-----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, S2EUYNeF4OISCkPobeEFoV52pOl/MT7Sp92DMf/fSyKy7ceRfycFyPrVLLMThdzs VvgF22VJcUAfR+LcoHTaHw== 0000037912-99-000016.txt : 19990802 0000037912-99-000016.hdr.sgml : 19990802 ACCESSION NUMBER: 0000037912-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990619 FILED AS OF DATE: 19990730 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: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06080 FILM NUMBER: 99673818 BUSINESS ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 BUSINESS PHONE: 7046338250 MAIL ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 FORMER COMPANY: FORMER CONFORMED NAME: FOOD TOWN STORES INC DATE OF NAME CHANGE: 19830510 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 19, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........to........... Commission File number 0-6080 FOOD LION, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0660192 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1330, 2110 Executive Drive, Salisbury, NC 28145-1330 (Address of principal executive office) (Zip Code) (704) 633-8250 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Outstanding shares of common stock of the Registrant as of July 23, 1999. Class A Common Stock 242,890,915 Class B Common Stock 227,189,964 Page 1 of 45 The Exhibit index is located on page 21. FOOD LION, INC. INDEX TO FORM 10-Q June 19, 1999 Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Income for the 12 and 24 weeks ended June 19, 1999 and June 20, 1998 3-4 Consolidated Balance Sheets as of June 19, 1999, January 2, 1999 and June 20, 1998 5 Consolidated Statements of Cash Flows for 24 weeks ended June 19, 1999 and June 20, 1998 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17 Part II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Exhibit Index 21 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 12 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands except per share data) June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998 % % Net sales $2,509,240 $2,353,260 100.00 100.00 Cost of goods sold 1,933,085 1,826,657 77.04 77.62 Gross profit 576,155 526,603 22.96 22.38 Selling and administrative expenses 380,811 352,609 15.18 14.98 Depreciation and amortization 59,717 54,012 2.38 2.30 Operating income 135,627 119,982 5.40 5.10 Interest expense 25,384 23,154 1.01 0.99 Income before income taxes 110,243 96,828 4.39 4.11 Provision for income taxes 41,892 36,795 1.67 1.56 Net income $ 68,351 $ 60,033 2.72 2.55 Basic and diluted earnings per share $ 0.14 $ 0.13 Dividends per share $ 0.04 $ 0.04 Weighted average number of shares outstanding: Class A 245,114,162 244,777,891 Class B 229,261,156 232,727,364 Total 474,375,318 477,505,255
-3- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 24 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands except per share data) June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998 % % Net sales $4,916,286 $4,658,733 100.00 100.00 Cost of goods sold 3,789,947 3,626,772 77.09 77.85 Gross profit 1,126,339 1,031,961 22.91 22.15 Selling and administrative expenses 754,653 688,904 15.36 14.79 Depreciation and amortization 117,176 106,430 2.38 2.28 Operating income 254,510 236,627 5.17 5.08 Interest expense 49,737 50,768 1.01 1.09 Income before income taxes 204,773 185,859 4.16 3.99 Provision for income taxes 77,814 70,592 1.58 1.52 Net income $ 126,959 $ 115,267 2.58 2.47 Basic and diluted earnings per share $ 0.27 $ 0.24 Dividends per share $ 0.08 $ 0.07 Weighted average number of shares outstanding: Class A 246,510,337 240,556,329 Class B 230,045,760 232,727,364 Total 476,556,097 473,283,693
-4- FOOD LION, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) June 19, 1999 January 2, 1999 June 19, 1998 Assets Current assets: Cash and cash equivalents $ 89,822 $ 123,592 $ 94,697 Receivables 167,358 199,101 157,905 Inventories 1,104,720 1,103,635 1,000,916 Prepaid expenses 27,215 20,552 48,562 Deferred tax asset 65,397 65,397 63,123 Total current assets 1,454,512 1,512,277 1,365,203 Property, at cost, less accumulated depreciation 1,968,728 1,897,080 1,832,946 Deferred tax asset 4,707 4,707 51,980 Intangible assets 267,193 258,402 267,046 Other assets 3,346 3,495 4,069 Total assets $3,698,486 $3,675,961 $3,521,244 Liabilities and Shareholders' Equity Current Liabilities: Short-term borrowings $ 62,000 $ 61,000 $ - Accounts payable, trade 559,399 545,015 557,580 Accrued expenses 353,137 360,105 321,621 Capital lease obligations - current 22,531 21,940 21,229 Long term debt - current 42,292 42,518 2,646 Other liabilities - current 11,272 9,839 9,911 Total current liabilities 1,050,631 1,040,417 912,987 Long-term debt 428,641 429,763 470,797 Capital lease obligations 492,327 492,660 491,178 Other liabilities 109,576 114,199 120,686 Total liabilities 2,081,175 2,077,039 1,995,648 Shareholders' Equity: Class A non-voting common stock, $.50 par value 121,813 123,946 125,299 Class B voting common stock, $.50 par value 114,039 115,415 116,364 Additional capital - 60,332 105,999 Retained earnings 1,381,459 1,299,229 1,177,934 Total shareholders' equity 1,617,311 1,598,922 1,525,596 Total liabilities and shareholders' equity $3,698,486 $3,675,961 $3,521,244
-5- FOOD LION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the 24 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands) 24 Weeks June 19, 1999 June 20,1998 Cash flows from operating activities Net income $126,959 $115,267 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 117,176 106,430 Gain on disposals of property and capital lease terminations (1,571) (1,841) Changes in operating assets and liabilities: Receivables 31,743 8,885 Inventories (1,085) (18,172) Prepaid expenses (6,663) (26,048) Other assets 149 1,651 Accounts payable and accrued expenses 7,416 30,121 Other liabilities (3,190) (4,039) Total adjustments 143,975 96,987 Net cash provided by operating activities 270,934 212,254 Cash flows from investing activities Capital expenditures (185,851) (141,878) Proceeds from disposal of property 1,279 66,895 Net cash used in investing activities (184,572) ( 74,983) Cash flows from financing activities Net proceeds (payments) under short-term borrowings 1,000 (80,000) Principal payments on long-term debt (1,348) (4,992) Principal payments under capital lease obligations (11,214) (17,621) Dividends paid (39,884) (35,248) Repurchase of common stock (69,546) - Proceeds from issuance of common stock 860 1,947 Net cash used in financing activities (120,132) (135,914) Net (decrease) increase in cash and cash equivalents (33,770) 1,357 Cash and cash equivalents at beginning of period 123,592 93,340 Cash and cash equivalents at end of period $ 89,822 $ 94,697 -6- Notes to Consolidated Financial Statements (Dollars in thousands) 1) Basis of Presentation: The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures normally required by generally accepted accounting principles or those normally made in the Annual Report on Form 10-K of Food Lion, Inc. (the "Company"). Accordingly, the reader of this Form 10-Q should refer to the Company's Form 10-K for the year ended January 2, 1999 for further information. The financial information has been prepared in accordance with the Company's customary accounting practices and has not been audited. In the opinion of management, the financial information includes all adjustments consisting of normal recurring adjustments necessary for a fair presentation of interim results. 2) Supplemental Disclosure of Cash Flow Information: Selected cash payments and non-cash activities during the period were as follows: June 19, 1999 June 20, 1998 Cash payments for income taxes $ 86,923 $93,273 Cash payments for interest, net of amounts capitalized 51,332 52,952 Non-cash investing and financing activities: Capitalized lease obligations incurred for store properties 28,878 31,975 Capitalized lease obligations terminated for store properties 17,406 12,302 Conversion of long-term debt to stock 0 110,445 The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. -7- 3) Inventories Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first-out(LIFO) method comprised approximately 85% and 84% of inventories as of June 19, 1999 and June 20, 1998, 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 $141.5 million and $119.9 million greater as of June 19, 1999 and June 20, 1998, respectively. Application of the LIFO method resulted in increases in the cost of goods sold of $2.4 million and $5.5 million for the 24 weeks ended June 19, 1999 and June 20, 1998, respectively. 4) Reclassification Certain financial statement items have been reclassified to conform to the current year's format. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS (12 and 24 weeks ended June 19, 1999 compared to 12 and 24 weeks ended June 20, 1998) The Company recorded earnings for the second quarter and year to date for 1999 of $68.4 million and $127.0 million, respectively, resulting in increases of 13.9% and 10.1% over the corresponding periods of 1998. The second quarter of 1999 includes an after-tax charge of $2 million related to executive post-employment benefits (see discussion below). Excluding this charge, earnings would have been $70.4 million for the second quarter and $129.0 million year to date, representing increases of 17.2% and 11.9% over the respective periods of 1998. Sales for the second quarter and year to date of 1999 were $2.5 billion and $4.9 billion, respectively, resulting in increases of 6.6% and 5.5% over the corresponding periods of 1998. The Company's second quarter 1999 sales are not comparable to 1998 due to a change in the method of collecting sales tax on products discounted through the MVP customer ("MVP") and Preferred Customer Club ("PCC") loyalty card programs (see discussion below). On a comparable basis, 1999 second quarter and year to date sales increased 7.5% and 7.0% over the corresponding periods of last year. Same store sales increased 2.4% for the second quarter. 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 the second quarter and year to date of 1999 was to reduce reported sales by approximately $20.4 million and $70.4 million, respectively. 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 rather than cost of goods sold under the original method. The following table illustrates the impact of the change. -9- Second Quarter of 1999 1999 Dollars % 1999 Comparable % Comparable Dollars to As to As Qtr. 2- Reported Qtr. 2- Reported 1998 1998 (Dollars and (New (Original (New (Original shares in Method) Method) Method) Method) thousands) Net sales $ 2,509,240 $2,529,658 100.00% 100.00% Cost of goods sold 1,933,085 1,953,503 77.04 77.22 Gross profit 576,155 576,155 22.96 22.78 Selling and administrative expenses 380,811 380,811 15.18 15.05 Depreciation and 59,717 59,717 2.38 2.37 amortization Operating income 135,627 135,627 5.40 5.36 Interest expense 25,384 25,384 1.01 1.00 Income before 110,243 110,243 4.39 4.36 income taxes Provision for 41,892 41,892 1.67 1.66 income taxes Net income $ 68,351 $68,351 2.72% 2.72% Basic and diluted earnings per share $ 0.14 $ 0.14 Weighted average number of shares 474,375 474,375 outstanding The Company's 1999 business plan includes opening 94 new stores, closing 35 existing stores (approximately 20 of these closings will be relocations) and renovating approximately 140 existing stores. With this growth plan, the Company anticipates a net increase in store square footage of approximately 8.5% in 1999. As of June 19, 1999, the Company had opened 53 new stores, closed 13 stores (of which 12 were relocations), and completed renovations of 52 existing stores. Gross profits of 22.96% for the second quarter and 22.91% year to date (or 22.78% and 22.59%, respectively, adjusted to the original method of reporting sales tax) compared favorably against prior year gross profits of 22.38% of sales in the second quarter and 22.15% of sales year to date. The increase in gross profit is due to continued category management initiatives particularly in the perishable and non-grocery categories. In addition, The Company benefited from continued efficient warehouse operations which led to lower operating costs. The second quarter LIFO charge was $1 million. The Company's internal testing for the second quarter indicated minimal inflation; however, given the difficulty in predicting inflationary trends, the Company has provided a $2.4 million LIFO provision through the second quarter of 1999. -10- For the second quarter of 1999, selling and administrative expenses were $380.8 million or 15.18% of sales (15.05% adjusted for the original method of reporting sales tax) as compared to $352.6 million or 14.98% of sales in the corresponding period of the prior year. Excluding the one-time charge of $3.3 million (pre tax) related to the executive post-employment benefits (see discussion below), selling and administrative expenses would have been 15.05% of sales for the second quarter (14.93% adjusted for the original method of reporting sales tax). The Company posted an improvement in selling and administrative expenses on a comparable basis despite continued increases in labor related costs due to the low unemployment rate in the Southeast market, and an increase in occupancy costs resulting from the Company's new store opening and renovation program. This improvement was accomplished through strong sales posted during the quarter and good cost control across all remaining expense categories. During the second quarter, the Company recorded a $3.3 million pre-tax charge ($2 million after-tax) related to executive post-employment benefits. These benefits relate to the resignation of the Company's former Senior Vice President of Merchandising and finalization of amounts due upon retirement of the Company's former President and Chief Executive Officer ("CEO"). These costs are included in selling and administrative expenses. Depreciation and amortization of $59.7 million was 2.38% of sales compared to 2.30% of sales in the second quarter of 1998. Year to date depreciation and amortization was $117.2 million or 2.38% of sales compared to 2.28% of sales for the same period of the prior year. The quarter and year to date increases are primarily due to leasehold improvements and equipment purchases for new stores and renovations. Interest expense of $25.4 million for the second quarter of 1999 and $49.7 million year to date compares to $23.2 million and $50.8 million for the respective periods of 1998 due to higher interest expense on store capital leases. Net income for the quarter was $68.4 million or 2.72% of sales as compared to $60.0 million or 2.55% of sales in the second quarter of the prior year. Basic and diluted earnings per share were $0.14 for the second quarter of 1999 compared to $0.13 last year. Excluding the one-time after-tax charge related to post-employment benefits of $2.0 million (see discussion above), net income for the second quarter of 1999 would have been $70.4 million or 2.80% of sales, and basic and diluted earnings per share would have been $0.15. -11- Store Closing Costs (Dollars in millions) Reduction of Asset Lease Accrued Values Liabilities Expenses Total Balance at March 27, 1999 $15.4 $110.5 $1.2 $127.1 Additions .6 3.8 1.6 6.0 Reductions 0.0 -3.6 -2.7 -6.3 Balance at June 19, 1999 $16.0 $110.7 $.1 $126.8 The Company recorded $3.5 million in store closing costs (included in Selling and Administrative Expenses on the Company's Consolidated Statement of Income) during the second quarter of 1999. These costs are included in the "Additions" line in the table above. Significant additions also include $2.1 million related to 12 acquired stores that will not re-open as Food Lion locations. The costs associated with closing these stores were charged against Goodwill. Reductions include fees totaling $1.9 million related to the termination of three store leases. The remaining $4.4 million relates to on-going rent payments made on lease obligations and payment of expenses arising from contractual obligations. During the second quarter of 1999, the Company closed 8 stores in the normal course of business, all 8 stores were relocated. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During the second quarter of 1999, the Company completed disposition efforts related to 4 closed stores. At the end of the second quarter of 1999 the Company had $126.8 million in store closing costs related to 142 stores (137 leased and 5 owned) and one distribution center. Disposition efforts on the properties related to these facilities (leases, equipment, and buildings) will continue until all related properties are disposed. Liquidity and Capital Resources Cash provided by operating activities totaled $270.9 million for the 24 weeks ended June 19, 1999, compared with $212.3 million for the same period last year. The increase was primarily due to an increase in operating income and improved receivable management. Capital expenditures totaled $186 million for the 24 weeks ended June 19, 1999, compared with $142 million for the same period in 1998. The Company opened 53 new stores, closed 13 stores (including 12 relocations), and completed the renovation of 52 existing stores through the end of the second quarter of -12- 1999. Food Lion plans to open a total of 94 new stores in 1999 and renovate approximately 140 stores. The Company anticipates that the majority of the new stores will be opened under conventional leasing arrangements. Capital expenditures currently estimated for 1999 are $390 million. Capital expenditures for 1999 will be financed through funds generated from operations and existing bank and credit lines. The Company maintains the following bank and credit lines: $250.0 million commercial paper program under which no borrowings were outstanding during the first and second quarters of 1999 and 1998. A revolving credit facility with a syndicate of commercial banks providing $625.0 million in committed lines of credit which expires in December 1999. There were no outstanding borrowings as of the end of the second quarter of 1999 or 1998. Additional short-term 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 June 19, 1999, the outstanding borrowings from this line totaled $20 million. There were no outstanding borrowings as of June 20, 1998. During the second quarter of 1999, the Company had average borrowings of $8.04 million at a daily weighted average interest rate of 5.01% with a maximum amount outstanding of $20.0 million. Periodic short-term borrowings may be placed under informal credit arrangements, which are available to the Company at the discretion of the lender. Borrowings for the second quarter were as follows: Informal Credit Arrangements (Dollars in millions) 1999 1998 Outstanding borrowings at the end of the second quarter $42.0 $0.0 Average borrowings $26.8 $15.8 Maximum amount outstanding $105.0 $72.0 Daily weighted average interest rate 5.09% 5.62% -13- During the second quarter of 1999, the Company repurchased $69.5 million of Company stock, representing approximately 4.4 million Class A shares and approximately 2.8 million Class B shares. In July 1999, The Board of Directors approved a $100 million as the amount available for share repurchase going forward. Purchases of Class A and/or Class B Common Stock may be made in the open market, as deemed in the best interest of shareholders. 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. Installation of replacement systems impacted by Year 2000 issues is progressing with completion expected in fall, 1999. The Company 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, as well as development of contingency plans, will continue throughout 1999. -14- 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 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 the second quarter of fiscal 1999, the Company had incurred approximately $11 million of the total cost of the Year 2000 project of which $3.1 million had been expensed as incurred and $7.9 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, 22 employees during Phase Two, and 19 employees during Phase Three 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 continues to communicate 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 -15- Company understands that all critical suppliers have indicated they anticipate being Year 2000 compliant. A substantial percentage of these critical suppliers have indicated they are Year 2000 compliant while the remaining suppliers 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. -16- 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. -17- Part II OTHER INFORMATION Item 1. Legal Proceedings The Company has had no significant developments related to legal matters since the Item 1 disclosure included in the Company's Form 10Q filed May 5, 1999 for the quarter ended March 27, 1999. Item 2. Change in Securities This item is not applicable. Item 3. Defaults Upon Senior Securities This item is not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a). The Company held its Annual Meeting of Shareholders on May 6, 1999. (b). Not applicable (c). Matters voted upon at the meeting. Election of Directors For Withheld Broker Non-Votes Pierre-Olivier Beckers 195,608,525 4,848,998 30,372,841 Dr. J. Kelly Collamore 196,305,905 4,151,618 30,372,841 JC Coppieters`T Wallant 195,619,021 4,838,502 30,372,841 Pierre Dumont 195,615,704 4,841,819 30,372,841 William G. Ferguson 196,207,350 4,250,173 30,372,841 Dr.Bernard W. Franklin 196,221,278 4,236,245 30,372,841 Joseph C. Hall, Jr. 196,301,520 4,156,003 30,372,841 Margaret H. Kluttz 196,185,035 4,272,488 30,372,841 Bill McCanless 196,337,033 4,120,490 30,372,841 Dominique Raquez 195,620,013 4,837,510 30,372,841 Appointment of For Against Abstain Broker Independent Accountants Non-votes PricewaterhouseCoopers 199,865,894 380,374 211,255 30,372,841 LLP Item 5. Other Information This item is not applicable. -18- Item 6. Exhibits and Reports on Form 8-K (a). Exhibits 10A Employment Severance Agreement and Mutual Release dated April 14, 1999 between The Company and Pamela K. Kohn. 10B Employment Agreement dated April 7, 1999 between The Company and R. William McCanless. 27 Financial Data Schedule (b). The Company did not file a report on Form 8-K during the period ended June 19, 1999. -19- SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. FOOD LION, INC. Registrant DATE: July 29, 1999 BY:\s\Laura Kendall Laura Kendall Vice President of Finance Chief Financial Officer Principal Accounting Officer -20- Exhibit Index Exhibit Description Page No. 10A Employment Severance Agreement and Mutual Release dated April 14, 1999 between The Company and Pamela K. Kohn. 22-29 10B Employment Agreement dated April 7, 1999 between the Company and R. William McCanless. 30-43 27 Financial Data Schedule 44-45 -21- EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, the Consolidated Statements of Operations and the Consolidated Statement of Cash Flows and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS JAN-01-2000 JAN-03-1999 JUN-19-1999 89,822 0 167,358 0 1,104,720 1,454,512 3,179,646 1,210,918 3,698,486 1,050,631 428,641 0 0 235,852 1,381,459 3,698,486 4,916,286 4,916,286 3,789,947 3,789,947 0 0 49,737 204,773 77,814 126,959 0 0 0 126,959 .27 .27
EX-10.A 3 Exhibit 10A EMPLOYMENT SEVERANCE AGREEMENT AND MUTUAL RELEASE This Employment Severance Agreement and Mutual Release (this "Agreement") is entered into as of this 14th day of April, 1999, by and between Food Lion, Inc. (the "Company") and Pamela K. Kohn (the "Executive"). The Company and the Executive hereby agree as follows: 1. Purpose of Agreement. The parties hereto recognize that during her eight years of employment with the Company, the Executive has performed service to the Company in a confidential capacity. By virtue of her responsibilities during her employment, the Executive has acquired valuable proprietary information of a sensitive and confidential nature pertaining to the Company's business operations, trade secrets, strategies and plans, which, if disclosed to individuals or entities not employed by the Company, would materially harm the Company and provide an unfair advantage to its competitors. The purpose of this Agreement is to set forth the terms of the Executive's severance from employment with the Company, to resolve fully any and all obligations arising out of her employment and severance from employment and to protect the Company's legitimate interest in maintaining the confidentiality of information pertaining to its business plans and operations known to, or possessed by, the Executive. 2. Resignation. The Executive hereby resigns from employment as the Senior Vice President of Merchandising for the Company effective April 14, 1999 (the "Resignation Date"). Notwithstanding any provision of the Employment Agreement between the Company and the Executive dated October 1, 1997 (the "Employment Agreement"), to the contrary, such resignation shall not be deemed to be a breach by the Executive of the Employment Agreement, and the Employment Agreement shall terminate as of the Resignation Date and shall have no further force and effect. 3. Consideration. In consideration of the Executive's release of all claims that may exist against the Company in connection with her employment as more specifically set forth below in Paragraph 4, and in consideration of the Executive's compliance with the obligations set forth below in Paragraphs 6, 7, 8 and 9, and provided the Executive complies with all other terms and conditions of this Agreement, the Company agrees that the Company will pay the Executive $887,784.76 within 30 days following the execution of this Agreement by the Executive. The Company also shall pay to the Executive the full amount of her base salary and other compensation earned prior to the Resignation Date and will reimburse the Executive for actual travel and other out- of-pocket expenses (which are accounted for in accordance with the policies and procedures currently established by the Company and which have not yet been reimbursed) reasonably incurred by the Executive in connection with the performance of her duties under the Employment Agreement prior to the Resignation Date. In addition, the Company will pay to the Executive, on the same schedule as currently paid for the Executive, the nondiscretionary portion of the annual incentive bonus (which nondiscretionary portion currently is 20% of the Executive's annual base salary) for 1999, 2000 and 2001, that the Executive would have received assuming the Executive was employed by the Company at the end of each of such years at the annual base salary of the Executive in effect immediately prior to the Resignation Date, provided that annual incentive bonuses are paid to the executives of the Company for each of such years. In the event that the Company implements a new incentive bonus plan that replaces the Company's current Annual Incentive Bonus Plan for any period referenced in the immediately preceding sentence, the Executive shall continue to receive an amount equal to 20% of the Executive's current annual base salary for any such remaining period. In addition, the Company annually will pay to the Executive $10,963 (the amount that would have been paid to the Executive as a "wellness bonus" for 1999) for 1999, 2000 and 2001 on the same schedule as currently paid for the Executive, provided that wellness bonuses are paid to the executives of the Company for each of such years. Executive and her eligible dependents shall be entitled until September 30, 2002, to participate in the Food Lion Group Benefit Plan and the Executive Medical Plan (including coverage for medical, dental, health and life insurance but excluding disability insurance) or any similar successor plans. If the Executive's continued participation in either plan is barred, the Company shall arrange to provide substantially similar benefits to which the Executive and her eligible dependents were entitled immediately prior to the Resignation Date for such period. Following such period, the Executive shall be entitled to continuation of health care under the Comprehensive Omnibus Budget Reconciliation Act of 1986 ("COBRA"). With respect to the Company's Profit Sharing Plan and Profit Sharing Restoration Plan, the Executive shall be entitled to all accrued amounts to which the Executive is eligible under such plans. In addition, following the Resignation Date, the Executive shall receive cash payments from the Company in the amounts that would have been contributed to the Profit Sharing Plan and the Profit Sharing Restoration Plan for the Executive (and on the same schedule) as if she remained employed by the Company through September 30, 2002, with such contributions to be calculated in each year assuming (i) an annual salary of $285,027, (ii) an annual wellness bonus of $10,963 and (iii) an annual incentive bonus equal to the applicable amount (i.e., the nondiscretionary portion of any annual incentive bonus amount) paid under Paragraph 3(A) of this Agreement (but, in the case of the calculation for 1999, the amount of the annual incentive bonus that was paid for 1998 in 1999). As provided in the stock option agreements governing such stock options, all vested stock options of the Company held by the Executive as of the Resignation Date shall remain exercisable for three months less one day following the Resignation Date. The vesting of all other stock options that have been granted to the Executive prior to the Resignation Date shall be accelerated to the Resignation Date and shall remain exercisable for three months less one day following the Resignation Date. After such period, all unexercised stock options shall terminate and cease to be exercisable. For purposes of clarification, Schedule A attached hereto sets forth the stock options (and corresponding exercise prices) that have been granted to the Executive as of the date immediately prior to the Resignation Date. The Executive shall continue to be vested in all shares of restricted stock that have vested as of the Resignation Date. All unvested shares of restricted stock under awards granted to the Executive prior to the Resignation Date shall be vested as of the Resignation Date. Accordingly, the total number of vested shares of restricted stock to be issued to the Executive immediately following the Resignation Date is 16,033 shares. The Company shall continue to pay the premiums on and shall maintain in effect the split-dollar life insurance policy currently outstanding with respect to the Executive (Policy No. 3669218) through the period ending on September 30, 2002. As of October 1, 2002, such policy shall be transferred to the Executive, and thereafter the Executive shall be responsible for all premiums under such policy, and the Company shall waive its right to receive reimbursement for premiums paid on such policy. The Company may withhold from any compensation or benefits payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law or governmental regulation or ruling. Except as specifically provided herein or as otherwise may be required by law, the Executive shall not be entitled to receive any other payments, benefits or severance amounts from the Company following the Resignation Date. The Executive acknowledges that the rights and payments provided in Paragraph 3(A): represent good and valuable consideration and that her release of claims in Paragraph 4 and her agreement to comply with the obligations of Paragraphs 6, 7, 8 and 9 of this Agreement are in return for this consideration; shall be in lieu of any and all claims for severance pay, additional wages, bonus, salary, accrued vacation and sick leave pay or other compensation, or benefits, or claim of damages she may have as of the Resignation Date other than vested benefits described in Paragraph 3(A) and such rights as the Executive may have to obtain continued insurance coverage under COBRA; and arise solely out of the terms of this Agreement and are not part of any Company severance pay plan. The Company acknowledges that its promises and releases contained in this Agreement are for good and valuable consideration. 4. Waiver and Release. As a material inducement for the Executive and the Company to enter into this Agreement, each of them hereby irrevocably and unconditionally releases and forever discharges the other as detailed below. In exchange for the consideration described in Paragraph 3 above, the Executive hereby releases the Company, its parents, affiliates, subsidiaries, shareholders, directors, officers, agents and employees from all claims, demands and causes of action whatsoever that she may have as a result of events occurring during, or events related to, her employment by the Company, including but not limited to the termination of that employment, and covenants not to bring a lawsuit to assert such claim, demand or cause of action. In exchange for said consideration, the Executive further agrees to accept no benefit in any form offered to her as a result of actions taken by any other person or by a federal, state or local organization concerning events occurring, or events related to, the Executive's employment by the Company, including but not limited to the termination of that employment. The Executive acknowledges that the claims, demands or causes of action she is hereby releasing include, but are not limited to, any claims, demands or causes of action she may have under federal laws such as, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act, the Family and Medical Leave Act and the Americans with Disabilities Act, as well as any claims, demands or causes of action she may have under state or local laws or ordinances. The Executive acknowledges that she has been given a reasonable period of time in which to consider this Agreement, that she has been advised to consult with an attorney concerning this Agreement and that she has been given a reasonable period of time in which to consult an attorney concerning this Agreement. The Company, on behalf of its officers, directors, employees, agents, counsel, successors, assigns and related entities hereby releases and forever discharges the Executive, her heirs, assigns and representatives from any and all claims, liabilities, damages, costs and other obligations in any manner arising out of or attributable to her employment with the Company, and will indemnify and hold harmless the Executive, her heirs, assigns and representatives from such claims, except those claims attributable to the gross negligence or willful misconduct of the Executive. This Agreement does not waive or release rights or claims for occurrences after the Resignation Date. This Agreement does not preclude the Executive or Company from filing a lawsuit against the other for purposes of enforcing rights conferred to each other under this Agreement. 5. Company Property. The Executive agrees that, in connection with her resignation from the Company, she shall not take with her, retain, distribute or cause to be distributed, without the written authorization of the Board of Directors, any papers, files or other documents or copies thereof or other confidential information of any kind belonging to the Company pertaining to its business, sales, financial condition or products. 6. Confidentiality. As described more fully in Paragraph 1(A) of this Agreement, the Executive acknowledges that as a result of her employment by the Company, she has acquired confidential or proprietary information of special value to the Company. The Executive covenants and agrees that, following the Resignation Date, the Executive shall not, without the written consent of the Board of Directors in writing, disclose to anyone not entitled thereto, any confidential information relating to the business, sales, financial condition or products of the Company or any affiliate thereof. 7. Noncompetition. The Executive acknowledges that the Company has legitimate business interests in assuring that the skills and knowledge relating to the nature and character of the Company's business obtained by the Executive during her employment with the Company are not converted to the use of entities in competition with the Company or who are engaged in activities aimed at damaging the Company's public image or are otherwise antithetical to the Company's lawful interests. In recognition of these legitimate interests, the Executive agrees that for a period of two years following the Resignation Date, she shall not, without the written consent of the Board of Directors, engage in any retail or wholesale grocery business which is directly competitive with the business of the Company or any affiliate thereof in any geographic area in which the Company or any affiliate operates on the Resignation Date; provided, however, that the foregoing shall not prohibit the Executive from being employed by any company that has or later acquires a subsidiary or division, or that is later acquired by a company, that is competitive with the business of the Company or any affiliate thereof so long as the Executive is not employed in (or provide substantial services to) such subsidiary or division or such acquiring company and so long as the Executive does not otherwise disclose confidential information relating to the business, sales, financial condition or products of the Company to such subsidiary or division or such acquiring company. 8. Nonsolicitation. The Executive agrees that, for a period of two years following the Resignation Date, she shall not, without the prior written consent of the Board of Directors, directly or indirectly solicit or recruit any employee or independent contractor of the Company for the purpose of being employed by the Executive, directly or indirectly, or any other person or entity on behalf of which the Executive is acting as an agent, representative or employee; provided, however, that nothing in this Paragraph 8 shall prohibit the Executive from responding to an unsolicited request from any third party for an employment reference with respect to any person who was an employee of the Company during the period of the Executive's employment with the Company. 9. Nondisparagement. Following the Resignation Date, the Executive shall not disparage the Company or any of the Company's subsidiaries or affiliates or their respective officers, directors, employees, agents, successors or assigns, and the Company shall not disparage the Executive or any of her representatives or agents, or any of her heirs or assigns. A proceeding brought by any party to enforce its rights under this Agreement shall not be deemed to be a breach of this Paragraph 9. 10. Enforcement. Without limiting the remedies available to the Company, the Executive acknowledges that a breach of the covenants contained in Paragraphs 6, 7, 8 and 9 herein may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order or a preliminary injunction restraining the Executive from engaging in actvities prohibited by Paragraphs 6, 7, 8 or 9 or such other relief as may required to specifically enforce any of the covenants in such Paragraphs. 11. Acknowledgment of Voluntary Nature of Agreement. By signing this Agreement, the Executive and the Company acknowledge: That each has entered into this Agreement voluntarily and fully understands all of its terms; That the Executive has been advised and has had the opportunity to consult with an attorney prior to signing this Agreement; That the Executive and the Company are not relying on any statement or promise other than as contained in this Agreement. 12. Assistance. Upon reasonable notice, the Executive agrees to willingly give her reasonable assistance, including her attendance, where appropriate, to the Company's defense or prosecution of any existing or future claims or litigation. The Company will reimburse the Executive for all reasonable travel expenses incurred by the Executive in complying with this paragraph. 13. Binding Agreement. This Agreement will become effective and enforceable upon the Resignation Date. This Agreement constitutes the entire agreement of the parties with respect to the subject matter set forth herein and there are no promises, understandings or representations, oral or written, other than those set forth herein. The Executive and the Company promise that, after this Agreement becomes final and binding, they will not pursue any claim which has been waived under this Agreement and will not challenge the enforceability of this Agreement by filing or instigating any lawsuit or administrative complaint or investigation arising out of the Employee's employment or termination. 14. Governing Law. This Agreement, having been executed and delivered in the State of North Carolina, shall be governed by the laws of the State of North Carolina. 15. Severability. Each provision of this Agreement is intended to be severable. If any provision, sentence, phrase or word of this Agreement or the application thereof to any person or circumstance shall be held invalid or unenforceable, the remainder of this Agreement, or the application of such provision, sentence, phrase or word to persons or circumstances, other than those as to which it is held invalid, shall not be affected thereby. 16. Notices. Any notices required or permitted to be given by the parties hereto shall be given in writing by certified mail, return receipt requested, or by prepaid telegram, or by nationally recognized overnight delivery service delivered to: Lester C. Nail Vice President of Legal Affairs Food Lion, Inc. 2110 Executive Drive Post Office Box 1330 Salisbury, NC 28145-1330 and Pamela K. Kohn 105 Aston Lane Salisbury, NC 28147 17. Arbitration. Except as otherwise necessary to secure the remedies specified in Paragraphs 6, 7, 8 and 9 of this Agreement, any dispute arising between the Company and the Executive with respect to the performance or interpretation of this Agreement shall be submitted to arbitration in Charlotte, North Carolina, for resolution in accordance with the commercial arbitration rules of the American Arbitration Association, modified to provide that the decision by the arbitrators shall be binding on the parties, shall be furnished in writing, separately and specifically stating the findings of fact and conclusions of law on which the decision is based, and shall be rendered within 90 days following impanelment of the arbitrators. The cost of arbitration shall initially be borne by the party requesting arbitration. Following a decision by the arbitrators, the costs of arbitration shall be divided as directed by the arbitrators. 18. Assignment. This Agreement is binding on Employee and the Company and their successors and assigns; provided, however, that the rights and obligations of the Company under this Agreement may be assigned to a successor entity which assumes (either by operation of law or otherwise) the Company's obligations hereunder. Any such assignment by the Company will not release the Company unless and until all obligations to Employee hereunder are fully discharged. No rights or obligations of Employee hereunder may be assigned by Employee to any other person or entity, except by will or the laws of descent and distribution. In the event of Employee's death prior to receipt by Employee of all amounts payable by the Company hereunder, such amounts shall be payable to Employee's designated beneficiaries on the same schedule as provided for in this Agreement. IN WITNESS WHEREOF, the parties hereto have their duly authorized representatives to execute this Agreement as of the date first set forth above. \s\ Pamela K. Kohn Food Lion, Inc. Pamela K. Kohn, Individually By: \s\ Lester C. Nail Name:Lester C.Nail Title: Vice President of Legal Affairs SCHEDULE A STOCK OPTIONS No. of Options Granted Exercise Price 167 $5.75 3,500 $5.875 16,011 $7.375 24,805 $6.6875 14,714 $10.22 339 $6.875 28,528 $10.22 EX-10.B 4 Exhibit 10B EXECUTION COPY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made as of this 7th day of April, 1999 (the "Effective Date"), between FOOD LION, INC., a North Carolina corporation with its principal place of business in Salisbury, North Carolina (the "Company"), and R. WILLIAM McCANLESS, an individual residing at 244 Confederate Avenue, Salisbury, North Carolina 28144 ("Mr. McCanless"), W I T N E S S E T H: WHEREAS, Mr. McCanless is currently employed by the Company as its President and Chief Executive Officer; WHEREAS, the Board of Directors of the Company recognizes that it is in the best interests of the Company and its shareholders to retain capable and experienced executive officers such as Mr. McCanless; WHEREAS, the Board of Directors recognizes that Mr. McCanless has made substantial contributions to the growth and success of the Company and desires to provide for the continuing employment of Mr. McCanless and to encourage the continued dedication and attention of Mr. McCanless to the Company; WHEREAS, Mr. McCanless is willing to continue to serve the Company; and WHEREAS, the Company and Mr. McCanless desire to enter into this Employment Agreement. NOW, THEREFORE, in consideration of the premises, and the mutual agreements herein contained, the Company and Mr. McCanless hereby agree as follows: 1. Continue to Employ. The Company hereby agrees to continue to employ Mr. McCanless as President and Chief Executive Officer of the Company for the Term of Employment as herein set forth, and Mr. McCanless hereby agrees to continue to serve the Company as President and Chief Executive Officer for such term. 2. Term of Employment. The "Term of Employment," as used herein, will commence on the date hereof and, unless sooner terminated as hereinafter provided, shall terminate on the fifth (5th) anniversary of such date; provided, however, that the Term of Employment shall automatically be extended for additional periods of one (1) year each on the terms and conditions provided herein unless either party shall give written notice to the other party no less than one hundred eighty (180) days prior to the expiration of the applicable Term of Employment. 3. Employment During the Term. During the Term of Employment, Mr. McCanless shall devote his full professional time to the business of the Company, shall use his best efforts to promote the interests of the Company and shall serve as President and Chief Executive Officer of the Company and in such other senior executive capacities as the Board of Directors of the Company shall hereafter designate from time to time. 4. Vacation. Mr. McCanless shall be entitled to annual vacations in accordance with the vacation policy and practices of the Company. 5. Compensation. (a) Base Salary. As compensation for Mr. McCanless's services hereunder and for his covenants set forth in Sections 10, 11 and 12 below, the Company shall pay to Mr. McCanless a base salary which shall not be less than Six Hundred Fifty Thousand Dollars ($650,000) per annum; provided, however, such amount shall be increased from time to time by the Board of Directors of the Company to assure that the compensation paid to Mr. McCanless under this Employment Agreement remains competitive with amounts paid to other chief executive officers in the large supermarket chain industry and reflects the performance of Mr. McCanless and the financial performance of the Company. In no event shall such annual review result in any reduction in base salary provided in this Employment Agreement. Such compensation shall be payable in accordance with the Company's payroll practices for executive employees. (b) Bonus Plans. Mr. McCanless annually shall be eligible to receive up to forty-five percent (45%) of his base salary in the form of a bonus under the Company's Key Executive Annual Incentive Bonus Plan, as it shall be administered by the Board of Directors of the Company and the relevant committees thereof. In addition, Mr. McCanless shall be eligible to participate in the Company's stock option plans and other compensation plans of the Company, as they shall be administered by the Board of Directors of the Company and the relevant committees thereof. Mr. McCanless shall not be eligible to participate in the Company's Annual Incentive Bonus Plan. (c) Deferral Arrangement. (i) Right to Defer. Mr. McCanless may elect to defer some or all of his bonus compensation and up to fifty percent (50%) of his base salary payable to him pursuant to this Employment Agreement. Any deferral of bonus compensation shall be irrevocable and must be requested by Mr. McCanless in writing prior to the start of the fiscal year to which such bonus relates. Any deferral of base salary shall be irrevocable and must be requested by Mr. McCanless in writing prior to the start of the fiscal year to which such salary relates. Any deferral of base compensation or bonus compensation for fiscal year 1999 shall be made in accordance with procedures established by the Company. An election for a given fiscal year shall be deemed a continuing election for each subsequent fiscal year, unless a subsequent written election to defer (or not to defer) is provided to the Company by Mr. McCanless prior to the start of such fiscal year. (ii) Bookkeeping Account and Grantor Trust. Any amounts deferred by Mr. McCanless hereunder will be credited to a bookkeeping account established on the books and records of the Company for the purpose of accounting for the amounts deferred by Mr. McCanless. In addition, the Company will maintain in a separate, irrevocable grantor trust established by the Company an amount in cash equal to the amounts deferred by Mr. McCanless. In connection with the deferral election, Mr. McCanless shall have the right to specify the investments in which his bookkeeping account shall be deemed invested; provided, however, the Company shall be under no obligation to purchase any such investments chosen by Mr. McCanless. Mr. McCanless's bookkeeping account shall be credited to reflect all income, gains and losses of such deemed investments. The parties hereto agree that, to the extent that any investment vehicle that Mr. McCanless selects results in a loss to the bookkeeping account, the Company will have no obligation to compensate Mr. McCanless for such loss or to make any compensatory adjustment to the bookkeeping account to make up for such loss. Notwithstanding the foregoing, at no time shall Mr. McCanless's rights to any amounts deferred under this Section 5(c)(ii) be greater than those of general unsecured creditors of the Company. (iii)Distribution. The timing of the payment of all amounts deferred by Mr. McCanless shall be specified in his initial deferral election and may not be subsequently changed by Mr. McCanless without the prior written approval of the Board of Directors. The initial deferral may specify a lump sum payment of up to five (5) annual installment payments to be paid out in their entirety by no later than the sixth anniversary of the Date of Termination (as defined below); provided, however, that, notwithstanding Mr. McCanless's deferral election, all amounts will be paid to Mr. McCanless within thirty (30) days following a termination of this Employment Agreement for any reason specified in Sections 7(c) or 7(e). (a) Jump Start Options. As of the Effective Date, the Company shall grant to Mr. McCanless options to purchase 600,000 shares of Class A Common Stock of the Company on such terms and conditions set forth in the underlying stock option agreement, provided that, the terms shall not be inconsistent with those provided in this Employment Agreement (the "Jump Start Options"). The Jump Start Options shall have a term commencing on the Effective Date and ending on April 7, 2009 (the "Option Term"). If the closing price per share of the Class A Common Stock of the Company (as reported on the Nasdaq National Market or other nationally-recognized securities market or exchange on which such shares are traded) is $20 or greater for forty-five (45) consecutive trading days ending on or prior to the third (3rd) anniversary of the Effective Date and Mr. McCanless is employed as the President and Chief Executive Officer of the Company on such date, the Jump Start Options shall vest and be exercisable on such date and remain exercisable until April 7, 2009. If the Jump Start Options have not vested on or prior to April 7, 2002, the Jump Start Options shall automatically vest and be exercisable on April 7, 2006, provided that Mr. McCanless remains employed as the President and Chief Executive Officer of the Company on such date. The exercise price per share for the Jump Start Options shall be $8.875 (which is the closing price per share of Class A Common Stock as reported on the Nasdaq National Market on the Effective Date). At the end of the Option Term, all unexercised Jump Start Options shall terminate and cease to be exercisable. 1. Benefits. Mr. McCanless shall be entitled to participate in all health, accident, disability, medical, life and other insurance programs and other benefit and compensation plans maintained by the Company for the benefit of Mr. McCanless and/or other executive employees of the Company in accordance with the Company's policies. In addition, the Company shall maintain in full force and effect on the life of Mr. McCanless a life insurance policy subject to a split dollar arrangement in the face amount of three and one-half (3.5) times Mr. McCanless's base salary if his death occurs prior to his retirement (provided his retirement is on terms consistent with the terms of the life insurance policy and any split dollar arrangements between Mr. McCanless and the Company relating thereto ) and two (2) times Mr. McCanless's last base salary if his death occurs after any such retirement. Mr. McCanless shall be the owner of such policy with the authority to designate the beneficiary thereof. 2. Termination. Termination of Mr. McCanless's employment under any of the following circumstances shall not constitute a breach of this Employment Agreement: (a) Death. Termination upon the death of Mr. McCanless. (b) Cause. Termination by the Company for "Cause" as described in this Section 7(b). For purposes of this Employment Agreement, "Cause" shall mean (i) willful failure (other than by reason of incapacity due to physical or mental illness) to perform his material duties hereunder and his inability or unwillingness to correct such failure within thirty (30) days after receipt of written notice, (ii) conviction of Mr. McCanless of a felony or plea of guilty or no contest to a felony or (iii) perpetration of a material dishonest act or fraud against the Company or any affiliate thereof. The definition of "Cause" expressly excludes any mistake of fact or judgment made by Mr. McCanless in good faith with respect to the Company's business. (c) Good Reason. Termination by Mr. McCanless for "Good Reason" as described in this Section 7(c). For purposes of this Employment Agreement, "Good Reason" shall mean (i) a material diminution of the professional responsibilities of Mr. McCanless, (ii) assignment of inappropriate duties to Mr. McCanless, (iii) failure of the Company to comply with compensation and benefits obligations to Mr. McCanless, (iv) transfer of Mr. McCanless more than 50 miles from Salisbury, North Carolina, (v) a purported termination of this Employment Agreement by the Company other than in accordance with the terms hereof or (vi) failure of the Company to require any successor to the Company to assume and comply with this Employment Agreement. For purposes of this Employment Agreement, a determination in good faith by Mr. McCanless of "Good Reason" shall be conclusive. An election by Mr. McCanless to terminate his employment under this Section 7(c) shall not be deemed a voluntary termination of employment by Mr. McCanless for the purpose of this Employment Agreement or any plan, arrangement or program of the Company. (d) Disability. Termination by the Company or Mr. McCanless upon Disability of Mr. McCanless. For the termination by the Company to be valid, (i) the Company must first give forty-five (45) days' written Notice of Termination, as defined below (which may occur before or after the end of the 180-day period specified in the definition of Disability below), and (ii) Mr. McCanless shall not have returned to the performance of his duties hereunder on a full-time basis during such 180-day period. For purposes of this Employment Agreement, "Disability" shall mean Mr. McCanless's absence from continuous full-time employment with the Company for a period of at least 180 consecutive days by reason of a mental or physical illness. The Company shall have the right to have Mr. McCanless examined at such reasonable times by such physicians satisfactory to Mr. McCanless as the Company may designate, and Mr. McCanless will make himself available for and submit to such examination as and when requested. Except as otherwise provided in this Section 7(d), the inability of Mr. McCanless to perform his duties hereunder, whether by reason of injury, illness (physical or mental) or otherwise shall not result in the termination of Mr. McCanless's employment hereunder, and he shall be entitled to continue to receive his base salary and other benefits as provided herein. (e) Without Cause. Termination by the Company without Cause. (f) Date and Notice of Termination. Any termination of Mr. McCanless's employment by the Company or by Mr. McCanless (other than termination pursuant to Section 7(a) above) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Employment Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Employment Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Mr. McCanless's employment under the provision so indicated. "Date of Termination" shall mean (i) if Mr. McCanless's employment is terminated by his death, the date of his death, and (ii) if Mr. McCanless's employment is terminated pursuant to a Notice of Termination, the date specified in the Notice of Termination; provided that, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date which is finally determined to be the Date of Termination, either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment, order, or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 8. Effect of Termination. In the event of termination of employment as described in Section 7 hereof, the Company shall compensate Mr. McCanless as follows: (a) Death. If Mr. McCanless's employment is terminated as a result of his death, as specified in Section 7(a), the Company shall pay Mr. McCanless's beneficiary the benefit called for under his Salary Continuation Agreement with the Company. Mr. McCanless's beneficiary shall accept the payment provided for in this Section 8(a) in full discharge and release of the Company of and from any further obligations under this Employment Agreement, except for any other benefits due under any applicable plan or policy of the Company (including life insurance policies and pension or similar plans), as determined under the provisions of such plans or policies. (b) Disability. If Mr. McCanless's employment is terminated by the Company or Mr. McCanless as a result of his disability as specified in Section 7(d), then the Company shall pay Mr. McCanless his full compensation until the Date of Termination. Within thirty (30) days after the termination of his employment, the Company shall pay Mr. McCanless a lump sum payment equal to fifty percent (50%) of the present value of the future base salary payable to Mr. McCanless during the remainder of his Term of Employment under this Employment Agreement or for a period of two (2) years, whichever is longer. Such lump sum amount shall be calculated by using a discount rate equal to the applicable Federal rate that is in effect on the date of payment as determined under Section 1274(d) of the Internal Revenue Code of 1986 (the "Code") and the regulations thereunder, and by assuming that Mr. McCanless's annual salary in effect on the Date of Termination would continue for the remainder of the Term of Employment, or for a period of two (2) years, whichever is longer. This payment shall be in addition to any payments Mr. McCanless shall be entitled to receive under any applicable disability insurance policies maintained by the Company for Mr. McCanless. (c) Cause. If Mr. McCanless's employment is terminated for any reason specified in Section 7(b) hereof, the Company shall no longer be obligated to make any payments to Mr. McCanless pursuant to this Employment Agreement, except for the full amount of his base salary and all compensation earned prior to the Date of Termination and payments pursuant to plans, programs, or arrangements, as determined under the provisions of such plans or policies. (d) Good Reason or Without Cause. (i) If Mr. McCanless's employment is terminated by Mr. McCanless for Good Reason as specified in Section 7(c) hereof, or if his employment is terminated by the Company without Cause as specified in Section 7(e): (A) the Company shall pay Mr. McCanless the full amount of his base salary and other compensation earned prior to the Date of Termination; and (B) the Company shall pay Mr. McCanless, within thirty (30) days after the Date of Termination, a lump sum payment equal to the present value of three (3) (or the number of years left in the Term of this Agreement, whichever is greater) times his current annual base salary. Such lump sum amount shall be calculated by using a discount rate equal to the applicable Federal rate that is in effect on the date of payment as determined under Section 1274(d) of the Code and the regulations thereunder. (ii) If prior to a Change in Control of the Company (as defined below), Mr. McCanless's employment is terminated by Mr. McCanless for Good Reason or by the Company without Cause, the Company shall maintain in full force and effect for the continued benefit of Mr. McCanless and his eligible dependents for three (3) years after the Date of Termination (or for the number of years remaining in the Term of this Agreement, whichever is greater), employee fringe benefit plans and programs such as medical, dental, health and life insurance in which Mr. McCanless was entitled to participate immediately prior to the Date of Termination, if Mr. McCanless's continued participation is permitted under the general terms and provisions of such plans and programs and applicable law, but not including the Key Executive Annual Incentive Bonus Plan, the Wellness Bonus Plan, the Profit Sharing Plan and the Profit Sharing Restoration Plan and any other bonus, retirement or similar compensation plan. (iii) If (A) Mr. McCanless's employment is terminated by the Company without Cause in contemplation of a Change in Control of the Company within six (6) months prior to such Change in Control or (B) Mr. McCanless's employment is terminated by the Company without Cause or by Mr. McCanless with Good Reason within one (1) year following a Change in Control of the Company, the Company shall pay Mr. McCanless the compensation and fringe benefits set forth in clauses (i) and (ii) above, and in addition, for three (3) years following the Date of Termination (or for the number of years remaining in the Term of this Agreement, whichever is greater), Mr. McCanless shall be paid an annual amount equal to the amounts, if any, which would have been payable to him under the Key Executive Annual Incentive Bonus Plan, the Wellness Bonus Plan, the Profit Sharing Plan and the Profit Sharing Restoration Plan (or such other plans in which Mr. McCanless was entitled to participate as of the Date of Termination) assuming Mr. McCanless had remained employed for such three (3) year (or greater) period and received an annual salary at the rate in effect on his Date of Termination. For purposes of this Employment Agreement, "a Change in Control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, a Change in Control of the Company shall be deemed to have occurred if: (A) an acquisition (other than directly from the Company) by a Person (as defined below) (excluding the Company or an employee benefit plan of the Company or an entity controlled by the Company's shareholders) results in the aggregate number of shares of the Company's voting securities beneficially owned by any other Person to exceed the number of shares of the Company's voting securities beneficially owned, in the aggregate, by Etablissements Delhaize Freres et Cie "Le Lion" S.A. ("Delhaize") and Delhaize The Lion America, Inc.; (B) at any time during the term of this Employment Agreement there is a change in the composition of the Board of Directors of the Company resulting in a majority of the directors of the Company who are in office on the date hereof ("Incumbent Company Directors") no longer constituting a majority of the directors of the Company; provided that, in making such determination, persons who are elected to serve as directors of the Company and who are approved by all of the directors in office on the date of such election (other than in connection with an actual or threatened proxy contest) shall be treated as Incumbent Company Directors; (C) consummation of a complete liquidation or dissolution of the Company or a merger, consolidation or sale of all or substantially all of the Company's assets (collectively, a "Business Combination") other than a Business Combination in which all or substantially all of the holders of voting securities of the Company receive fifty percent (50%) or more of the voting securities of the company or entity resulting from the Business Combination ("Resulting Company"), at least a majority of the board of directors of the resulting corporation were Incumbent Company Directors, and after which no person or entity beneficially owns twenty percent (20%) ("Beneficial Ownership Threshold") or more of the voting securities of the Resulting Company, who did not beneficially own such stock immediately before the Business Combination; or (D) occurrence of any of the events described in Section 8(d)(iii)(B) or (C) to Delhaize or the acquisition by any Person of more than thirty percent (30%) of the voting securities of Delhaize. Notwithstanding any other provision of this paragraph, for purposes of the definition of "Change in Control of the Company," a change in control of Delhaize shall not constitute a Change in Control of the Company unless it involves an event contemplated by this Section 8(d)(iii)(D). With respect to Section 8(d)(iii)(C) as it applies to Delhaize under this Section 8(d)(iii)(D), the Beneficial Ownership Threshold shall be thirty percent (30%). For the purpose of this paragraph, the term "beneficially owned" shall have the meaning set forth in Rule 13d-3 promulgated under the Exchange Act, the term "Person" shall have the meaning set forth in Sections 3(a)(2) and 13(d)(3) of the Exchange Act and the term "voting securities" shall have the meaning set forth in Rule 12b-2 under the Exchange Act. 9. Business Expenses. The Company agrees that during the Term of Employment, the Company will reimburse Mr. McCanless for actual travel and other out-of-pocket expenses reasonably incurred by him in connection with the performance of his duties hereunder and accounted for in accordance with the policies and procedures currently established by the Company. 10. No Competing Employment. Mr. McCanless agrees that, during the Term of Employment and for a period of two (2) years after the Date of Termination ("Restricted Period"), he will not, without the written consent of the Board of Directors, engage in any retail or wholesale grocery business which is directly competitive with the business of the Company or any affiliate thereof in any geographic area in which the Company or any affiliate operates on the Date of Termination. Mr. McCanless understands and agrees that a portion of the amounts paid to him under Section 5(a) hereof is in consideration for his covenants set forth in Sections 10, 11, and 12. 11. No Solicitation. Mr. McCanless agrees that, during the Restricted Period, he will not, without the prior written consent of the Board of Directors, directly or indirectly solicit or recruit any employee or independent contractor of the Company for the purpose of being employed by Mr. McCanless, directly or indirectly, or any other person or entity on behalf of which Mr. McCanless is acting as an agent, representative or employee. Notwithstanding the above, if Mr. McCanless's employment is terminated for any reason specified in Section 7 hereof prior to the first anniversary of the date on which a Change in Control (as defined above) occurred, the covenants of Sections 10 and 11 shall not be applicable. 12. Confidentiality. Mr. McCanless agrees that, during the Term of Employment and thereafter, he will not, without the prior written consent of the Company, disclose to anyone not entitled thereto, any confidential information relating to the business, sales, financial condition, or products of the Company or any affiliate thereof. Mr. McCanless also recognizes and acknowledges that he has a common law obligation not to disclose trade secrets and other proprietary information of the Company. Mr. McCanless further agrees that, should he leave the active service of the Company, he will not take with him or retain, without the written authorization of the Board of Directors, any papers, files, or other documents or copies thereof or other confidential information of any kind belonging to the Company pertaining to its business, sales, financial condition, or products. Mr. McCanless understands and agrees that the rights and obligations set forth in this Section 12 are perpetual and, in any case, shall extend beyond the Restricted Period. 13. Injunctive Relief. Without limiting the remedies available to the Company, Mr. McCanless acknowledges that a breach of the covenants contained in Sections 10, 11 and 12 herein may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order or a preliminary injunction restraining Mr. McCanless from engaging in activities prohibited by Sections 10, 11 and 12 or such other relief as may be required to specifically enforce any of the covenants in such Sections. 14. Indemnification. The Company shall indemnify and hold harmless Mr. McCanless to the fullest extent permitted under North Carolina law, including, without limitation, the provisions of Part 5 (or any successor provision) of the North Carolina Business Corporation Act, from and against all losses, claims, damages, liabilities, costs and expenses (including, without limitation, attorneys' fees), which may, at any time, be suffered by Mr. McCanless as a result of the fact that Mr. McCanless is or was an officer of the Company, or is or was serving at the request of the Company as an officer, employee or agent of an affiliate of the Company. The expenses incurred by Mr. McCanless in any proceeding shall be paid promptly by the Company in advance of the final disposition of any proceeding at the written request of Mr. McCanless to the fullest extent permitted under North Carolina law. The indemnification provision of this Section 14 shall survive the termination or expiration of this Employment Agreement. 15. Gross-Up Payment. In the event that any payments to which Mr. McCanless becomes entitled under this Employment Agreement (the "Agreement Payments") will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to Mr. McCanless at the time specified below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Mr. McCanless (taking into account the Total Payments (as hereinafter defined) and the Gross-Up Payment), after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and Excise Tax upon the Gross-Up Payment provided for by this Section 15, but before deduction for any federal, state or local income tax on the Total Payments, shall be equal to the "Total Payments," as defined below. Except as otherwise provided below, the Gross-Up Payment or portion thereof provided for in this Section 15 shall be paid not later than the thirtieth (30th) day following payment of any amounts under the Employment Agreement that will be subject to the Excise Tax; provided, however, that if the amount of such Gross-Up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under the Employment Agreement that will be subject to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Mr. McCanless, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments, accruals, vestings or other compensatory benefits received or to be received by Mr. McCanless in connection with a Change in Control of the Company or the termination of Mr. McCanless's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company's independent auditors, such other payments or benefits (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (a) the total amount of the Total Payments and (b) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (i) above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Mr. McCanless shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made and the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, Mr. McCanless shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid) if such repayment results in a reduction in Excise Tax and/or a federal, state, and local income tax deduction, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including, by reason of any payment, the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross- up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. 16. Vesting. Upon a Change in Control of the Company or if Mr. McCanless's employment is terminated for reasons specified in Sections 7(a), 7(c), 7(d) or 7(e) hereof, all of the rights granted to Mr. McCanless by the Company to own or acquire stock of the Company (including, without limitation, stock options and restricted stock granted under the Company's Stock Option Plan and including, subject to the last sentence of this Section 16, the Jump Start Options) shall automatically vest upon the date of such Change in Control or Date of Termination, respectively, without the need for further action or consent by the Company; provided, however, that (assuming no occurrence of a Change in Control) such rights shall not vest if Mr. McCanless's employment is terminated for Mr. McCanless's failure to adequately perform his duties hereunder as determined by an affirmative vote of at least seventy percent (70%) of the Board of Directors of the Company. For purposes of the preceding sentence, "Change in Control of the Company" shall have the meaning set forth in Section 8(d)(iii) hereof. Notwithstanding anything herein to the contrary, if the Jump Start Options have not vested by April 7, 2002, the Jump Start Options shall not vest for any reason, including, without limitation, a Change in Control of the Company or a termination of Mr. McCanless's employment (pursuant to Sections 7(a), 7(c), 7(d) or 7(e) hereof or otherwise) prior to April 7, 2006. 17. Legal Expenses. The Company shall reimburse Mr. McCanless for all reasonable legal fees incurred in a successful effort to establish entitlement to compensation and benefits under this Employment Agreement. 18. Mitigation. The Company recognizes that Mr. McCanless has no duty to mitigate the amounts due to him upon termination of this Employment Agreement, and the obligations of the Company will not be diminished in the event Mr. McCanless is employed by another employer after the termination of his employment with the Company. 19. Successors. This Employment Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns and upon Mr. McCanless and his legal representatives. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Employment Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 20. Amendments. This Employment Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the parties hereto. 21. Governing Law. This Employment Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 22. Waiver. The waiver of breach of any term or condition of this Employment Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 23. Severability. In the event that any provision or portion of this Employment Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Employment Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent provided by law. 24. Notices. Any notices or other communications required or permitted hereunder shall be deemed sufficiently given if sent by registered mail, postage prepaid, as follows: (a) If to Mr. McCanless: R. William McCanless 244 Confederate Avenue Salisbury, North Carolina 28144 (b) If to the Company: Food Lion, Inc. Post Office Box 1330 2110 Executive Drive Salisbury, North Carolina 28145-1330 Attention: Secretary with a copy to: Bruce S. Mendelsohn Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1333 New Hampshire Avenue, N.W. Suite 400 Washington, D.C. 20036 or to such other address as shall have been specified in writing by either party to the other. Any such notice or communication shall be deemed to have been given on the second day (excluding any days U.S. Post Offices are not open) after the date so mailed. [The next page is the signature page] IN WITNESS WHEREOF, the Company has caused this Employment Agreement to be executed by its duly authorized representative, and Mr. McCanless has hereunto set his hand as of the date first above written. FOOD LION, INC. By: \s\ William G. Ferguson William G. Ferguson Chairman, Senior Management Compensation Committee \s\ R. William McCanless R. William McCanless -----END PRIVACY-ENHANCED MESSAGE-----