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)
<TABLE>
June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998
% %
<S> <C> <C> <C> <C>
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
</TABLE>
-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)
<TABLE>
June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998
% %
<S> <C> <C> <C> <C>
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
</TABLE>
-4-
FOOD LION, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
June 19, 1999 January 2, 1999 June 19, 1998
Assets
Current assets:
<S> <C> <C> <C>
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
</TABLE>
-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-
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<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUN-19-1999
<CASH> 89,822
<SECURITIES> 0
<RECEIVABLES> 167,358
<ALLOWANCES> 0
<INVENTORY> 1,104,720
<CURRENT-ASSETS> 1,454,512
<PP&E> 3,179,646
<DEPRECIATION> 1,210,918
<TOTAL-ASSETS> 3,698,486
<CURRENT-LIABILITIES> 1,050,631
<BONDS> 428,641
0
0
<COMMON> 235,852
<OTHER-SE> 1,381,459
<TOTAL-LIABILITY-AND-EQUITY> 3,698,486
<SALES> 4,916,286
<TOTAL-REVENUES> 4,916,286
<CGS> 3,789,947
<TOTAL-COSTS> 3,789,947
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,737
<INCOME-PRETAX> 204,773
<INCOME-TAX> 77,814
<INCOME-CONTINUING> 126,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,959
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
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
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
