated Debt to Consolidated Total Capitalization shall not at any time exceed 0.60 to 1.00. 6.8 SECTION Limitation on Sales of Assets. The Parent will not, nor will it permit any Subsidiary to, convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets, whether now owned or hereafter acquired, or discontinue or eliminate any business line or segment, except: (a) the sale or other disposition of obsolete, surplus or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) as permitted by Section 6.2(a); (d) sales of assets in a single transaction or in a series of related transactions the aggregate book value of which is not greater than $25,000,000 in any one such transaction or series of related transactions; (e) dispositions and discontinuances of a business line or segment not otherwise permitted pursuant to this Section 6.8, provided that the aggregate assets to be so disposed of or the aggregate assets utilized in a business line or segment to be so discontinued (in a single transaction or in a series of related transactions), when combined with all other assets disposed of (including, without limitation, pursuant to a sale and leaseback transaction) and all other assets utilized in all other business lines or segments discontinued, during the period from the date of this Agreement through and including the date of any such disposition or discontinuation would not exceed 10% of Consolidated Total Assets as determined by reference to the Parent 's most recently audited financial statements provided to the Administrative Agent and the Lenders pursuant to Section 5.1(a) and provided, further that if, within 180 days of the sale of any assets, the Parent or any Subsidiary acquires similar assets having a use similar to and a fair market value at least equal to the assets so sold, then the value of the assets sold shall not be included in calculating future assets permitted to be sold under this Section 6.8; and (f) conveyances, sales, leases, assignments, transfers or other dispositions of assets from the Borrower to a wholly owned Subsidiary, from a Subsidiary to the Borrower or from a Subsidiary to a wholly owned Subsidiary, provided that in each case any such wholly owned Subsidiary to whom such assets are being conveyed, sold, leased, assigned, transferred or otherwise disposed of executes and delivers a guarantee of the Borrower's obligations hereunder in favor of the Administrative Agent in substantially the form of Exhibit C. 6.9 SECTION Activities of Holdings. Prior to the consummation of the Reorganization, the Borrower will not permit Holdings to conduct any business or create, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except as otherwise contemplated by, or required in connection with, the Reorganization. ARTICLE VII Events of Default If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five days; (c) any representation or warranty made or deemed made by or on behalf of the Parent or any Subsidiary in or in connection with this Agreement or any amendment or modification hereof, or in any report, certificate, financial statement or other document delivered pursuant to this Agreement or any amendment or modification hereof, shall prove to have been incorrect when made or deemed made; (d) the Parent shall fail to observe or perform any covenant, condition or greement contained in Section 5.2, 5.3 (with respect to the Parent's existence) or 5.8 or in Article VI; (e) the Parent shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent (given at the request of any Lender) to the Borrower; (f) the Parent or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Parent or any Subsidiary or their respective debts, or of a substantial part of their respective assets, under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Parent or any Subsidiary or for a substantial part of their respective assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Parent or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Parent or any Subsidiary or for a substantial part of their respective assets, (iv) file an answer admitting the material allegations of a petition filed against either of them in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Parent or any Subsidiary shall become unable, or admit in writing or fail generally, to pay their respective debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against the Parent, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, bonded or vacated, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Parent or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Majority Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (m) a Change in Control shall occur; or (n) any Related Guarantee shall cease, for any reason (other than any act on the part of the Administrative Agent or any Lender), to be binding and in effect (except in accordance with its terms or as permitted hereunder) or any Guarantor shall so assert; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Majority Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments , and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII The Administrative Agent Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Parent or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Majority Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Parent or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Majority Lenders or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub- agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Majority Lenders shall have the right (so long as no Default has occurred and is continuing with consent of the Borrower which consent shall not be unreasonably withheld) to appoint a successor. If no successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.3 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. The Documentation Agent shall have no duties or responsibilities nor shall it incur any liabilities under this Agreement. ARTICLE IX Miscellaneous 9.1 SECTION Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at 2110 Executive Drive, Salisbury, North Carolina 28145-1330, Attention of Richard James, Treasurer/Director of Finance (Telecopy No. 704-636-5024); (b) if to the Administrative Agent , to The Chase Manhattan Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th floor, New York, New York 10081, Attention of Concetta Prainito (Telecopy No. (212) 552- 7500), with a copy to The Chase Manhattan Bank, 270 Park Avenue, New York 10017, Attention of Joanne Roberts (Telecopy No. (212) 270-7594); and (c) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 9.2 SECTION Waivers; Amendments. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement, nor any Related Guarantee nor any provision hereof or thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower (or the relevant Guarantor, as the case may be) and the Majority Lenders or by the Borrower (or the relevant Guarantor, as the case may be) and the Administrative Agent with the consent of the Majority Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.16(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender adversely affected thereby, or (v) change any of the provisions of this Section or the definition of "Majority Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. 9.3 SECTION Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent, and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including in connection with any workout, restructuring or negotiations in respect thereof (other than any such expenses directly related to a court enforcement action in which the Borrower prevails on the merits in a final and nonappealable judgment). (b) The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, (ii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor. 9.4 SECTION Successors and Assigns.(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (other than as expressly permitted in Article X) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Borrower and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided further that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (h) or (i) of Article VII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.14, 2.15 and 9.3). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the " Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.2(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13, 2.14 and 2.15 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) A Participant shall not be entitled to receive any greater payment under Section 2.13 or 2.15 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.15 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.15(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. 9.5 SECTION Survival. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.13, 2.14, 2.15 and 9.3 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. 9.6 SECTION Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.1, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. 9.7 SECTION Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. 9.8 SECTION Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. 9.9 SECTION Governing Law; Jurisdiction; Consent to Service of Process. (a)This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 9.10 SECTION WAIVER OF JURY TRIAL . EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 9.11 SECTION Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. 9.12 SECTION Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates ' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to a written agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower, its Subsidiaries or their businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 9.13 SECTION Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. ARTICLE X Provisions Relating to the Reorganization 10.1 SECTION Consent to Reorganization. Notwithstanding anything to the contrary contained herein, upon the satisfaction of the following conditions, Food Lion may effect the Reorganization: (a) No Default shall have occurred and be continuing or would occur after giving effect to the Reorganization. (b) All governmental and third party approvals necessary in connection with the Reorganization shall have been obtained and be in full force and effect. (c) The Administrative Agent shall have received a certificate signed by the President, a Vice President or a Financial Officer of Food Lion, confirming compliance with the conditions set forth in paragraphs (a) and (b) of this Section 10.1 (d) If the Assumption is not occurring concurrently with the Reorganization, the Administrative Agent shall have received from Holdings either (i) a counterpart of a Related Guarantee signed on behalf of Holdings or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of the Related Guarantee) that Holdings has signed a counterpart thereof. (e) The Administrative Agent shall have received such legal opinions, documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of Holdings, the authorization of the Related Guarantee delivered by Holdings (if applicable) and any other legal matters relating to Holdings, this Agreement or the Reorganization, all in form and substance satisfactory to the Administrative Agent and its counsel. SECTION 10.2 Consent to Assumption. Notwithstanding anything to the contrary contained herein, upon the satisfaction of the following conditions, Holdings may effect the Assumption: (a) Prior thereto or contemporaneously therewith, the Reorganization shall have occurred and the conditions thereto set forth in Section 10.1 shall have been satisfied. (b) At least a majority of (i) the outstanding principal amount of each separate issuance of Existing Public Debt and (ii) the outstanding aggregate principal amount of the Medium Term Notes shall, in each case, have been assumed by Holdings. (c) No Default shall have occurred and be continuing or would occur after giving effect to the Assumption. (d) All governmental and third party approvals necessary in connection with the Assumption shall have been obtained and be in full force and effect. (e) All existing Indebtedness of Food Lion (other than as permitted pursuant to Section 6.1A) shall have been assumed by Holdings and Food Lion shall have been released from its obligations thereunder (except in its capacity as guarantor after the Assumption). (f) The Administrative Agent shall have received a certificate signed by the President, a Vice President or a Financial Officer of Holdings, confirming compliance with the conditions set forth in paragraphs (a), (b), (c), (d) and (e) of this Section 10.2. (g) The Administrative Agent shall have received an assignment and assumption agreement, in a form satisfactory to it, pursuant to which Holdings shall confirm the satisfaction of the conditions to the Assumption and shall acknowledge the Assumption, as Borrower, of all of the obligations of Food Lion hereunder. (h) The Administrative Agent shall have received from Food Lion either (i) a counterpart of a Related Guarantee signed on behalf of Food Lion or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of the Related Guarantee) that Food Lion has signed a counterpart thereof. (i) The Administrative Agent shall have received such legal opinions, documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the authorization of the agreements delivered pursuant to this Section 10.2 and any other legal matters relating to this Agreement or the Assumption, all in form and substance satisfactory to the Administrative Agent and its counsel. The Administrative Agent shall notify Holdings and the Lenders of the date on which the conditions set forth in this Section 10.2 have been satisfied, and such notice shall be conclusive and binding. On the date of satisfaction of such conditions, Food Lion shall be released from all of its obligations hereunder in its capacity as Borrower, without any further action on the part of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. FOOD LION, INC. By: Richard James Name: Richard James Title: Treasurer THE CHASE MANHATTAN BANK, individually and as Administrative Agent By: William P. Rindfuss Name: William P. Rindfuss Title: Vice President WACHOVIA BANK, N.A., individually and as Documentation Agent By: Timothy R. Hileman Name: Timothy R. Hileman Title: Senior Vice President BANCA DI ROMA By: James B. Sieger Name: James B. Sieger Title: Vice President By: William J. Fontana Name: William J. Fontana Title: Vice President BANCA MONTE DEI PASCHI DI SIENA S.p.A. By: G. Nataliochl Name: G. Nataliochl Title: S.V.P and General Manager By: Brian R. Landy Name: Brian R. Landy Title: Vice President THE BANK OF NEW YORK By: Paula Regan Name: Paula Regan Title: Vice President BRANCH BANK & TRUST By: Cory Boyte Name: Cory Boyte Title: Vice President BW CAPITAL MARKETS, INC. By: Thomas A. Lowe Name: Thomas A. Lowe Title: Vice President By: Robert B.Herber Name: Robert B. Herber Title: Managing Director CRESTAR BANK By: James P. Duval, Jr. Name: James P. Duval Jr Title: Vice President DEUTSCHE BANK AG, NEW YORK BRANCH By: Stefan Hafke Name: Stefan Hafke Title: Assistant Vice President By: Oliver Schwarz Name: Oliver Schwarz Title: Assistant Vice President FIRST AMERICAN NATIONAL BANK By: H.Hope Stewart Name: H.Hope Stewart Title: Assistant Vice President THE FIRST NATIONAL BANK OF CHICAGO By: Dave T. NcNeela Name: Dave T. McNeela Title: Vice President THE FIRST NATIONAL BANK OF MARYLAND By: Robert M. Beaver Name: Robert M. Beaver Title: Vice President THE FIRST TENNESSEE BANK NATIONAL ASSOCIATION By: Rosemary R. Moody Name: Rosemary R. Moody Title: Vice President FIRST UNION NATIONAL BANK By: Thomas J. McDonnell Name: Thomas J. McDonnell Title: Vice President GENERALE BANK N.V., New York Branch By: E.Matthews Name: E. Matthews Title: Senior Vice President By: Hans Nenhowman Name: Hans Nenhowman Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By: Kazuo Iida Name: Kazuo Lida Title: General Manager NATIONSBANK By: E.Bradley Jones Name: E. Bradley Jones Title: Vice President SUNTRUST BANK, Atlanta Agency By: Charles C. Pick Name: Charles C. Pick Title: Vice President By: Thomas A. Shanklin Name: Thomas A. Shanklin Title: Banking Officer Schedule 2.1 Commitments Administrative Agent Chase Manhattan Bank $55,000,000 Syndication Agent Wachovia Bank, N.A. $55,000,000 Managing Agents Bank of America $50,000,000 Deutsche Bank, AG New York Branch 50,000,000 First National Bank of Chicago 50,000,000 First Union National Bank 50,000,000 Generale Bank 50,000,000 Co-Agent SunTrust Bank, Atlanta $25,000,000 Participants Bank of New York $25,000,000 Branch Bank & Trust 25,000,000 BW Capital Markets, Inc. 25,000,000 Crestar Bank 25,000,000 First American National Bank 25,000,000 First National Bank of Maryland 25,000,000 First Tennessee National Bank 25,000,000 Banca Di Roma 25,000,000 Banca monte Dei Paschi di Siena S.P.A. 20,000,000 Industrial Bank of Japan 20,000,000 Total $625,000,000 Schedule 3.6 Incorporated herein by reference is Part I, Item 3 of the Form 10K of the Borrower for the Fiscal Year ended January 3, 1998, and Part II, Item 1 of the Forms 10Qs of the Borrower for the Fiscal Quarters ended March 28, 1998, June 20, 1998 and September 12, 1998. Schedule 3.14 SUBSIDIARIES OF BORROWER FLI Holding Corp., a Delaware corporation ("FLI"), and a wholly- owned subsidiary of the Borrower. Risk Management Services, Inc., a North Carolina corporation, and a wholly-owned subsidiary of the Borrower. Kash n' Karry Food Stores, Inc., a Delaware corporation, and a wholly-owned subsidiary of FLI. (1) FL Food Lion, Inc., a Florida corporation, and a wholly-owned subsidiary of FLI. Barnwell, Inc., a Delaware corporation, and a wholly-owned subsidiary of FLI. (1) KNK 702 Delaware Business Trust, KNK 886 Delaware Business Trust, KNK 891 Delaware Business Trust, all Delaware business trusts, are wholly-owned by Kash n' Karry Food Stores, Inc. Schedule 6.1 EXISTING LIENS Liens representing the interest of the Lessor under Capitalized Leases in existence on the date of this Agreement have an aggregate outstanding principal amount not exceeding $520,591,000. Kash n' Karry has Liens encumbering certain real property listed on Annex A hereto. EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement, dated as of December 14, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among FOOD LION, INC., the Lenders named therein, THE CHASE MANHATTAN BANK, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), and WACHOVIA BANK, N.A., as Documentation Agent. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Assignor identified on Schedule l hereto (the "Assignor") and the Assignee identified on Schedule l hereto (the "Assignee") agree as follows: (a) The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date (as defined below), the interest described in Schedule 1 hereto (the "Assigned Interest") in and to the Assignor's rights and obligations under the Credit Agreement with respect to those credit facilities contained in the Credit Agreement as are set forth on Schedule 1 hereto (individually, an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal amount for each Assigned Facility as set forth on Schedule 1 hereto. (b) The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument or document furnished pursuant thereto or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that the Assignor has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any of its Subsidiaries or any other obligor or the performance or observance by the Borrower, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches any promissory notes held by it evidencing the Assigned Facilities and (i) requests that the Administrative Agent, upon request by the Assignee, exchange the attached promissory notes for a new promissory note or promissory notes payable to the Assignee and (ii) if the Assignor has retained any interest in the Assigned Facility, requests that the Administrative Agent exchange the attached promissory notes for a new promissory note or promissory notes payable to the Assignor, in each case in amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). (c) The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 3.4 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender including, if it is organized under the laws of a jurisdiction outside the United States, its obligation pursuant to Section 2.15(e) of the Credit Agreement. (d) The effective date of this Assignment and Acceptance shall be the Effective Date of Assignment described in Schedule 1 hereto (the "Effective Date"). Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by it and recording by the Administrative Agent pursuant to the Credit Agreement, effective as of the Effective Date (which shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent). (e) Upon such acceptance and recording, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to the Effective Date and to the Assignee for amounts which have accrued subsequent to the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. (f) From and after the Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. (g) This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance Name of Assignor: Name of Assignee: Effective Date of Assignment: Credit Principal Commitment Percentage Facility Assigned Amount Assigned Assigned (1) $ % [Name of Assignee] [Name of Assignor] By: By: Title: Title: Accepted: Consented To: THE CHASE MANHATTAN BANK, as [BORROWER] Administrative Agent By: By: Title: Title: (1) Calculate the Commitment Percentage that is assigned to at least 15 decimal places and show as a percentage of the aggregate committments of all Lenders. EXHIBIT B AKIN,GUMP,STRAUSS,HAUER & FELD,L.L.P. ATTORNEYS AT LAW 1700 PACIFIC AVENUE SUITE 4100 DALLAS, TEXAS 75201-4675 (214) 969-2800 FAX (214) 969-4343 DECEMBER 14, 1998 The Chase Manhattan Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Each of the Lenders named on Annex A Dear Sirs: We have acted as counsel for Food Lion, Inc., a North Carolina corporation (the "Borrower"), in connection with the Credit Agreement, dated as of December 15, 1997 (the "Credit Agreement"), among the Borrower, the Lenders party thereto (the "Lenders"), The Chase Manhattan Bank ("Chase"), as Administrative Agent, and Wachovia Bank, N.A. ("Wachovia"), as Documentation Agent, and as counsel for each of the subsidiaries of the Borrower (collectively, the "Guarantors"), in connection with their respective Related Guarantees dated as of December 14, 1998 (each, a "Related Guarantee") made by the respective Guarantors in favor of the Administrative Agent. The opinions expressed here are furnished to you pursuant to Subsection 4.1 (c) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given in the Credit Agreement. In connection with this opinion, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the Credit Agreement and the Related Guarantees (the Credit Agreement and the Related Guaranties being collectively called the "Loan Documents"), the certificate referred to in Subsection 4.1 (f) of the Credit Agreement, and such corporate documents and records of the Borrower and the Guarantors as we have deemed necessary or appropriate. As to questions of fact relevant to this opinion, we have, without independent investigation, relied upon representations made to us by the Borrower and the Guarantors, including the representations contained in the Loan Documents, and in various certificates delivered by the Borrower, including, but not limited to, certificates presented to the Lenders, the Administrative Agent and the Documentation Agent, and certain representations of public officials, all of which we assume to be true. In our examination, we have assumed (i) the genuineness of all signatures of all parties other AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. The Chase Manhattan Bank, as Administrative Agent December 14, 1998 Page 2 than signatures of the Borrower and the Guarantors, (ii) the authenticity of all corporate records, agreements, documents, instruments and certificates submitted to us as originals, the conformity to original agreements, documents and instruments of all agreements and instruments submitted to us as conformed, certified or photostatic copies thereof and the authenticity of the originals of such conformed, certified or photostatic copies; (iii) the due authorization, execution and delivery of all agreements, documents and instruments by all parties other than the Borrower and the Guarantors; and (iv) the legal right and power of all such parties other than the Borrower and the Guarantors under all applicable laws and regulations to enter into, execute and deliver such agreements, documents and instruments. We have further assumed that the Lenders, the Administrative Agent and the Documentation Agent have the requisite power and authority to enter into the Loan Documents and to consummate the transactions contemplated thereby and the absence of any requirement of consent, approval or authorization by any Person or by any governmental body, agency or official with respect to the Lenders, the Administrative Agent and the Documentation Agent and that the Loan Documents are legal, valid and binding obligations of the Lenders, the Administrative Agent and the Documentation Agent enforceable against such Persons in accordance with their respective terms. This law firm is a registered limited liability partnership organized under the laws of the State of Texas. We express no opinion as to the laws of any jurisdiction other than the laws of the State of New York, the United States of America, the General Corporation Law of the State of Delaware, Florida law and The North Carolina Business Corporation Act. As to matters governed by the laws of the State of Florida, we are relying on an opinion of ___________________________ of even date herewith, a copy of which is attached hereto. As to matters governed by the laws of the State of North Carolina, we are relying upon an opinion of Linn Evans, Esq. of even date herewith, a copy of which is attached hereto. The opinions expressed in paragraphs 1(b) and 2(b) below are based solely upon our review of certain certificates of public officials of various jurisdictions and are not based upon any examination of the laws of any such jurisdiction. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower (a) is duly incorporated, validly existing and in good standing under the laws of North Carolina and has all requisite power and authority, to carry on its business as now conducted and (b) is qualified to do business in, and is in good standing in, each jurisdiction listed on Schedule I attached hereto. 2. Each Guarantor (a) is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation listed on Schedule II and has all requisite power and authority to carry on its business as now conducted and (b) is qualified to do business in, and is in good standing in, each jurisdiction listed on Schedule II attached hereto. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. The Chase Manhattan Bank, as Administrative Agent December 14, 1998 Page 3 3. The Transactions to be effected on the date hereof are each within the Borrower's corporate powers and have each been duly authorized by all necessary corporate and, if required, stockholder action. The Credit Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower. 4. The execution, delivery and performance by each Guarantor of the Related Guarantee is within such Guarantor's corporate powers and has been duly authorized by all necessary corporate and , if required, stockholder action of such Guarantor. Each Related Guarantee has been duly executed and delivered by the Guarantor party thereto and constitutes a legal, valid and binding obligation of such Guarantor. 5. To our knowledge, neither the Transactions to be effected on the date hereof nor the execution, delivery and performance of the Related Guarantees (a) require any consent or approval of, registration or filing with, or any other action by, any Federal, New York, Delaware, North Carolina or Florida Governmental Authority, except for consents, approvals, registrations, filings or other actions as have been obtained, made or waived and are in full force and effect and which are not required to have been effected prior to the date hereof, (b) will violate any applicable Federal, New York, Delaware corporate, North Carolina corporate or Florida corporate law or regulations or the charter, bylaws or other organizational documents of the Borrower or any of the Guarantors or any order of any Federal or New York Governmental Authority, (c) will violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of the Guarantors or their respective assets other than defaults or violations for which consents or waivers have been obtained or which defaults or violations, individually or in the aggregate, could not have a Material Adverse Effect, or (d) give rise under any indenture, agreement or other instrument binding upon the Borrower or any of the Guarantors to any requirement for any payments be made by the Borrower or any of the Guarantors, or (e) will result in the creation or imposition of any Lien on any asset of the Borrower or any of the Guarantors. 6. To our knowledge, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or threatened against the Borrower or any of the Guarantors (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve the Credit Agreement, the Related Guarantees or the Transactions to be effected on the date hereof. 7. Neither the Borrower nor any of the Guarantors is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. The Chase Manhattan Bank, as Administrative Agent December 14, 1998 Page 4 The foregoing opinions are subject to the exceptions, limitations and qualifications contained herein, including the following: A. The enforceability of the Loan Documents may be (a) limited by applicable bank- ruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance or transfer and other similar laws affecting creditors' rights, (b) subject to general principles of equity (regardless of whether considered in a proceeding in equity or at law), commercial reasonableness and good faith, and (c) limited by the power of courts to award damages in lieu of equitable remedies. In addition, the right to indemnification contained in the Loan Documents may be limited by Federal or New York state laws or the policies of such laws. B. We express no opinions as to enforceability of any provisions (i) purporting to vest jurisdiction on any property of the Borrower or any Guarantor in the Supreme Court of the State of New York sitting in New York County or the United States District Court of the Southern District of New York to the extent that such property is not situated in New York, New York, (ii) purporting to waive or restrict access to legal or equitable remedies (including venue, forum non conveniens or the right to assert a setoff) or the right to collect damages (including special, indirect, consequential or punitive damages), (iii) preserving and maintaining a guarantor's liability despite the fact that the Lenders have willfully released the primary obligor's liability or the guaranteed indebtedness is unenforceable due to illegality, (iv) prohibiting oral amendments or waivers or provisions of the Loan Documents; (v) establishing evidentiary standards or (vi) permitting a Lender to set off against any debtor's accounts any amounts belonging to a third party or otherwise held in a fiduciary capacity. C. When used in this opinion, the phrase "to our knowledge" means known to attorneys in our firm who have rendered services to the Borrower or any Guarantor in connection with the Transactions. This opinion is as of the date hereof, and we undertake no, and hereby disclaim any, obligation to advise you of any change in any matter set forth herein, whether based on a change in the law, a change in any fact relating to the Borrower, any Guarantor or any other Person or any other circumstance. This opinion is delivered to you in connection with the transactions referenced above and may be relied upon only by you, any permitted assignee of an assigning Lender or Participant under the Credit Agreement, and Simpson Thatcher & Bartlett in connection with such transaction and may not be relied upon in any manner or for any purpose by any other person without our prior written consent. Very truly yours, AKIN, GUMP, STRAUSS, HAUER & FELD EXHIBIT C FORM OF RELATED GUARANTEE RELATED GUARANTEE, dated as of December 14, 1998, made by [SUBSIDIARY]/[HOLDINGS]2[FOOD LION, INC.]3 (the "Guarantor"), in favor of THE CHASE MANHATTAN BANK, as administrative agent (in such capacity, the "Administrative Agent") for the lenders (the "Lenders") parties to the Credit Agreement, dated as of December 14, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among FOOD LION, INC. (the "Borrower"), the Lenders, the Administrative Agent and Wachovia Bank, N.A., as Documentation Agent. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, the Borrower owns indirectly all of the issued and outstanding stock of the Guarantor4; WHEREAS, the proceeds of the Loans will be used in part to enable the Borrower to make valuable transfers (as determined as provided herein) to the Guarantor in connection with the acquisition and operation of its business; WHEREAS, the Borrower is, and the Guarantor will be, engaged in related businesses, and the Guarantor will derive substantial direct and indirect benefit from the making of the Loans; and WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective Loans to the Borrower under the Credit Agreement that the Guarantor shall have executed and delivered this Guarantee to the Administrative Agent for the ratable benefit of the Lenders; NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Loans to the Borrower under the Credit Agreement, the Guarantor hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders, as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. (b) As used herein: "Material Adverse Effect" means a material adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, the ability of the Guarantor to perform any of its obligations under this Guarantee or the rights of or benefits available to the Lenders under this Guarantee. "Obligations" means the collective reference to the unpaid principal of and interest on the Loans and all other obligations and liabilities of the Borrower to the Administrative Agent or the Lenders (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement or any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by the Borrower or the Guarantor pursuant to the terms of the Credit Agreement or this Guarantee). (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and section and paragraph references are to this Guarantee unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Guarantee. (a) Subject to the provisions of paragraph 2(b), the Guarantor hereby unconditionally and irrevocably guarantees to the Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (b) Anything herein to the contrary notwithstanding, the maximum liability of the Guarantor hereunder shall in no event exceed the amount which can be guaranteed by the Guarantor under applicable federal and state laws relating to the insolvency of debtors. (c) The Guarantor further agrees to pay all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Guarantee, including in connection with any workout, restructuring or negotiations in respect thereof (other than any such expenses directly related to a court enforcement action in which the Guarantor prevails on the merits in a final and nonappealable judgment). This Guarantee shall remain in full force and effect until the Obligations are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrower may be free from any Obligations. (d) The Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of the liability of the Guarantor hereunder without impairing this Guarantee or affecting the rights and remedies of the Administrative Agent or any Lender hereunder. (e) No payment or payments made by the Borrower, the Guarantor, any other guarantor or any other Person or received or collected by the Administrative Agent or any Lender from the Borrower, the Guarantor, any other guarantor or any other Person by virtue of any action or proceeding or any setoff or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of the Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made by the Guarantor in respect of the Obligations or payments received or collected from the Guarantor in respect of the Obligations, remain liable for the Obligations up to the maximum liability of the Guarantor hereunder until the Obligations are paid in full and the Commitments are terminated. (f) The Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to the Administrative Agent or any Lender on account of its liability hereunder, it will notify the Administrative Agent in writing that such payment is made under this Guarantee for such purpose. 3. Right of Setoff. Upon the occurrence of any Default, the Guarantor hereby irrevocably authorizes each Lender at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Guarantor against any of and all the obligations of the Guarantor now or hereafter existing under this Guarantee held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Guarantee and although such obligations may be unmatured. The Administrative Agent and each Lender shall notify the Guarantor promptly of any such setoff and the application made by the Administrative Agent or such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Administrative Agent and each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which the Administrative Agent or such Lender may have. 4. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder or any setoff or application of funds of the Guarantor by any Lender, the Guarantor shall not be entitled to be subrogated to any of the rights of the Administrative Agent or any Lender against the Borrower or any collateral security or guarantee or right of offset held by any Lender for the payment of the Obligations, nor shall the Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower in respect of payments made by the Guarantor hereunder, until all amounts owing to the Administrative Agent and the Lenders by the Borrower on account of the Obligations are paid in full and the Commitments are terminated. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by the Guarantor in trust for the Administrative Agent and the Lenders, segregated from other funds of the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to the Administrative Agent in the exact form received by the Guarantor (duly indorsed by the Guarantor to the Administrative Agent, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Administrative Agent may determine. 5. Amendments, etc. with respect to the Obligations; Waiver of Rights. The Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by such party and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Lender, and the Credit Agreement and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Majority Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against the Guarantor, the Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand on the Borrower or any other guarantor, and any failure by the Administrative Agent or any Lender to make any such demand or to collect any payments from the Borrower or any other guarantor or any release of the Borrower or such other guarantor shall not relieve the Guarantor of its obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Administrative Agent or any Lender against the Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 6. Guarantee Absolute and Unconditional. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Guarantee or acceptance of this Guarantee, the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and the Guarantor, on the one hand, and the Administrative Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or the Guarantor with respect to the Obligations. The Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Lender (b) any defense, setoff or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against the Administrative Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or the Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Guarantor, the Administrative Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve the Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent and the Lenders against the Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Administrative Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of the Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Obligations. 7. Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or the Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or the Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. The Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent without setoff or counterclaim in Dollars at the office of the Administrative Agent located at 270 Park Avenue, New York, New York 10017. 9. Representations and Warranties. The Guarantor hereby represents and warrants that: (a) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required; (b) the execution, delivery and performance of this Guarantee is within the Guarantor's corporate powers and has been duly authorized by all necessary corporate and, if required, stockholder action. This Guarantee has been duly executed and delivered by the Guarantor and constitutes a legal, valid and binding obligation of the Guarantor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law; (c) the execution, delivery and performance of this Guarantee does not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Guarantor or any of its subsidiaries or any order of any Governmental Authority, will not violate or result in a default under any indenture, agreement or other instrument binding upon the Guarantor or any of its subsidiaries or its assets other than defaults or violations for which consents or waivers have been obtained or which defaults or violations, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, will not give rise to a right under any indenture, agreement or other instrument binding upon the Guarantor or any of its subsidiaries or its assets to require any payment to be made by the Guarantor or any of its subsidiaries other than the repayment of Indebtedness with the proceeds of the initial Loans under the Credit Agreement and any other payments contemplated to be made in connection with the Transactions, and will not result in the creation or imposition of any Lien on any asset of the Guarantor or any of its subsidiaries; (d) the Guarantor has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes and except as may be permitted pursuant to Section 6.1 of the Credit Agreement; (e) the Guarantor owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Guarantor and its subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; (f) there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Guarantor, threatened against or affecting the Guarantor or any of its subsidiaries or that involve the Credit Agreement, this Guarantee or the Transactions as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters); (g) the Guarantor is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; and (h) the Guarantor has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except Taxes that are being contested in good faith by appropriate proceedings and for which the Guarantor has set aside on its books reserves as and to the extent required by GAAP or to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. The Guarantor agrees that the foregoing representations and warranties shall be deemed to have been made by the Guarantor on the date of each Borrowing by the Borrower under the Credit Agreement on and as of such date of borrowing as though made hereunder on and as of such date. 10. Authority of Administrative Agent. The Guarantor acknowledges that the rights and responsibilities of the Administrative Agent under this Guarantee with respect to any action taken by the Administrative Agent or the exercise or non- exercise by the Administrative Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Guarantor, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and the Guarantor shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 11. Notices. All notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Administrative Agent or any Lender, at its address or transmission number for notices provided in Section 9.1 of the Credit Agreement; and (b) if to the Guarantor, at its address or transmission number for notices set forth under its signature below. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Guarantee shall be deemed to have been given on the date of receipt. 12. Counterparts. This Guarantee may be executed by the Guarantor on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the counterparts of this Guarantee signed by the Guarantor shall be lodged with the Administrative Agent. 13. Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Integration. This Guarantee represents the entire agreement of the Guarantor with respect to the subject matter hereof and there are no promises or representations by the Administrative Agent or any Lender relative to the subject matter hereof not reflected herein. 15. Amendments in Writing; No Waiver; Cumulative Remedies. None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Guarantor and the Administrative Agent, provided that any provision of this Guarantee may be waived by the Administrative Agent and the Lenders in a letter or agreement executed by the Administrative Agent or by facsimile transmission from the Administrative Agent. (b) Neither the Administrative Agent nor any Lender shall by any act (except by a written instrument pursuant to paragraph 15(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 16. Section Headings. The section headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Successors and Assigns. This Guarantee shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of the Administrative Agent and the Lenders and their successors and assigns. 18. Governing Law. This Guarantee shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. 19. Jurisdiction; Consent to Service of Process. (a) The Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Guarantee, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guarantee shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Guarantee against the Guarantor or its properties in the courts of any jurisdiction. (b) The Guarantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Guarantee in any court referred to in paragraph (a) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Guarantee irrevocably consents to service of process in the manner provided for notices in Section 11. Nothing in this Guarantee will affect the right of any party to this Guarantee to serve process in any other manner permitted by law. 20. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS GUARANTEE OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS GUARANTEE BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. [SUBSIDIARY]/[HOLDINGS]/[FOOD LION] By: _________________________ Title: Address for Notices: Attention: Fax: _______________________________ 1 A Related Guarantee shall be executed by Holdings in the event that the Assumption does not occur concurrently with the Reorganization. 2 A Related Guarantee shall be executed by Food Lion as a condition precedent to the Assumption. 3 This clause should be deleted in the event that the Assumption does not occur concurrently with the Reorganization. EX-11 4 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (Amounts in thousands except Years Ended per share amounts) January 2, January 3, December 28, 1999 1998 1996 BASIC NET INCOME $272,585 $172,250 $215,220 WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 478,084 468,916 470,216 BASIC EARNINGS PER SHARE $ .57 $ .37 $ .46 DILUTED NET INCOME $272,585 $172,250 $215,220 ELIMINATION OF INTEREST EXPENSE, NET OF RELATED TAX EFFECT, APPLICABLE TO 5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 - 3,479 3,499 ADJUSTED INCOME APPLICABLE TO COMMON STOCK $272,585 $175,729 $218,719 WEIGHTED AVERAGE COMMON SHARES AND OTHER COMMON STOCK EQUIVALENTS: COMMON STOCK OUTSTANDING 478,084 468,916 470,216 STOCK OPTIONS 1,037 737 573 SHARES ISSUABLE UPON CONVERSION OF 5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 (1) - 14,440 14,440 479,121 484,093 485,229 DILUTED EARNINGS PER SHARE $ .57 $ .36 $ .45 (1) During the second quarter of 1998, the Company's convertible subordinated debentures were redeemed. EX-21 5 Exhibit 21 Subsidiaries of Food Lion, Inc.: Entity State of Incorporation Kash n' Karry Food Stores, Inc. DE FLI Holding Corp. DE Barnwell, Inc. DE Risk Management Services, Inc. NC FL Food Lion, Inc. FL EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Food Lion, Inc. on Form S-8 (File Nos. 33-18796,33-18797 and 33-03669) and Form S-3 (File Nos. 33-40457,33-50037 and 33-49620) of our report dated February 10, 1999, on our audits of the consolidated financial statements of Food Lion, Inc. and subsidiaries as of January 2, 1999, and January 3, 1998, and for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, which report is included in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS, LLP Charlotte, North Carolina February 10, 1999 EX-99 7 Exhibit 99 UNDERTAKING TO FILE EXHIBITS PURSUANT TO ITEM 601(b)(4)(iii)(A) OF REGULATIONS S-K The undersigned registrant acknowledges that it has not filed with the Securities and Exchange Commission (the "Commission") copies of certain instruments with respect to long-term debt of the registrant representing obligations not exceeding 10% of the registrant's total assets as of January 2, 1999, pursuant to the provisions of Item 601(b)(4)(iii)(A) of Regulation S-K of the Commission (the "Regulation"). Pursuant to the Regulation, the undersigned registrant hereby undertakes to furnish to the Commission upon its request a copy of any such instrument. This is the 25th day of March, 1999. FOOD LION, INC. Laura Kendall Laura Kendall Vice President of Finance Chief Financial Officer Principal Financial Officer EX-13 8 Consolidated Statements of Income Year Ended Year Ended Year Ended January 2, January 3, December 28, (Dollars in thousands 1999 1998 1996 except per share amounts) Net sales $10,219,474 $10,194,385 $9,005,932 Cost of goods sold 7,925,844 7,975,659 7,087,177 Gross profit 2,293,630 2,218,726 1,918,755 Selling and administrative expenses 1,534,293 1,516,726 1,325,592 Depreciation and amortization 236,021 219,833 165,286 Asset impairment reserve - - 22,187 Store closing charge/(income) - 84,402 (27,600) Operating income 523,316 397,765 433,290 Interest expense 95,334 115,389 80,520 Income before income taxes 427,982 282,376 352,770 Provision for income taxes 155,397 110,126 137,550 Net income $ 272,585 $ 172,250 $ 215,220 Basic and diluted earnings per common share $ .57 $ .37 $ .46 (Results as a percentage of net sales) Net sales 100.00% 100.00% 100.00% Cost of goods sold 77.56 78.24 78.69 Gross profit 22.44 21.76 21.31 Selling and administrative expenses 15.01 14.88 14.72 Depreciation and amortization 2.31 2.16 1.84 Asset impairment reserve - - .25 Store closing charge/(income) - .82 (.31) Operating income 5.12 3.90 4.81 Interest expense .93 1.13 .89 Income before income taxes 4.19 2.77 3.92 Provision for income taxes 1.52 1.08 1.53 Net income 2.67% 1.69% 2.39% The accompanying notes are an integral part of the consolidated financial statements. Consolidated Balance Sheets January 2, January 3, (Dollars in thousands 1999 1998 except per share amounts) Assets Current assets: Cash and cash equivalents $ 123,592 $ 93,340 Receivables 199,101 166,790 Inventories 1,103,635 982,744 Prepaid expenses 20,552 22,514 Deferred tax asset 65,397 63,123 Total current assets 1,512,277 1,328,511 Property, at cost, less accumulated depreciation 1,897,080 1,842,269 Deferred tax asset 4,707 51,980 Intangible assets less accumulated amortization 258,402 267,656 Other assets 3,495 5,720 Total assets $3,675,961 $3,496,136 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $ 61,000 $ 80,000 Accounts payable, trade 545,015 497,907 Accrued expenses 360,105 351,173 Capital lease obligations - current 21,940 20,427 Long term debt - current 42,518 2,525 Other liabilities - current 9,839 8,756 Total current liabilities 1,040,417 960,788 Long-term debt 429,763 586,355 Capital lease obligations 492,660 489,928 Other liabilities 114,199 125,880 Total liabilities 2,077,039 2,162,951 Shareholders' equity: Class A non-voting common stock, $.50 par value; authorized 1,500,000,000 shares; issued and outstanding 247,893,000 shares at January 2, 1999 and 236,224,000 shares at January 3, 1998 123,946 118,112 Class B voting common stock, $.50 par value; authorized 1,500,000,000 shares; issued and outstanding 230,830,000 shares at January 2, 1999 and 232,727,000 shares at January 3, 1998 115,415 116,364 Additional capital 60,332 794 Retained earnings 1,299,229 1,097,915 Total shareholders' equity 1,598,922 1,333,185 Total liabilities and shareholders' equity $3,675,961 $3,496,136 The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statements of Cash Flows January 2, January 3, 1999 1998 (Dollars in thousands) Cash flows from operating activities Net income $272,585 $172,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 236,021 219,833 (Gain)loss on disposals of property (8,953) 964 Store closing charge - 84,402 Asset impairment reserve - - Deferred income taxes 44,999 (36,527) Changes in operating assets and liabilities net of effect of acquisition of subsidiary: Receivables (32,311) (15,627) Inventories (120,891) 82,999 Prepaid expenses 1,962 8,377 Other assets 2,225 (2,951) Accounts payable and accrued expenses 56,040 (116,816) Income taxes payable - (5,578) Other liabilities (10,598) (36,416) Total adjustments 168,494 182,660 Net cash provided by operating activities 441,079 354,910 Cash flows from investing activities Capital expenditures (356,058) (346,134) Proceeds from sale of property 109,850 32,572 Investment in subsidiary, net of cash received - - Net cash used in investing activities (246,208) (313,562) Cash flows from financing activities Net (payments) proceeds under short-term borrowings (19,000) (170,010) Principal payments on long-term debt (6,154) (212,027) Proceeds from issuance of long-term debt - 304,823 Principal payments under capital lease obligations (22,172) (22,076) Dividends paid (71,271) (62,748) Repurchase of common stock (50,192) (2,960) Proceeds from issuance of common stock 4,170 1,555 Net cash (used in) provided by financing activities (164,619) (163,443) Net increase (decrease) in cash and cash equivalents 30,252 (122,095) Cash and cash equivalents at beginning of year 93,340 215,435 Cash and cash equivalents at end of year $123,592 $ 93,340 The accompanying notes are an integral part of the consolidated financial statements Consolidated Statements of Cash Flows December 28, 1996 (Dollars in thousands) Cash flows from operating activities Net income $215,220 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165,286 Loss on disposals of property 466 Store closing (income) (27,600) Asset impairment reserve 22,187 Deferred income taxes (23,450) Changes in operating assets and liabilities: Receivables (50,845) Inventories (90,484) Prepaid expenses (6,940) Other assets 409 Accounts payable and accrued expenses 184,415 Income taxes payable 5,578 Other liabilities 34,099 Total adjustments 213,121 Net cash provided by operating activities 428,341 Cash flows from investing activities Capital expenditures (283,564) Proceeds from sale of property 27,464 Investment in subsidiary, net of cash received (99,852) Net cash used in investing activities (355,952) Cash flows from financing activities Net proceeds under short-term borrowings 250,000 Principal payments on long-term debt (65,656) Proceeds from issuance of long-term debt - Principal payments under capital lease obligations (17,764) Dividends paid (52,310) Repurchase of common stock (44,345) Proceeds from issuance of common stock 3,086 Net cash provided by financing activities 73,011 Net increase in cash and cash equivalents 145,400 Cash and cash equivalents at beginning of year 70,035 Cash and cash equivalents at end of year $215,435 The accompanying notes are an integral part of the consolidated financial statements Consolidated Statements of Shareholders' Equity Class A Class B (Dollars and shares in thousands Common Stock Common Stock except per share amounts) Shares Amount Shares Amount Balances December 30, 1995 238,509 $119,255 236,625 $118,313 Cash dividends declared: Class A - $.1120 per share Class B - $.1104 per share Sale of stock 587 293 - - Repurchase of common stock (3,047) (1,524) (3,723) (1,862) Converted debt 117 59 Net income Balances December 28, 1996 236,166 118,083 232,902 116,451 Cash dividends declared: Class A - $.1348 per share Class B - $.1328 per share Sale of stock 293 147 - - Repurchase of common stock (235) (118) (175) (87) Net income Balances January 3, 1998 236,224 118,112 232,727 116,364 Cash dividends declared: Class A - $.1500 per share Class B - $.1480 per share Sale of stock 746 373 - - Repurchase of common stock (3,086) (1,543) (1,897) (949) Restricted shares 29 14 Converted debt 13,980 6,990 Net income Balances January 2, 1999 247,893 $123,946 230,830 $115,415 The accompanying notes are an integral part of the consolidated financial statements Additional Retained Capital Earnings Total Balances December 30, 1995 - $864,942 $1,102,510 Cash dividends declared: Class A - $.1120 per share (26,436) (26,436) Class B - $.1104 per share (25,874) (25,874) Sale of stock 2,793 - 3,086 Repurchase of common stock (1,953) (39,006) (44,345) Converted debt 868 927 Net income 215,220 215,220 Balances December 28, 1996 1,708 988,846 1,225,088 Cash dividends declared: Class A - $.1348 per share (31,825) (31,825) Class B - $.1328 per share (30,923) (30,923) Sale of stock 1,408 1,555 Repurchase of common stock (2,322) (433) (2,960) Net income 172,250 172,250 Balances January 3, 1998 794 1,097,915 1,333,185 Cash dividends declared: Class A - $.1500 per share (36,832) (36,832) Class B - $.1480 per share (34,439) (34,439) Sale of stock 3,585 3,958 Repurchase of common stock (47,700) - (50,192) Restricted shares 198 212 Converted debt 103,455 110,445 Net income 272,585 272,585 Balances January 2, 1999 $60,332 $1,299,229 $1,598,922 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Nature of Operations As of January 2, 1999, the Company operated 1,207 retail food supermarkets and eight distribution centers in 11 states in the Southeast and Mid-Atlantic United States. The Company's stores, which are operated under the names of "Food Lion" and "Kash n' Karry," sell a wide variety of groceries, produce, meats, dairy products, seafood, frozen foods, deli/bakery and non-food items, such as health and beauty care, prescriptions, and other household and personal products. Principles of Consolidation The consolidated financial statements include the accounts of Food Lion, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Operating Segment The Company engages in one line of business, the operation of general food supermarkets. Fiscal Year The Company's fiscal year ends on the Saturday nearest to December 31. The years ended January 2, 1999 and December 28, 1996 each included 52 weeks. The year ended January 3, 1998 included 53 weeks. The 1998 disclosed amounts represent the year ended January 2, 1999. Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first out (LIFO) method comprised approximately 87% and 86% of inventories, in 1998 and 1997, respectively. Meat, produce and deli inventories are valued on the first-in, first-out (FIFO) method. If the FIFO method were used entirely, inventories would have been $139.1 million and $114.4 million greater in 1998 and 1997, respectively. Application of the LIFO method resulted in increases in the cost of goods sold of $24.7, $10.0 and $10.2 million for 1998, 1997 and 1996, respectively. Statements of Cash Flows Selected cash payments and non-cash activities were as follows: (Dollars in thousands) 1998 1997 1996 Cash payments for income taxes $127,352 $158,543 $154,791 Cash payments for interest, net of amounts capitalized 103,820 108,743 76,631 Non-cash investing and financing activities: Capitalized lease obligations incurred for store properties 62,608 80,207 130,899 Capitalized lease obligations terminated for store properties 30,026 31,633 25,710 Capitalized lease obligations terminated for store equipment 6,165 7,148 - Conversion of long term debt to stock 110,445 - 927 Property Property is stated at historical cost and depreciated on a straight-line basis over the estimated service lives of assets, generally as follows: Buildings 40 years Furniture, fixtures and equipment 3 - 10 years Leasehold improvements 8 years Vehicles 7 years Property under capital leases Lease term Annually, the value of all long-lived assets is reviewed in conjunction with the Company's compliance with Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FASB No.121). Intangible Assets Intangible assets primarily include goodwill, tradenames and favorable leasehold interests, all of which have been acquired in conjunction with purchase business combinations. Intangible assets are amortized on a straight-line basis over the estimated useful lives. The Company evaluates, on an ongoing basis, the carrying value of intangible assets based on projections of undiscounted cash flows. If impairment is identified, the Company compares the asset's future discounted cash flows to its current carrying value and records specific provisions as appropriate. Deferred Income Taxes Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. Cost of Goods Sold Purchases are recorded net of cash discounts. Advertising Costs Advertising costs are expensed as incurred. Store Opening Costs Costs associated with the opening of new stores are expensed as incurred. Store Closing Costs When a decision is made to close a store, the Company records a charge to cover the estimated costs of the planned store closing including (1) the unrecoverable portion of the present value of the remaining lease payments on leased stores (recorded in Other Liabilities on the Company's Consolidated Balance Sheet), (2) the write down of store assets (building, equipment, etc.) to reflect estimated realizable values (recorded as a reduction of the recorded asset cost on the Company's Consolidated Balance Sheet), and (3) other costs associated with the store closing (recorded in Accrued Expenses on the Company's Consolidated Balance Sheet). The Company intends to close stores within a year after the decision to close is made. Recoverable and realizable values are determined based on historical disposition of similar assets and current economic conditions, and are reviewed as new information becomes available or economic conditions change. The Company makes adjustments to the valuation reserves as needed. At the store closing date, the Company discontinues depreciation on all assets related to closed store properties. Disposition efforts on these assets begin immediately following the store closing. Significant cash outflows associated with store closings relate to ongoing rent payments on leased stores. The principal portion of the rent payments is charged against the lease liability established for closed stores (discussed above), while the interest portion of the rent payments is recorded against current year earnings in Interest Expense. Self Insurance The Company is self-insured for workers' compensation, general liability and vehicle accident claims. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Maximum per occurrence is $500,000 for workers' compensation, $600,000 for general liability and $750,000 for vehicle liability. The Company is insured for covered costs in excess of these limits. Self insurance expense related to the above totaled $34.2 million in 1998, $32.9 million in 1997, and $30.4 million in 1996. Total claim payments were $31.2 million in 1998, $30.3 million in 1997, and $25.8 million in 1996. Earnings Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding (478.1 million shares in 1998, 468.9 million shares in 1997 and 470.2 million shares in 1996). The effect of stock options and convertible subordinated debentures does not result in a material dilution of earnings per share. Reclassification Certain financial statement items have been reclassified to conform to the current year's format. 2. Acquisitions On December 18, 1996, the Company acquired all of the outstanding shares of Kash n' Karry Food Stores, Inc. ("Kash n' Karry"), a Florida-based supermarket retailer which operated 100 stores, for $121.6 million. The Company began reporting consolidated results of operations, including Kash n' Karry, in the first quarter of 1997. The Kash n' Karry acquisition was accounted for using the purchase method of accounting, and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon their respective fair values at the date of acquisition. In accordance with Accounting Principles Board Opinion No. 17, the Company determined that the balance of the purchase price (goodwill, including tradenames) had an unlimited useful life, and as a result, established a 40-year straight-line amortization period for these intangible assets. The net purchase price was initially allocated as follows: (Dollars in thousands) Property, plant and equipment $103,078 Other assets 49,229 Intangible assets 269,348 Long-term debt (230,836) Other liabilities, net ( 90,967) Purchase price less cash received $ 99,852 3. Property Property consists of the following: (Dollars in thousands) 1998 1997 Land and improvements $ 103,820 $ 160,543 Buildings 377,736 397,496 Furniture, fixtures and equipment 1,343,514 1,265,085 Vehicles 100,370 98,529 Leasehold improvements 478,848 361,278 Construction in progress (estimated costs to complete and equip at January 2, 1999 are $80.0 million) 44,895 41,488 2,449,183 2,324,419 Less accumulated depreciation 1,012,193 941,298 1,436,990 1,383,121 Property under capital leases 584,931 569,855 Less accumulated depreciation 124,841 110,707 460,090 459,148 $1,897,080 $1,842,269 At January 2, 1999 and January 3, 1998, the Company had $21.0 million and $99.4 million (net book value), respectively, in property held for sale. 4. Intangible Assets Intangible assets is comprised of the following: (Dollars in thousands) 1998 1997 Goodwill $203,286 $205,809 Tradenames 58,000 58,000 Leasehold interests 18,438 15,312 279,724 279,121 Accumulated amortization 21,322 11,465 $258,402 $267,656 During 1998, changes in Goodwill arose primarily from adjustments to reduce store closing reserves for Kash n' Karry, originally established at the acquisition date, to reflect updated recoverable values and costs related to the Company's current plans to close stores as part of the acquisition strategy. 5. Accrued Expenses Accrued expenses consist of the following: (Dollars in thousands) 1998 1997 Employee profit sharing $100,647 $100,634 Self insurance 76,207 75,735 Payroll 66,887 37,410 Reserves for store closings 1,126 7,436 Other 115,238 129,958 $360,105 $351,173 6. Employee Benefit Plan The Company has a non-contributory retirement plan covering all Food Lion employees. The plan provides benefits to participants upon death, retirement or termination of employment with the Company. Contributions to the retirement plan are determined by the Company's Board of Directors. Expense related to the plan totaled $94.9 million in 1998, $97.8 million in 1997 and $94.9 million in 1996. 7. Long-Term Debt Long-term debt consists of the following: (Dollars in thousands) 1998 1997 Medium-term notes, due from 1999 to 2006. Interest ranges from 8.32% to 8.73%. $150,300 $150,300 Debt Securities, due 2007. Interest is at 7.55%. 150,000 150,000 Debt Securities, due 2027. Interest is at 8.05%. 150,000 150,000 Convertible subordinated debentures converted May 1998. - 114,073 Mortgage payables due from 1999 through 2003. Interest ranges from 7.50% to 10.35%. 19,029 20,043 Other 2,952 4,464 472,281 588,880 Less current portion 42,518 2,525 $429,763 $586,355 During the second quarter of 1998, the Company redeemed its outstanding convertible subordinated debentures totaling $113.8 million through either (1) payment to the bond holders at 101% of the principal together with accrued interest or (2) conversion of the debentures into shares of the Company's Class A Stock. Most bond holders elected conversion resulting in the issuance of 13.9 million shares of Class A Common Stock. The Company paid $3.8 million in principal, premium and accrued interest to remaining bond holders. At January 2, 1999, $23.2 million (net book value) in property was pledged as collateral for mortgage payables. At January 2, 1999 and January 3, 1998, the Company estimated that the fair value of its long-term debt was approximately $522.0 million and $641.3 million, respectively. The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. Approximate maturities of long-term debt in the years 1999 through 2003 are $42.5, $2.8, $106.3, $1.6 and $11.0 million, respectively. 8. Credit Arrangements The Company maintains a revolving credit facility with a syndicate of commercial banks providing $625.0 million in committed lines of credit, which will expire on December 13, 1999. These lines replaced the previous $700.0 million revolving credit facility. There were no borrowings outstanding under each of the facilities for the years ended January 2, 1999 and January 3, 1998. Additionally, the Company had other committed short-term lines of credit with banks totaling $20.0 million, of which $20.0 million was outstanding at January 2, 1999. There were no borrowings outstanding at January 3, 1998. During 1998, the Company had average borrowings of $100,000 at a daily weighted average interest rate of 5.37% with a maximum amount outstanding of $20.0 million. The Company has a $250.0 million commercial paper program. No borrowings were outstanding during the years ended January 2, 1999 and January 3, 1998. In addition, the Company has periodic short-term borrowings under other informal arrangements. Outstanding borrowings under these arrangements were $41.0 million at January 2, 1999 at an average interest rate of 5.64% and $80.0 million at January 3, 1998 at an average interest rate of 6.09%. 9. Leases The Company's stores operate principally in leased premises. Lease terms generally range from 10 to 20 years with renewal options ranging from five to 20 years. The following schedule shows, as of January 2, 1999, the future minimum lease payments under capital leases, together with the present value of net minimum lease payments, and operating leases that have initial or remaining non- cancelable lease terms in excess of one year. Capital Operating Leases (Dollars in thousands) Leases Open Stores Closed Stores 1999 $ 83,463 $149,181 $ 19,920 2000 83,208 148,371 19,535 2001 82,627 147,330 19,145 2002 82,599 145,408 18,724 2003 82,354 142,018 17,964 Thereafter 845,502 1,234,793 128,053 Total minimum payments 1,259,753 1,967,101 $223,341 Less estimated executory costs 59,864 Net minimum lease payments 1,199,889 Less amount representing interest 685,289 Present value of net minimum lease payments $ 514,600 Minimum payments have not been reduced by minimum sublease income of $22.8 million due in the future over the term of non-cancelable subleases. Total rent expense for operating leases, excluding those with terms of one year or less, is as follows: (Dollars in thousands) 1998 1997 1996 Minimum rents $172,481 $133,786 $137,157 Contingent rents, based on sales 255 371 680 $172,736 $134,157 $137,837 In addition, the Company has signed lease agreements for additional store facilities, the construction of which were not complete at January 2, 1999. The leases expire on various dates extending to 2023 with renewal options generally ranging from 10 to 20 years. Total future minimum rents under these agreements are approximately $673 million. 10. Income Taxes Provisions for income taxes for 1998, 1997 and 1996 consist of the following: (Dollars in thousands) Current Deferred Total 1998 Federal $ 95,839 $40,199 $136,038 State 14,559 4,800 19,359 $110,398 $44,999 $155,397 1997 Federal $119,553 $(30,327) $ 89,226 State 27,100 ( 6,200) 20,900 $146,653 $(36,527) $110,126 1996 Federal $134,000 $(19,550) $114,450 State 27,000 ( 3,900) 23,100 $161,000 $(23,450) $137,550 The Company's effective tax rate varied from the federal statutory rate as follows: 1998 1997 1996 Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.9 4.8 4.3 Federal refund (1.7) 0.0 0.0 Other 0.1 (0.8) (0.3) 36.3% 39.0% 39.0% Deferred income tax expense relates to the following: (Dollars in thousands) 1998 1997 1996 Excess tax depreciation $21,868 $ 8,892 $ 2,774 Provision for store closings 11,745 (43,041) 7,793 Excess interest and depreciation over rent paid on capital leases (2,743) (4,604) (3,003) Excess tax loss/(gain) 14,964 (4,372) (9,277) Accrued expenses 6,342 (2,258) (3,251) Tax loss carryforwards - (1,959) - Asset impairment reserve 184 4,892 (8,713) Other (7,361) 5,923 (9,773) $44,999 $(36,527) $(23,450) The components of deferred income tax assets and liabilities at January 2, 1999 and January 3, 1998 are as follows: (Dollars in thousands) 1998 1997 Current assets: Inventories $ 14,818 $ 10,436 Accrued expenses 50,579 52,692 Provision for store closings 0 (5) Total current assets 65,397 63,123 Non-current assets/(liability): Depreciation (142,389) (105,483) Leases 43,560 50,937 Provision for store closings 73,777 76,970 Tax loss carryforwards 22,737 22,737 Other deferred charges 7,022 6,819 Total non-current assets 4,707 51,980 Net deferred taxes $ 70,104 $ 115,103 As of January 2, 1999, the Company had net operating loss carryforwards for tax purposes of approximately $56 million related to Kash n' Karry. Due to certain change of ownership requirements of Section 382 of the Internal Revenue Code, utilization of the Kash n' Karry net operating losses is expected to be limited to approximately $3.6 million or $6.9 million per year, depending upon the year in which the loss was generated. If the full amount of the limitation is not used in any year, the amount not used increases the allowable limit in the subsequent year. Loss carryovers will expire during the years 2006 through 2011. 11. Other Liabilities Other liabilities consist of the following: (Dollars in thousands) 1998 1997 Remaining lease liability - closed stores $113,161 $123,105 Other 10,877 11,531 124,038 134,636 Less current portion 9,839 8,756 $114,199 $125,880 12. Stock Options and Restricted Stock Plans The Company has a stock option plan under which options to purchase up to 10 million shares of Class A common stock may be granted to officers and key employees at prices equal to fair market value on the date of the grant. Options become exercisable as determined by the Stock Option Committee of the Board of Directors of the Company on the date of grant, provided that no option may be exercised more than ten years after the date of grant. In addition, the Company established a restricted stock plan in 1996 for executive employees pursuant to the 1996 Stock Incentive Plan. Under this stock plan, the Company issued 161,545 shares in 1998 (26,760 shares forfeited), 196,003 shares in 1997 (10,524 shares forfeited), and 133,393 shares in 1996 (1,803 shares forfeited). Currently, the Company has 423,034 shares of restricted Class A Common Stock outstanding under the plan. These shares of stock will vest over five years from grant date. The weighted average grant date fair value for these shares is $8.14. At January 2, 1999, 28,820 of these restricted shares had been issued. Changes in the shares reserved for outstanding options and restricted stock as of January 2, 1999, and related weighted average exercise price are presented below: Weighted Average Shares Exercise Price 1998 Outstanding at beginning of 3,322,792 $6.63 year Granted 1,180,589 8.73 Exercised (771,135) 5.10 Forfeited/expired (490,060) 6.43 Outstanding at end of year 3,242,186 7.14 Options exercisable at end of year 136,604 8.77 1997 Outstanding at beginning of 2,553,835 $6.08 year Granted 1,401,509 8.13 Exercised (289,833) 5.27 Forfeited/expired (342,719) 11.35 Outstanding at end of year 3,322,792 6.63 Options exercisable at end of year 958,595 5.71 1996 Outstanding at beginning of 2,658,069 $5.97 year Granted 931,715 7.38 Exercised (587,795) 6.19 Forfeited/expired (448,154) 11.35 Outstanding at end of year 2,553,835 6.08 Options exercisable at end of 1,367,820 5.75 year As of January 2, 1999, there were 5,111,257 shares of Class A common stock available for future grants. The following table summarizes options outstanding and options exercisable as of January 2, 1999, and the related weighted average remaining contractual life (years) and weighted average exercise price (excluding restricted stock). Options Outstanding Range of Weighted exercise Number Weighted Average prices Outstanding Average Exercise Remaining Price Contractual Life $ 5.12 - $7.70 1,674,269 7.4 $ 6.86 $ 7.71 -$11.55 1,069,883 8.6 10.03 $11.56 -$12.42 75,000 2.8 12.42 $ 5.12 -$12.42 2,819,152 7.7 $ 8.21 Options Exercisable Range of exercise Number Weighted prices Exercisable Average Exercise Price $ 5.12 - $ 7.70 76,571 $ 5.92 $ 7.71 - $11.55 33 8.56 $11.56 - $12.42 60,000 12.42 $ 5.12 - $12.42 136,604 $ 8.77 The weighted average fair value at date of grant for options granted during 1998, 1997, and 1996 was $2.62, $2.14, and $2.35 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: 1998 1997 1996 Expected dividend yield (%) 1.50 1.50 1.50 Expected volatility (%) 30.00 25.00 25.00 Risk-free interest rate (%) 5.60 6.50 6.60 Expected term (years) 5.0 5.5 5.5 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock options granted in 1998, 1997 or 1996. Had compensation cost been determined based on the fair value at the grant date consistent with the provisions of this statement, the Company's pro forma net earnings and earnings per share would have been as follows: (Dollars in thousands, except per share data) 1998 1997 1996 Net earnings - as reported $272,585 $172,250 $215,220 Net earnings - pro forma 272,144 171,656 214,986 Basic earnings per share - as reported 0.57 0.37 0.46 Basic earnings per share - pro forma 0.57 0.37 0.46 13. Common Stock On January 2, 1999, approximately 23.2% and 14.4% of the issued and outstanding Class A non-voting common stock and 24.7% and 27.5% of the issued and outstanding Class B voting common stock was held, respectively, by Etablissements Delhaize Freres et Cie "Le Lion" S.A. (Delhaize) and Delhaize The Lion America, Inc., a wholly owned subsidiary of Delhaize (Detla). In the aggregate, Delhaize and Detla owned approximately 52.2% of the Class B voting common stock and 37.6% of the Class A non-voting common stock. Holders of Class B common stock are entitled to one vote for each share of Class B common stock held, while holders of Class A common stock are not entitled to vote except as required by law. The Board of Directors of the Company may declare dividends with respect to Class A common stock without declaring and paying any dividends with respect to the Class B common stock. When dividends are declared with respect to the Class B common stock, the Board of Directors of the Company must declare a greater per share dividend to the holders of Class A common stock. 14. Interest Expense Interest expense consists of the following: (Dollars in thousands) 1998 1997 1996 Interest on capital leases $58,774 $ 56,809 $46,767 Other interest 36,560 58,580 33,753 $95,334 $115,389 $80,520 15. Reserves for Closed Stores (Dollars in millions) Reduction Lease Accrued of Asset Liabilities Expenses Total Values Balance at December 30, 1995 $ 58.2 $ 67.0 $ 20.5 $145.7 Additions 20.2 92.3 1.4 113.9 Reductions (31.2) (9.2) (1.8) (42.2) Recognition of unused (8.5) 0.0 (19.1) (27.6) reserves Balance at December 28,1996 38.7 150.1 1.0 189.8 Additions 98.8 22.6 13.7 135.1 Reductions (12.9) (20.0) (3.6) (36.5) Recognition of unused (20.8) (29.6) (3.7) (54.1) reserves Balance at January 3,1998 103.8 123.1 7.4 234.3 Additions 2.7 19.2 9.4 31.3 Reductions (90.7) (21.9) (15.7) (128.3) Recognition of unused 0.0 (7.2) 0.0 (7.2) reserves Balance at January 2, 1999 $ 15.8 $113.2 $ 1.1 $130.1 1998 Activity: During the year, the Company recorded $15.2 million in store closing costs (included in Selling and Administrative Expenses on the Company's Consolidated Statement of Income), related to planned store closings in the normal course of business. These costs are included in the "Additions" line in the table above. Significant additions also include gains ($11.1 million) related to the disposal of various properties ($5.1 million) and the sale of the Company's distribution center in the Southwest market ($6 million). The Company recorded these gains to the store closing reserve pending the results of disposition efforts on remaining closed store properties. Significant reductions include the disposition of 51 owned stores and the distribution center facility in the Southwest market, which the Company closed in 1997 (see discussion under 1997 Activity). Other significant reductions include (1) ongoing rent payments made on remaining lease obligations, (2) fees for lease terminations, (3) incremental direct costs to dispose of closed store properties, and (4) expenses arising from contractual obligations. The Company made a decision in 1998 not to close three Kash n' Karry stores due to improved performance. These stores were included in the store closing reserves established at the date of the Kash n' Karry acquisition. These unused reserves totaling $7.2 million were reflected as a reduction of Goodwill. During 1998, the Company closed 29 stores in the normal course of business, including 17 relocation closings and 12 closings due to poor performance. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During 1998, the Company completed disposition efforts related to 74 closed stores. At the end of 1998, the Company had $130.1 million in store closing costs related to 157 stores and one distribution center. 1997 Activity: During 1997, the Company recorded a pre-tax charge of $116.5 million related to the divestiture of its Southwest market. This charge included the write-down of store and distribution center assets to reflect estimated realizable values ($92.1 million), the present value (calculated by applying an 8% discount rate) of remaining rent payments on leased stores ($17.1 million) included in Other Liabilities above, and other costs associated with the store closings. These other costs include legal fees, commissions, severance costs, and certain other costs to sell the related assets and/or expenses arising from contractual obligations ($7.3 million) included in Accrued Expenses above. The Southwest market had negatively impacted the Company's operating results by approximately $0.01 per share annually. During 1997, the Company reduced store closing costs by $54.1 million in unused reserves which arose primarily from changes in estimated liabilities on remaining lease obligations and in estimated recoverable values of owned properties. Of this amount, $14.4 million related to stores closed in previous years, and $17.7 million related to the 1997 store closings in the Southwest market. These unused reserves were recorded into income. The remaining $22.0 million related to Kash n' Karry store closings and was reflected as an adjustment to Goodwill. The remaining 1997 activity represents store closing costs incurred, the disposition of properties held for sale, and payments made on remaining lease obligations, related to store closings in the normal course of business. During 1997, the Company closed 58 stores in the normal course of business including 25 relocation closings and 33 closings due to poor performance. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During 1997, the Company completed disposition efforts related to 33 closed stores. 1996 Activity: Significant additions to the reserve represent store closing reserves for Kash n' Karry established at the date of acquisition. During 1996, the Company recognized $27.6 million in unused reserves related to a $170.5 million pre-tax store closing charge against 1993 earnings. The remaining 1996 activity relates to store closings in the normal course of business and represents store closing costs incurred, the disposition of properties held for sale, and payments made on remaining lease obligations. During 1996, the Company closed 25 stores in the normal course of business including 22 relocation closings and three closings due to poor performance. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During 1996, the Company completed disposition efforts related to 39 closed stores. 16. Commitments and Contingencies The Company is involved in various claims and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of these legal proceedings cannot be predicted with certainty, the management of the Company believes that the resulting liability, if any, will not have a material effect upon the Company's consolidated financial statements or liquidity. Report of Independent Accountants To the Shareholders of Food Lion, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity, and cash flows present fairly, in all material respects, the financial position of Food Lion, Inc. and subsidiaries (the "Company") at January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Charlotte, North Carolina February 10, 1999 Results by Quarter (unaudited) (Dollars in thousands except per share amounts) 1998 First Second Third Fourth Quarter Quarter Quarter Quarter (12 Weeks) (12 Weeks) (12 Weeks) (16 Weeks) Net sales $2,305,473 $2,353,260 $2,378,922 $3,181,819 Gross profit 505,358 526,603 534,934 726,735 Selling and administrative 336,295 352,609 356,043 489,346 expenses Depreciation and amortization 52,418 54,012 55,777 73,814 Operating income 116,645 119,982 123,114 163,575 Net income $ 55,234 $ 60,033 $ 72,769 $ 84,549 Basic and diluted earnings per common share $0.12 $0.13 $0.15 $0.18 (Dollars in thousands except per share amounts) 1997 First Second Third Fourth Quarter Quarter Quarter Quarter (12 Weeks) (12 Weeks) (12 Weeks) (17 Weeks)* Net sales $2,276,746 $2,324,719 $2,366,905 $3,226,015 Gross profit 493,683 503,670 513,432 707,941 Selling and administrative 346,841 345,413 346,059 478,413 expenses Depreciation and amortization 48,697 52,150 52,153 66,833 Store closing charge/(income) 0 0 96,414 (12,012) Operating income 98,145 106,107 18,806 174,707 Net income(loss) $ 43,591 $ 47,791 $ (6,382) $ 87,250 Basic and diluted earnings per common share $0.09 $0.10 $(0.01) $0.19 *Note: The 1998 fourth quarter comprised 16 weeks; the 1997 fourth quarter comprised 17 weeks. Market Price of Common Stock Year Ended January 2, 1999 Year Ended January 3, 1998 Class A Class B Class A Class B Quarter High Low High Low High Low High Low First 11.25 8.47 11.38 8.13 9.78 7.63 10.13 8.00 Second 10.88 9.25 11.06 9.13 8.25 6.47 8.38 6.56 Third 11.44 8.81 11.06 9.00 7.50 6.94 7.56 6.91 Fourth 11.06 8.38 10.81 7.88 8.75 7.44 8.53 7.44 The Company's Class A and Class B common stock trade on the Nasdaq stock market under the symbols: FDLNA and FDLNB, respectively. Price quotations are reported on the Nasdaq national market system. The closing market prices per share for both Class A and Class B common stock at January 2, 1999 were $10.63 and $10.06, respectively compared with $8.50 and $8.31, respectively for both Class A and Class B common stock at January 3, 1998. The over-the-counter quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. On March 19, 1999, there were 24,319 holders of record of Class A common stock and 16,676 holders of record of Class B common stock. The closing market prices per share for the Class A and the Class B common stock at March 19, 1999 were $9.47 and $9.31, respectively. Dividends Declared Per Share of Common Stock Year Ended January 2, 1999 Year Ended January 3, 1998 Quarter Class A Class B Class A Class B First $.0375 $.0370 $.0337 $.0332 Second .0375 .0370 .0337 .0332 Third .0375 .0370 .0337 .0332 Fourth .0375 .0370 .0337 .0332 Total $.1500 $.1480 $.1348 $.1328 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company posted a record level of sales and earnings during 1998. Sales totaled $10.2 billion as earnings reached $272.6 million. The Company was able to achieve these strong operating results despite highly competitive conditions. In addition, the Company was able to accomplish these results while preserving its continued commitment to delivering low price leadership to its customers in all markets. During 1998, the Company complimented its guarantee of low price leadership with increased variety and selection, which not only addressed the demands of its customers but also helped to boost operating profits. Finally, the Company's continued focus on gaining operating efficiencies and increased productivity through its low cost structure rounded out the completion of Food Lion's most successful year. During 1998, the Company opened 79 new stores and closed 29 existing stores (including 17 relocations). As a result, at the end of 1998, the Company operated 1,207 stores compared with 1,157 stores in operation at the end of 1997. The Company renovated 141 existing stores in 1998. Sales Sales were $10.2 billion for the 52 weeks of fiscal 1998 compared with $10.2 billion during the 53 week period of fiscal 1997, and $9.0 billion for the 52 week period in 1996, resulting in annual increases of 0.2%, 13.2% and 9.7%, respectively. The Company's 1998 total sales are not comparable to 1997 total sales due to (1) the extra week included in fiscal 1997, (2) $249.1 million in prior year sales from stores in the Southwest market which closed during the fourth quarter of 1997 and (3) a change in the method of collecting sales tax on products discounted through the MVP customer ("MVP") and Preferred customer ("PCC") loyalty card programs. On a comparable basis, total sales increased 6.1% for fiscal 1998. In 1998, same store sales increased 2.6% as compared with increases of 0.2% for 1997 and 5.7% for 1996. Beginning in May 1998, after receiving permission from all state departments of revenue, the Company began collecting sales tax on the net sales price, after considering the MVP/PCC discount granted, rather than the full retail price of the MVP/PCC items. The related impact to fiscal 1998 was to reduce reported sales by approximately $127.1 million. This change does not impact the same store sales calculation or the Company's net income, as gross profit and expense dollars are the same under either method. The only difference is that under the new method the discount granted is reflected in sales as opposed to in cost of goods sold under the original method. The following table illustrates the impact of the change. Fiscal 1998 1998 1998 Dollars % % Dollars Comparable Comparable As to 1996 - As to 1996 - Reported 1997 Reported 1997 (Dollars and shares (New (Original (New (Original in thousands) Method) Method) Method) Method) Net sales $10,219,474 $ 10,346,538 100.00% 100.00% Cost of goods sold 7,925,844 8,052,908 77.56 77.83 Gross profit 2,293,630 2,293,630 22.44 22.17 Selling and administrative 1,534,293 1,534,293 15.01 14.83 expenses Depreciation and 236,021 236,021 2.31 2.28 amortization Operating income 523,316 523,316 5.12 5.06 Interest expense 95,334 95,334 .93 .92 Income before income 427,982 427,982 4.19 4.14 taxes Provision for income 155,397 155,397 1.52 1.51 taxes Net income $272,585 $272,585 2.67% 2.63% Basic and diluted earnings per share $.57 $.57 Weighted average number of shares 478,084 478,084 outstanding During 1998, the sales increase of 6.1% (on a comparable basis) resulted from the Company's new store additions and renovations of existing stores, as well as category management and marketing initiatives. The Company opened 79 new stores in 1998 and closed 29 existing stores (including 17 relocations), a net increase of 50 stores. Store renovations also increased sales, as 141 existing stores were renovated to update equipment and properties, and in many locations, to add square footage and deli/bakery departments. The Company's stores currently have an average age of only five years, compared with an industry average of seven years, as a result of its continued aggressive new store construction and renovation program. The Company continued to enhance the Food Lion MVP Customer card program and implemented the Kash n' Karry Preferred Customer Club card (PCC) program in 1998. These programs, which are primarily vendor supported, reward customers with additional discounts on the Company's everyday low prices on a selection of featured items. Up to 1,500 items are highlighted on the programs each week. In 1998, the Company created special promotions for customer card users, including the MVP Million Dollar Giveaway and direct mail offers, which have resulted in increased card usage and higher sales. During 1999, the Company plans increased usage of the expansive MVP and PCC customer databases to support targeted marketing efforts. The 1999 business plan currently includes opening 80 new stores (approximately 20 of these will replace older stores) and renovating approximately 140 existing stores. The Company is committed to a growth strategy, which includes plans to open new stores and strengthen existing stores through renovations in order to maintain a competitive edge in its current markets. In addition, the Company will continue to evaluate its store base and may close stores to take advantage of relocation opportunities or to eliminate operating losses in underperforming stores. The Company's growth strategy is flexible, and the Company will listen to its consumers and revise its strategy accordingly in an effort to meet current and future customer needs. Gross Profit In fiscal 1998, gross profit was 22.44% (22.17% adjusted to the original method of reporting sales tax) of sales compared with 21.76% and 21.31% in 1997 and 1996, respectively. The gross profit increase of 0.68% (0.41% increase on a comparable basis) of sales in 1998 is attributable to a continued focus on category management initiatives (merchandising stores for maximum performance). Product analysis, selection and strategic pricing all contributed to gross profit increases in the grocery, perishable and meat departments in 1998. In addition, gross profits were positively impacted by the Company's private label sales, which currently represent 16.0% of consolidated total sales. The LIFO charge, as a percentage of sales, decreased gross profit by 0.24% in 1998, 0.10% in 1997 and 0.11% in 1996. Current year inflation totaled 2.3% due primarily to the increase in the cost of cigarettes imposed by tobacco manufacturers during 1998. Cigarette costs increased $6.35 per carton, or 49% during 1998. Excluding cigarettes, all other merchandise categories experienced little or no inflation. The 1998 inflation rate excluding the cigarette cost increase was 0.7%. Selling and Administrative Expenses Selling and administrative expenses as a percentage of sales were 15.01% in 1998 (14.83% adjusted to the original method of reporting sales tax) and 14.88% and 14.72% in 1997 and 1996, respectively. The comparable decrease is attributable to decreases in 1) administrative costs, due to having Kash n' Karry fully integrated for the entire year of 1998 compared with only five months in 1997, and 2) a decrease in advertising costs as the Company increased the number of vendor-supported marketing programs. These decreases were partially offset by an increase in store utilities and an increase in store rent expense related primarily to 72 new leased stores and expansions of existing stores. The Company believes it is important to maintain flexibility with regard to expense levels and will take advantage of additional opportunities to grow sales profitably through new marketing and customer service programs. The Company expects to continue to perform at an expense ratio in the range of 15.0% - 15.5%. Food Lion's 1998 business plan reflected the Company's commitment to maintaining its existing store base as 141 store renovations were completed in 1998 compared with 99 in 1997 and 124 in 1996. The Company anticipates completing approximately 140 renovations to existing stores in 1999. Store renovations result in an average sales increase of 10% - 20% in the year following the renovation. The Company plans to continue an aggressive renovation program to maintain a modern and convenient shopping environment for customers in all stores. Store Closings With over 1,200 retail outlets, the Company must constantly evaluate its store base, and make decisions about store openings and closings that are in the best interest of shareholders. These store closings consist of both relocations, where a new store is opened to replace an older location in the same neighborhood, and the closing of stores due to poor performance. During 1998, 29 stores were closed in the normal course of business as discussed above. The average cost to close a store as part of the Company's normal business strategy is approximately $500,000 to $1,000,000. During 1998, the Company recorded $15.2 million in store closing costs (included in Selling and administrative expenses on the Company's Consolidated Statement of Income), related to planned store closings (see Note 15 to the consolidated financial statements). In 1997, the Company recorded a pre-tax charge of $116.5 million related to the divestiture of its Southwest market. This charge included the write-down of store and distribution center assets to reflect estimated realizable values ($92.1 million), the present value (calculated by applying an 8% discount rate) of remaining rent payments on leased stores ($17.1 million), and other costs associated with the store closings such as legal fees, commissions, severance costs, and certain other costs to sell the related assets and/or expenses arising from contractual obligations ($7.3 million). The Southwest market had negatively impacted the Company's operating results by approximately $0.01 per share annually. Significant cash outflows associated with store closings relate to on going rent payments on leased stores. These rent payments are funded by income from operations. The projected rental payments on closed stores are included in Note 9 to the consolidated financial statements. At the end of each year, the value of all owned assets related to store properties remaining to be disposed is reviewed in conjunction with the Company's compliance with Financial Accounting Standards Board Statement no. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("FASB no. 121"). No adjustments were recorded during 1998. Interest Expense Interest expense as a percent of sales was 0.93% in 1998 and 1.13% and 0.89% in 1997 and 1996, respectively. During 1998, the Company reached an agreement with the U.S. Internal Revenue Service ("IRS") regarding its examination of tax years 1991-1994. As a result of this agreement, the Company received a refund related to tax paid in previous years. The refund included $7.2 million in tax (recorded during the year as a reduction to the Provision for Income Taxes) and related interest income of $7.6 million (recorded during the year as a reduction to Interest expense). In addition, Interest expense was impacted by (1) the conversion of the Company's convertible subordinated debentures in 1998, and (2) the pre-payment of $50 million in note purchase agreements in late 1997. Depreciation Expense Depreciation expense as a percent of sales was 2.31% in 1998 compared with 2.16% in 1997 and 1.84% in 1996. Depreciation increased in 1998 due to an extensive capital expenditure program totaling $356.1 million. During 1998, the Company constructed and equipped 72 leased stores and seven owned stores, and renovated 141 existing stores. During 1997, the Company constructed and equipped 61 leased stores and three owned stores, and renovated 99 existing stores. In 1996, the Company equipped 55 leased stores and renovated 124 existing stores. LIFO The LIFO reserve increased $24.7 million in 1998 as compared with increases of $10.0 million in 1997 and $10.3 million in 1996. The 1998 increase was primarily due to a significant increase in cigarette costs (see discussion above). In 1997, increased coffee, paper and cigarette costs were the primary contributors to the LIFO increase, while in 1996, the increased costs of grocery, frozen food and dairy items supported the LIFO increase. Income Taxes The provision for income taxes was $155.4 million in 1998, $110.1 million in 1997 and $137.6 million in 1996. The Company's effective tax rate was 36.3% in 1998 and 39.0% in 1997 and 1996. The effective tax rate for 1998 was reduced by a $7.2 million tax refund received from the IRS (see discussion above under Interest Expense). The Company expects its continuing effective tax rate to be 38%. Liquidity and Capital Resources Cash provided by operating activities was $441.1 million in 1998 compared with $354.9 million in 1997 and $428.3 million in 1996. The increase in 1998 was due to improved earnings, an increase in inventory levels, net of trade payables, an increase in accrued expenses, and a reduction in deferred taxes. The increase in 1997 over the prior years was due primarily to a decrease in inventory levels resulting from continued inventory management efforts, the consolidation of the Kash n' Karry warehouse operation into Food Lion's Plant City, Florida distribution center, and closing the Southwest distribution center. The decrease in 1996 from 1995 was primarily due to increased inventory levels, net of trade payables, resulting from the Kash n' Karry acquisition and increased receivables. Cash flows used in investing activities decreased to $246.2 million in 1998 compared with $313.6 million in 1997 and $356.0 million in 1996. The decrease in investing activities in 1998 compared to 1997 is the result of an increase in the proceeds received from the disposition of the assets related to stores in the Southwest market. The decrease in investing activities in 1997 compared to 1996 reflects the investment in Kash n' Karry during 1996, partially offset by an increase in capital expenditures in 1997. In December of 1996, Food Lion purchased the stock of Kash n' Karry for $121.6 million. Capital expenditures increased to $356.1 million in 1998, compared with $346.1 million in 1997 and $283.6 million in 1996. During 1998, the Company equipped a total of 79 new stores and renovated 141 existing stores (including expanding square footage and adding deli/bakeries in many of these stores). During 1997, the Company equipped a total of 64 new stores and renovated 99 existing stores (including expanding square footage and adding deli/bakeries in most of these stores). During 1996, the Company equipped a total of 55 new stores and renovated 124 existing stores (including expansions in the majority of these stores) and implemented debit/credit and on-line communication technology in its Food Lion stores. Total store square footage increased 7.7% from 36.1 million in 1997 to 38.9 million in 1998. The total distribution space operated by the Company was 8.7 million square feet at the end of both 1998 and 1997, compared with 10.7 million at the end of 1996. The decrease in distribution space from 1996 to 1997 was the result of closing the distribution center in the Company's Southwest market, and the consolidation of the Kash n' Karry warehouse operation into Food Lion's Plant City, Florida distribution center. In 1999, the Company plans to continue its three-fold growth plan, which focuses on a combination of new store openings and renovations, as well as growth through acquisitions, as appropriate. The Company anticipates opening 80 new stores (20 of these will replace older stores) and renovating approximately 140 stores in 1999. The Company anticipates that 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 1999. Capital expenditures for 1999 are expected to total $390 million, which includes approximately $160 million for store expansion and new store construction and $160 million to equip new and renovated stores. The Company plans to finance capital expenditures for 1999 through funds generated from operations and existing bank and credit lines. 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. Cash flows used in financing activities increased to $164.6 million in 1998, compared with $163.4 million in 1997 and cash provided from financing of $73.0 in 1996. The increase in 1998 was primarily the result of shares purchased under the Company's share repurchase plan as described below, partially offset by a decrease in net payments on debt. The increase in cash used in 1997 compared to 1996 was related primarily to principal payments on debt. Under the Company's current share repurchase program, which expires in May 1999, the Company may repurchase up to $100.0 million in outstanding securities. The share repurchase program allows the Company the flexibility to repurchase securities as it deems appropriate in the best interests of its shareholders and in consideration of all other possible uses of funds generated by operations. During 1998, the Company expended $50.2 million (including commissions) for the purchase of Class A and Class B shares, as part of its repurchase program compared to $3.0 million in 1997, and $44.3 million in 1996. See table below. Class A Class B 1998 Shares purchased 3,085,700 1,897,000 Average purchase $10.37 $ 9.60 price Total purchased $31,998,709 $18,211,200 1997 Shares purchased 235,000 175,000 Average purchase $ 7.34 $ 7.06 price Total purchased $1,724,900 $1,235,000 1996 Shares purchased 3,047,000 3,722,250 Average purchase $ 5.89 $ 7.09 price Total purchased $17,946,830 $26,390,753 Additional purchases may be made in the open market under the current program as deemed in the best interest of shareholders. Debt In 1998, the Company redeemed its outstanding convertible subordinated debentures totaling $113.8 million through either (1) payment to the bond holders at 101% of the principal together with accrued interest or (2) conversion of the debentures into shares of the Company's Class A Stock at $7.90 per share. Most bond holders elected conversion resulting in the issuance of 13.9 million shares of Class A Common Stock with $3.8 million in principal, premium and accrued interest paid to the remaining bond holders. The conversion election had no impact on the Company's basic or diluted earnings per share. The Company currently has outstanding medium-term notes of $150.3 million due from 1999 to 2006 at interest rates of 8.32% to 8.73%. Additionally, the Company has long-term debt securities of $300.0 million of which $150.0 million is due 2007 at 7.55% and $150.0 million matures in 2027 at an interest rate of 8.05%. In December 1998, the Company replaced its $700.0 million revolving credit facility. The current credit facility with a syndicate of commercial banks provides for $625.0 million in committed lines of credit, which will expire on December 13, 1999. As of January 2, 1999, the Company had no outstanding borrowings related to this credit facility. The Company also maintains additional committed lines of credit totaling $20.0 million, which are available when needed. The Company is not required to maintain compensating balances related to these lines of credit, and borrowings may occur periodically. As of January 2, 1999, the Company had outstanding borrowings of $20.0 million. During 1998, the Company had average borrowings of $100,000 at a daily weighted average interest rate of 5.37% with a maximum amount outstanding of $20.0 million. The Company has a $250.0 million commercial paper program, of which no borrowings were outstanding at January 2, 1999, January 3, 1998, and December 28, 1996, nor used during these years. Finally, the Company has periodic short-term borrowings under informal credit arrangements which are available to the Company at the discretion of the lender (see table below): Informal Credit Arrangements (Dollars in millions) 1998 1997 1996 Outstanding borrowings $41.0 $80.0 $0.0 at year end Average borrowings 12.2 8.2 3.0 Maximum amount 100.0 80.0 55.0 outstanding Daily weighted average 5.47% 5.76% 5.48% interest rate Self Insurance The Company is self-insured for its workers' compensation, general liability and vehicle accident claims. The Company establishes reserves based on an independent actuary's valuation of open claims reported and an estimate of claims incurred but not yet reported. It is possible that the final resolution of some of these claims may require significant expenditures by the Company in excess of its existing reserves, over an extended period of time, and in a range of amounts that cannot be reasonably estimated. Impact of Inflation During 1998, the inflation rate on merchandise purchases was 2.3%. Inventory and labor, the Company's primary costs, increase with inflation and, where possible, will be recovered through operating efficiencies and gross profits. Year 2000 In 1996, the Company began evaluating both its information technology systems, and other systems and equipment in order to identify and adjust date sensitive systems for Year 2000 compliance. As part of this undertaking, the Company created a Year 2000 Project Team to address the issues related to Year 2000 compliance. The Year 2000 Team is led by representatives from the Company's Information Technology department and includes key representatives from other areas of the Company. The Year 2000 Team has developed a three-phase plan to identify and remediate all existing systems to ensure the Company's readiness for the century change. These phases consist of assessment, system remediation and integration testing. Project Phase One primarily focused on assessing the business impact of the century change on the Company's operating environment. This assessment included information technology systems, non-information technology systems and supply chain readiness. The assessment was conducted based on an analysis of the Company's individual business processes and the potential material risks associated with the Company's operations. Project Phase Two primarily focused on code and system conversion (remediation) of date impacted applications and systems. Remediation or replacement was conducted for all information technology and embedded systems impacted by Year 2000 issues. Project Phase Three involves the execution of various testing protocol, analysis of test results and the development of contingency plans for each of the impacted systems. The Company has completed Project Phase One for all systems and Project Phase Two for all systems not scheduled for replacement. The Company expects to complete installation of certain replacement systems impacted by Year 2000 issues by mid-1999 and has included the cost of these systems in its estimates for the Year 2000 Project. The Company has commenced Project Phase Three, which includes testing and validation of impacted systems, and anticipates this phase will be substantially complete by mid-1999. However, the Company anticipates testing and validation procedures, as well as development of contingency plans, will continue throughout 1999. Except for the cost of replacement systems, the Company will expense the cost of the Year 2000 Project as incurred. The Company is funding the costs associated with the Year 2000 Project through operating cash flows and has not deferred any Information Technology projects in order to complete the Year 2000 Project. The Company estimates the total incremental cost of the Year 2000 Project is approximately $17.0 million which includes equipment and software replacements, reprogramming, systems testing, and outside consulting services. Approximately $4.0 million of the total cost for the Year 2000 Project is related to reprogramming or remediation of existing software and new systems, while the remaining cost of approximately $13.0 million is related to the implementation of certain replacement systems. At the end of fiscal year 1998, the Company had incurred approximately $8.9 million of the total cost of the Year 2000 project of which $2.8 million had been expensed as incurred and $6.1 million had been capitalized for replacement systems. The Company has not materially increased the number of its employees in order to complete the Year 2000 Project. Although the Company has utilized external contractors in various phases of the Year 2000 Project, the Company does not consider any of these contracts or relationships material for the completion of the Year 2000 Project. The Company has assigned certain employees from its Information Technology department to the Year 2000 Project (averaging approximately 20 employees during Phase One and 22 employees during Phase Two of the project and less than 15 employees from its user departments). As discussed above, the Company has created a Year 2000 Project Team composed of representatives from all areas of the Company. Members of the Year 2000 Project Team have completed the tasks associated with the Year 2000 Project as part of their normal duties. Although the Company has discussed its Year 2000 Project with certain of its consultants third parties were not retained to perform independent verification and validation processes regarding the risks and cost estimates of the Year 2000 Project. As part of the Year 2000 Project, the Company has identified relationships with third parties, including vendors, suppliers, and service providers, which the Company believes are critical to its business operations. Although the Company considered several factors in identifying these critical relationships, the Company has concentrated its communication efforts as discussed below with suppliers and vendors from whom the company makes annual purchases in excess of $10 million. The Company is in the process of communicating with these third parties through questionnaires, letters and interviews in an effort to determine the extent to which they are addressing their Year 2000 compliance issues. Based on the responses received to date from these efforts, the Company understands that all critical suppliers have indicated they anticipate being Year 2000 compliant. A small percentage of these critical suppliers have indicated they are Year 2000 compliant, however, a majority have indicated they are still addressing Year 2000 issues. Where appropriate, the Company has developed strategies to work with its suppliers to verify Year 2000 readiness and create contingency plans as discussed below. The Company has identified its operational and supply chain activities as its most critical functions potentially impacted by Year 2000 issues. The Company will conduct testing within a parallel operating environment created to simulate business processes and integrated systems functionality, including front-end operations and supply chain activities. Validation of integrated systems functionality will be performed by comparing test results to actual processes and data. The Company cannot assure that there will not be an adverse impact on the Company if third parties do not appropriately address their Year 2000 issues in a timely manner. Such other possible consequences include, but are not limited to, loss of communications with stores, loss of electric power, and an inability to process customer transactions or otherwise engage in similar normal business activities. As discussed below, the Company has developed contingency plans with its critical suppliers in order to arrange for the timely delivery of inventory. The Company will continue to communicate with, assess and monitor the progress of these third parties in resolving Year 2000 issues. Although the Company does not believe the actual impact of any system failures related to the century change will be material, the Company has developed various contingency plans with its critical suppliers and certain other vendors in order to assure the timely delivery of inventory and prepare for normal business activities following the century change. In the event the Company or a key supplier is adversely impacted by the century change, the Company will implement its contingency plan for such situation. These plans include alternate means of communication with suppliers, such as facsimile, telephone and hand delivery, manual operation of certain systems, as well as the implementation of certain established ordering procedures. Under the terms of these established ordering procedures, the Company's critical suppliers will provide inventory to the Company based on historical ordering patterns. These suppliers will also substitute products and adjust inventory levels of substitute items based on the availability of certain products. The Company will continue to develop and finalize the implementation of its contingency plans with third parties throughout 1999. The projections and project completion dates are based on management's best estimates and may be updated from time to time as additional information becomes available. This section discussing Year 2000 issues contains forward-looking statements (refer to "Other" below which addresses forward-looking statements made by the Company). Other: Information provided by the Company, including written or oral statements made by its representatives, may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as expansion and growth of the Company's business, future capital expenditures and the Company's business strategy, are forward- looking statements. In reviewing such information, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking statements. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. Many of these factors have previously been identified in filings or statements made by or on behalf of the Company, including filings with the Securities and Exchange Commission of Forms 10-Q, 10-K and 8-K. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking statements include: changes in the general economy or in the Company's primary markets, changes in consumer spending, competitive factors, the nature and extent of continued consolidation in the industry, changes in the rate of inflation, changes in state or federal legislation or regulation, adverse determinations with respect to litigation or other claims, inability to develop new stores or complete remodels as rapidly as planned, stability of product costs -- supply or quality control problems with the Company's vendors, and issues and uncertainties related to Year 2000 detailed from time-to-time in the Company's filings with the Securities and Exchange Commission. EX-27 9
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 YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 123,592 0 199,101 0 1,103,635 1,512,277 3,034,114 1,137,034 3,675,961 1,040,417 429,763 0 0 299,693 1,299,229 3,675,961 10,219,474 10,219,474 7,925,844 7,925,844 0 0 95,334 427,982 155,397 272,585 0 0 0 272,585 .57 .57 At the end of 1998, the Company began reclassing bank overdrafts from Cash to Accounts Payable.
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