Filed pursuant to
Rule 424(b)(3)
File No. 33-50037
PROSPECTUS
14,401,646 Shares
FOOD LION, INC.
Class A Common Stock
This Prospectus relates to up to 14,401,646 shares (the
"Shares") of Class A non-voting Common Stock, par value $.50 per
share ("Class A Common Stock"), of Food Lion, Inc., a North
Carolina corporation (the "Company"), issuable by the Company
upon conversion of the Company's 5% Convertible Subordinated
Debentures due 2003 (the "Debentures"). The Shares are issuable
prior to redemption of the Debentures at a conversion price of
$7.90 per share, subject to adjustment under certain
circumstances. As a result of the antidilution provisions
relating to the conversion price, this Prospectus covers an
indeterminable number of shares. See "The Offering."
As of March 31, 1998, the Company had outstanding
236,510,410 shares of Class A Common Stock and 232,727,364 shares
of Class B voting Common Stock, par value $.50 per share ("Class
B Common Stock"). The holders of Class B Common Stock are
entitled to one vote on all matters on which the holders of Class
B Common Stock are entitled to vote. Holders of Class A Common
Stock do not have voting rights except to the extent provided by
North Carolina law. The Board of Directors of the Company may
declare and pay dividends on the Class A Common Stock and Class B
Common Stock out of earnings or assets of the Company legally
available for the payment thereof, provided that whenever a
dividend is declared and paid to the holders of the Class B
Common Stock (excluding a dividend payable in shares of the same
class of stock), the Board of Directors must declare and pay to
the holders of the Class A Common Stock a per share dividend
greater than the per share dividend declared and paid to the
holders of the Class B Common Stock. Upon dissolution and
liquidation of the Company, holders of the Class A Common Stock
will be entitled to receive an amount equal to the par value of
the Class A Common Stock before any payment is made with respect
to the Class B Common Stock. After such payment is made to the
holders of the Class A Common Stock, the holders of the Class B
Common Stock will be entitled to receive an amount equal to the
par value of the Class B Common Stock before any further payment
is made with respect to the Class A Common Stock. Thereafter,
the remainder of the assets of the Company will be distributed
equally to all shareholders pro rata. See "Description of
Capital Stock."
The Company will receive no cash proceeds from the sale of
Shares. The Company will pay all costs and fees associated with
the registration of the Shares under Federal and state securities
laws and the preparation and delivery of this Prospectus. No
underwriting discounts or commissions are payable in connection
with the sale of the Shares.
Outstanding shares of Class A Common Stock are listed on the
NASDAQ National Market System under the symbol "FDLNA."
On March 31, 1998, the last reported sale price of the Class A
Common Stock was $10.69 per share.
No dealer, salesman or other person has been authorized to
give any information or to make any representations other than
those contained or incorporated by reference in this Prospectus,
and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or
any underwriter or agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities
other than the registered securities to which it relates. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such
offer or in any jurisdiction in which the person making such
offer or solicitation is not qualified to do so. Neither the
delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date
hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
April 23, 1998
TABLE OF CONTENTS
Page
Available Information 1
Incorporation of Certain Information 1
by Reference
The Company 3
The Offering 4
Description of Capital stock 8
United States Taxation 9
Legal Matters 19
Experts 19
Safe Harbor Statement 19
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements
and other information filed by the Company with the Commission
can be inspected and copied at the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the regional offices of the Commission located
at 75 Park Place, New York, New York 10007 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621-2511. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"),
relating to the Shares. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information,
reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission are
incorporated herein by reference: (1) the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 and (2)
the description of the Company's Class A Common Stock included
under the heading "Description of Common Stock" on pages 1-3 of
the Company's Registration Statement on Form 8-A dated February
27, 1984 filed with the Commission on March 1, 1984, and in any
amendment or report for the purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of
the Shares shall be deemed to be incorporated by reference into
this Prospectus from the date of filing such documents. Any
statement contained herein or in a document, all or a portion of
which is incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy
of the foregoing documents incorporated herein by reference,
other than exhibits to such document (unless such exhibits are
specifically incorporated by reference in such documents).
Requests should be directed to the attention of Laura Kendall,
Vice President of Finance and Chief Financial Officer, 2110
Executive Drive, Post Office Box 1330, Salisbury, North Carolina
28145-1330, telephone number (704) 633-8250, Ext. 2642.
THE COMPANY
General
The Company operates food supermarkets primarily in the
southeastern United States. The Company's stores, which are
operated under the names "Food Lion" and "Kash n' Karry," sell a
wide variety of groceries, produce, meats, dairy products,
seafood, frozen food, deli/bakery and non-food items such as
tobacco, health and beauty aids and other household and personal
products. The Company offers nationally and regionally advertised
brand name merchandise as well as products manufactured and
packaged for the Company under private label for the Company.
The Company generally is known by consumers for its low item
prices, convenient and easy to shop locations and its image as a
low-cost operator.
As of January 3, 1998, the Company operated a total of
1,157 supermarkets in 11 states:
State Number
Number
of State of
Stores Stores
North Carolina 394 Virginia 251
Maryland 38 Pennsylvania 7
Florida 188 Kentucky 13
South Carolina 106 West Virginia 16
Tennessee 78 Delaware 10
Georgia 56
Supermarkets operated by Food Lion in the southeastern
United States average 31,207 square feet in size. All of the
Company's supermarkets are self-service stores, which have off-
street parking. The Company's supermarkets are served by the
Company's eight warehousing and distribution facilities located
in Salisbury and Dunn, North Carolina; Disputanta, Virginia;
Elloree, South Carolina; Green Cove Springs and Plant City,
Florida; Clinton, Tennessee; and Greencastle, Pennsylvania.
Factors that may affect the Company's future growth include
the Company's ability to open and operate profitable stores, to
project and control capital-related expenditures, and to find
acceptable acquisition candidates. Acceptance of the Company's
merchandising strategies by customers located in new markets, or
the Company's ability to adapt its merchandising strategies to
generate increased revenues in new markets, also will affect the
Company's future growth.
The Company was incorporated in North Carolina in 1957 and
maintains its principal executive offices at 2110 Executive
Drive, Post Office Box 1330, Salisbury, North Carolina 28145-
1330, and its telephone number is (704) 633-8250.
THE OFFERING
The Shares covered by this Prospectus are those shares of
the Company's Class A Common Stock issuable upon conversion of
the Debentures. The Debentures were issued by the Company on
June 14, 1993 under an Indenture (the "Indenture") dated as of
June l, 1993 between the Company and The Chase Manhattan Bank,
N.A., as Trustee (the "Trustee"). The Indenture governs the
terms of the Debentures, including the conversion of the
Debentures into shares of the Company's Class A Common Stock.
Certain statements under this heading are summaries of, and are
subject to, the detailed provisions of the Indenture, a copy of
which is filed as an exhibit to the Registration Statement.
Capitalized terms used below but not defined have the meanings
ascribed to them in the Indenture. At March 31, 1998, there was
outstanding under the Indenture $113,773,000 principal amount of
Debentures.
The Debentures or any portion of the principal amount
thereof (in an amount equal to $250,000 or an integral multiple
of $1,000 in excess thereof) are convertible into Class A Common
Stock of the Company, unless previously redeemed, at any time on
or after September 13, 1993 and prior to redemption or maturity,
initially at a conversion price of $7.90 per share ("Conversion
Price") subject to adjustment under certain circumstances. The
Debentures are subject to redemption (a) in whole or from time to
time in part, at the election of the Company, at the Redemption
Prices (expressed as percentages of the principal amount) that
follow if redeemed during the twelve-month period beginning June
1 of the years indicated: 1997, 101%; and 1998, 100%, and (b) in
whole, if the Company has or will become obligated to pay
Additional Amounts or an act specified in the Indenture has been
taken that results in a substantial probability that the Company
will be required to pay Additional Amounts, at a Redemption Price
equal to 100% of the principal amount, together in the case of
any such redemption (whether pursuant to clause (a) above or (b))
with accrued interest to the Redemption Date. The right to
convert Debentures called for redemption will terminate at the
close of business on the tenth calendar day preceding the date
fixed for such redemption. In the event any holder of Debentures
exercises its right to cause the Company to repurchase such
holder's Debentures, such holder's conversion right will
terminate upon the Company's receipt of the written notice of
exercise of such repurchase right. In the event of a Change of
Control or a Termination of Trading, each Holder of the
Debentures shall have the right, subject to the conditions of the
Indenture and as specified further in the Indenture, to require
the Company to purchase all of its Debentures or a portion
thereof (in an amount equal to U.S. $250,000 or an integral
multiple of U.S. $1,000 in excess thereof) at a purchase price of
100% of their principal amount, together with interest accrued,
if any , to the date fixed for such purchase or such other date
as specified in the Indenture.
The right of conversion attaching to any Debenture may be
exercised by the holder by delivering the Debenture at the
specified office of a Conversion Agent, accompanied by a duly
signed and completed notice of conversion. Debentures may be
surrendered for conversion at the corporate trust office of the
Trustee in New York City (at the address set forth below) or, at
the option of the holder and subject to applicable laws and
regulations, at the office of any Conversion Agent. The Company
has initially appointed as Conversion Agents the banks set forth
below:
Trustee and Conversion Agent (U.S.)
The Chase Manhattan Bank, N.A.
Global Trust Services
450 West 33rd Street
15th Floor
New York, NY 10001
Attention: Phil Jones
Conversion Agent (U.K.)
The Chase Manhattan Bank
P.O. Box 261
1 Chaseside
Bournemouth , Dorset
BH7 7DB
Attention: Matthew Ayrton
Conversion Agent (Luxembourg)
The Chase Manhatan Bank, S.A.
5, Rue Plaetis
P.O. Box 240
L2012 Luxembourg
Grand Duchy, Luxembourg
Attention: Veronique Cridel
The Company may at any time terminate the appointment of any
Conversion Agent and appoint additional or other Conversion
Agents, provided that until all of the Debentures have been
delivered to the Trustee for cancellation, or moneys sufficient
to pay the principal of and premium, if any, and interest on all
the Debentures have been made available for payment and either
paid or refunded to the Company as provided in the Indenture, it
will maintain a Conversion Agent in New York City for surrender
of Debentures for conversion, and in a Western European city
which, so long as the Debentures are listed on the Luxembourg
Stock Exchange and the Luxembourg Stock Exchange shall so
require, will be in Luxembourg, for the surrender of Debentures
for conversion. Notice of any such termination or appointment
and of any change in the office through which any Conversion
Agent will act will be given as provided in the Indenture.
The conversion date shall be the date on which the Debenture
and the duly signed and completed notice of conversion shall have
been delivered as described above. A holder delivering a
Debenture for conversion will not be required to pay any taxes or
duties payable in respect of the issue or delivery of Class A
Common Stock on conversion but will be required to pay any tax or
duty which may be payable in respect of: (i) any transfer
involved in the issue or delivery of the Class A Common Stock in
a name other than the holder of the Debenture; (ii) the payment
of cash in lieu of fractional shares; (iii) payments made
subsequent to the date of conversion; and (iv) adjustments to the
Conversion Price. Certificates representing shares of Class A
Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the holder have been paid.
The Conversion Price will be subject to adjustment under
certain circumstances, including (a) the declaration and payment
of dividends and other distributions in Class A Common Stock on
any class of capital stock of the Company, (b) the issuance to
all holders of Class A Common Stock of rights or warrants
entitling them to subscribe for or purchase Class A Common Stock
at less than the current market price (as defined in the
Indenture) on the date fixed for the determination of
shareholders entitled to receive such rights or warrants or at
less than the current market price (as defined in the Indenture)
on the day preceding the date triggering the exercisability of
the right or warrant, (c) certain subdivisions, combinations and
reclassifications of Class A Common Stock, (d) the distribution
to all holders of Class A Common Stock of any rights or warrants
to subscribe for or purchase any Company securities (other than
those referred to above) or any evidence of indebtedness or other
securities of the Company (other than Class A Common Stock) and
(e) the distribution to all holders of Class A Common Stock of
cash or other assets (other than any regular quarterly dividends
payable solely in cash that may from time to time be fixed by the
Board of Directors of the Company), where the fair market value
(as determined by the Board of Directors of the Company) of all
such distributions in any 12-month period is equal to 5% or more
of an amount determined by multiplying the number of shares of
Class A Common Stock outstanding on the record date for
determination of holders entitled to receive such distribution by
the current average market price of the Class A Common Stock. In
addition to the foregoing adjustments, the Company will be
permitted, but shall not be obligated, to make such adjustments
in the Conversion Price as it considers to be advisable in order
that any event treated for United States Federal income tax
purposes as a dividend of stock or stock rights will not be
taxable to the holders of the shares of Class A Common Stock.
Adjustments in the Conversion Price of less than l% of such price
will not be required, but any adjustment that would otherwise be
required to be made will be carried forward and taken into
account in the computation of any subsequent adjustment.
Conversion Price adjustments may in certain circumstances result
in constructive distributions that could be taxable as dividends
under the Internal Revenue Code of 1986, as amended (the "Code"),
to holders of Debentures or to holders of shares of Class A
Common Stock issued upon conversion of Debentures. See "United
States Taxation."
In case of certain consolidations or mergers to which the
Company is a party or the transfer of all or substantially all of
the assets of the Company, each Debenture then outstanding would,
without the consent of any holders of Debentures, become
convertible into the kind and amount of securities, cash or other
property receivable upon the consolidation, merger, conveyance or
transfer by a holder of the number of shares of Class A Common
Stock of the Company into which such Debentures might have been
converted immediately prior to such consolidation, merger,
conveyance or transfer assuming such holder of Class A Common
Stock failed to exercise his or her rights of election, if any,
as to the kind or amount of securities, cash and other property
receivable upon the consolidation, merger, conveyance or transfer
(provided that if the kind or amount so receivable is not the
same for each non-electing share, then the kind and amount
receivable for each non-electing share shall be deemed to be the
kind and amount so receivable per share by the holders of a
plurality of the non-electing shares).
Fractional shares of Class A Common Stock will not be issued
upon conversion, but, in lieu thereof, the Company will pay a
cash adjustment, as provided in the Indenture, based upon the
market price of the Class A Common Stock on the trading day
before the date of conversion.
Debentures surrendered for conversion during the period from
the close of business on any Regular Record Date to the opening
of business on the next succeeding Interest Payment Date (unless
such Debentures have been called for redemption on a redemption
date within such period) must be accompanied by payment of an
amount equal to the interest payable on such Interest Payment
Date on the principal amount so converted. Unless previously
redeemed, interest on such Debentures will be payable by the
Company on the Interest Payment Date subsequent to the date of
conversion. A Debenture converted on an Interest Payment Date
need not be accompanied by any such payment, and the interest on
the principal amount of such Debenture will be paid on such
Interest Payment Date to the registered holder of such Debenture
on the immediately preceding Regular Record Date. In the case of
Debentures called for redemption between a Regular Record Date
and the opening of business on the next succeeding Interest
Payment Date, no interest will be payable on any such Debentures
converted during such period. Except as described above, no
payment or adjustment will be made by the Company on conversion
of a Debenture for interest accrued to the date of conversion or
for dividends on the Class A Common Stock issued on conversion
which were declared for payment to holders of Class A Common
Stock of record as of a date prior to the date of conversion.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of
1,500,000,000 shares of Class A Common Stock and 1,500,000,000
shares of Class B Common Stock. As of March 31, 1998,
236,510,410 shares of Class A Common Stock were issued and
outstanding, and 232,727,364 shares of Class B Common Stock
were issued and outstanding. As of March 31, 1998, there were
28,649 holders of record of the Company's Class A Common Stock
and 19,571 holders of record of the Company's Class B Common
Stock.
The holders of Class B Common Stock are entitled to one vote
per share on all matters on which the holders of Class B Common
Stock are entitled to vote and do not have cumulative voting
rights in the election of directors. Holders of Class A Common
Stock do not have voting rights except to the extent provided by
North Carolina law.
The Board of Directors of the Company may declare and pay
dividends on the Class A Common Stock and Class B Common Stock
out of earnings or assets of the Company legally available for
the payment thereof, provided that, whenever a dividend is
declared and paid to holders of Class B Common Stock (other than
a dividend payable in the same class of stock), the Board of
Directors of the Company must also declare and pay to the holders
of Class A Common Stock a per share dividend greater than the per
share dividend declared and paid to the holders of the Class B
Common Stock. The Board of Directors of the Company may declare
and pay dividends to the holders of Class A Common Stock without
declaring and paying dividends to the holders of the Class B
Common Stock.
Upon dissolution and liquidation of the Company, the holders
of Class A Common Stock will be entitled to receive an amount
equal to the par value of the Class A Common Stock before any
payment is made with respect to Class B Common Stock. After such
payment is made to the holders of Class A Common Stock, the
holders of Class B Common Stock will be entitled to receive an
amount equal to the par value of the Class B Common Stock before
any further payment is made with respect to the Class A Common
Stock. Thereafter, the remainder of the assets of the Company
will be distributed equally to all shareholders pro rata
according to the number of shares of common stock held,
regardless of class.
Holders of Class A Common Stock and Class B Common Stock
have no preemptive rights to subscribe for any additional
securities of any class which the Company may issue, nor any
conversion, redemption or sinking fund rights.
Transfer Agent
The transfer agent for the Class A Common Stock and Class B
Common Stock is First Chicago Trust Company, N.A.
UNITED STATES TAXATION
The following discussion is a summary of the material U.S.
federal income tax consequences of the purchase, ownership and
disposition of the shares of Class A Common Stock issuable upon
conversion of the Debentures. The discussion is limited solely
to investors who will own shares of Class A Common Stock issuable
upon conversion of the Debentures as "capital assets" within the
meaning of section 1221 of the Code.
In the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
counsel to the Company, the material federal tax issues are set
forth below. The opinion of counsel is based on currently
applicable law, which is subject to change, on the facts and
circumstances in existence at closing, and on the continuing
accuracy of certain representations to be made by the Company.
The opinion of counsel is not binding on the Internal Revenue
Service (the "IRS"), and no ruling will be requested from the IRS
on any issues described herein.
The following discussion is based on the provisions of the
Code, the applicable Treasury Regulations promulgated and
proposed thereunder, judicial authority and current
administrative rulings add practice, all as of the date of this
offering. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the
statements and conclusions set forth below. Any such changes or
interpretations may or may not be retroactive. In particular,
potential investors should be aware that certain relevant
amendments to the Code have not been subject to definitive
interpretation by the IRS or the courts.
The U.S. federal income tax treatment of an investor
acquiring Class A Common Stock may vary depending on its
particular situation. Certain investors (including, without
limitation, S corporations, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers and
taxpayers subject to alternative minimum tax) may be subject to
special treatment under the federal income tax laws not discussed
below. In addition, the following discussion does not consider
the effect of any applicable foreign, state, local or other tax
laws.
The Company has not sought, nor does it intend to seek, a
ruling from the IRS as to any of the matters covered by this
discussion, and there can be no assurance that the IRS will not
successfully challenge the conclusions reached in this
discussion. Each investor should consult its own tax advisor
with respect to the particular situation of such investor,
including the specific tax consequences under U.S. federal,
state, local, foreign and other tax laws, of the purchase,
ownership and disposition of Class A Common Stock.
The following discussion is divided into two parts. The
first part summarizes certain U.S. federal income tax
considerations primarily applicable to "U.S. Holders" who acquire
the Shares offered by this Prospectus. In general, a "U.S.
Holder" is a person who, for U.S. federal income tax purposes, is
(i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized under the laws of
the United States or of any State or the District of Columbia,
, other than a partnership that is not treated as a U.S. person
under any applicable Treasury Regulations, (iii) an estate whose
income is includable in gross income for U.S. federal income tax
purposes regardless of its source, or (iv) a trust for which
either (A) a U.S. court is able to exercise primary supervision
over its administration, or (B) one or more U.S. persons has the
authority to control all substantial decisions. Notwithstanding
the preceding sentence, to the extent and in accordance
with the procedures provided in Notice 98-25 (released by the U.S.
Internal Revenue Service on April 14, 1998) and future Treasury
Regulations which will incorporate Notice 98-25, certain trusts in
existence on August 20,1996, and treated as U.S. persons prior to
such date, which elect to continue to be treated as U.S. persons, will
also be considered U.S. Holders. The second part summarizes certain U.S.
federal income tax considerations applicable to United States
Aliens. As used in this Prospectus, the term "United States
Alien" means any person who, for U.S. federal income tax
purposes, is (i) a foreign corporation, (ii) a nonresident alien,
(iii) an estate that is not an estate or trust that is subject to
U.S. federal income taxation regardless of the source of its
income, (iv) a trust that is not described in clause (iv) of the
preceding sentence (as modified by Notice 98-25) or (v) a foreign
partnership one or more of the members of which is, for U.S.
federal income tax purposes, a foreign corporation, a nonresident
alien individual or an estate or trust that is not an estate or
trust that is subject to U.S. federal income taxation regardless
of the source of its income.
U.S. Holders
The material U.S. federal income tax considerations
applicable to U.S. Holders may be summarized as follows:
Adjustment of Conversion Price
The conversion ratio of the Debentures is subject to
adjustment under certain circumstances. In relevant part,
Section 305 of the Code and the Treasury Regulations issued
thereunder treat shareholders as receiving a constructive
distribution, taxable as a dividend (subject to a possible
dividends received deduction in the case of corporate holders) to
the extent of the Company's current and/or accumulated earnings
and profits, if the result of a distribution (or series of
distributions) is the receipt of property by some shareholders
and the increase in the proportionate interests of other
shareholders in the assets or earnings and profits of the
corporation. For purposes of Section 305 of the Code, holders of
the Debentures are treated as shareholders. Certain adjustments
in the conversion ratio (such as an adjustment to reflect a cash
distribution to holders of Class A Common Stock) will be deemed
to increase the proportionate interest of a holder of Debentures
in the fully diluted Class A Common Stock under Section 305 of
the Code, whether or not such holder ever exercises its
conversion privilege. Adjustments to the conversion ratio of the
Debentures, which may be subject to Section 305 of the Code, may
occur in limited circumstances.
Moreover, if a full adjustment is not made to the conversion
ratio of the Debentures to reflect a stock dividend or other
event that increases the proportionate interests of the holders
of outstanding Class A Common Stock in the assets or earnings and
profits of the Company, then such increase in the proportionate
interest of the holders of the Class A Common Stock generally
will be treated under Section 305 of the Code as a distribution
to such holders, taxable as ordinary income (subject to a
possible dividends received deduction in the case of corporate
holders) to the extent of the Company's current and/or
accumulated earnings and profits. The Indenture contemplates a
full adjustment to the conversion ratio of the Debentures and, in
addition, provides generally that the Company may increase the
conversion ratio as it deems advisable to avoid or diminish any
such adverse consequence to holders of Class A Common Stock.
Accordingly, the Company does not believe that the holders of
Class A Common Stock will be deemed to receive any such taxable
dividend distribution under Section 305 of the Code. See "The
Offering," above.
Conversion into Class A Common Stock
In general, no gain or loss will be recognized for U.S.
federal income tax purposes on a conversion of the Debentures
into shares of Class A Common Stock. However, cash paid in lieu
of a fractional share of Class A Common Stock will be treated as
a redemption by the Company of such fractional share. Such
payment will be treated as a distribution taxable as a dividend
to the redeemed stockholder under Section 302 of the Code unless
the redemption is "substantially disproportionate" with respect
to the stockholder under Section 302(b)(2) or is treated as a
distribution "not essentially equivalent to a dividend" with
respect to the stockholder under Section 302(b)(1). Most holders
would be expected to satisfy the substantially disproportionate
test upon a conversion, so the amount received for the fractional
share generally would be treated as an exchange under Section
302(a) of the Code. Such holders would recognize capital gain
(or loss) to the extent that the amount of such cash exceeds (or
is exceeded by) the portion of the adjusted basis of the
Debentures allocable to such fractional shares. The adjusted
basis of shares of Class A Common Stock received on conversion
will equal the adjusted basis of the Debentures converted,
reduced by the portion of adjusted basis allocated to any
fractional share of Class A Common Stock exchanged for cash. The
holding period of an investor in the Class A Common Stock
received on conversion will include the period during which the
converted Debentures were held.
Any payment of interest received by a U.S. Holder in
connection with a conversion would be taxable as ordinary income.
However, it is not anticipated that any interest will be payable
upon conversion, other than upon the conversion between the
Regular Record Date and the Interest Payment Date (which should
result in no net income to the holder because the interest paid
to the Company should offset the interest paid by the Company).
See "The Offering," above.
Section 1276 of the Code provides that gain on the
disposition of a market discount bond is ordinary income
(generally treated as interest) to the extent of the accrued
market discount. Congress contemplated that such gain would be
deferred, pursuant to regulations to be issued by the Treasury
Department, if the bond is disposed of in certain nonrecognition
transaction(s) (such as the conversion) until the disposition of
the property received in such transaction. At this time, no such
regulations have been issued.
Dividends on Class A Common Stock
Distributions on the shares of Class A Common Stock into
which Debentures have been converted will be taxable as dividends
(i.e., as ordinary income) to the extent of the Company's current
and/or accumulated earnings and profits. To the extent that the
amount of any distribution exceeds the Company's current and
accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of
capital, causing a reduction in the adjusted basis of the Class A
Common Stock (thereby increasing the amount of gain, or
decreasing the amount of loss, to be recognized by the investor
on a subsequent disposition on the Class A Common Stock), and the
balance in excess of adjusted basis will be taxed as capital gain
recognized on a sale or exchange of such stock. Corporate
shareholders will not be entitled to claim the dividends received
deduction with respect to distributions that do not qualify as
dividends. See the discussion regarding the dividends received
deduction below. For the remainder of this discussion, the term
"dividends" refers to a distribution paid entirely out of the
Company's current or accumulated earnings and profits, unless the
context otherwise requires.
Subject to important restrictions, dividends received by a
corporate holder of Class A Common Stock generally will qualify
for the 70 percent dividends received deduction provided by
Section 243(a)(1) of the Code. Under Section 246(b) of the Code,
the aggregate dividends received deduction permitted such a
corporate holder may not exceed 70 percent of such holder's
"taxable income," as specially computed for this purpose under
Section 246(b). Under Section 246(c) of the Code, the dividends
received deduction is not available if the holder does not comply
with certain holding period requirements, or to the extent the
taxpayer is under any obligation to make related payments with
respect to a position in substantially similar or related
property. If, during any portion of a holder's actual holding
period, such holder's risk of loss with respect to the stock
investment is diminished due to certain, circumstances described
in the Code, such portion of the holding period does not count
toward compliance with the statutory holding period requirement.
Section 246A of the Code may proportionately reduce the
percentage of the dividends received deduction available to a
corporate holder with respect to "debt-financed portfolio stock"
as defined in Section 246A(c) of the Code. In addition, for
purposes of computing the "adjusted current earnings" adjustment
to alternative minimum taxable income, a corporate holder will be
denied the benefit of the 70 percent dividends received
deduction.
Section 1059 of the Code will require a corporate holder to
reduce (but not below zero) its basis in the Class A Common Stock
by the "nontaxed portion" of any "extraordinary dividend" if the
holder has not held the Class A Common Stock subject to a risk of
loss for more than two years before the date the Company
declares, announces, or agrees to, the amount or payment of such
dividend, whichever is earliest. In addition, a holder will
recognize gain for the taxable year in which the extraordinary
dividend is received to the extent that the nontaxed portion of
such extraordinary dividend exceeds the holder's adjusted basis
in the Class A Common Stock. Generally, the nontaxed portion of
an extraordinary dividend is the amount effectively excluded from
income by virtue of allowance of a dividends received deduction.
An extraordinary dividend on common stock, such as the Class A
Common Stock, is a dividend that (i) equals or exceeds 10 percent
of the holder's adjusted basis in the stock (reduced by the
nontaxed portion of any prior extraordinary dividend), treating
all dividends having ex-dividend dates within an 85-day period as
one dividend, or (ii) exceeds 20 percent of the holder's adjusted
basis in the stock, treating all dividends having ex-dividend
dates within the same 365-day period as one dividend. A
stockholder may elect to determine whether a dividend on the
Class A Common Stock is extraordinary by reference to the fair
market value of the stock on the day before the ex-dividend date
(rather than by reference to the stockholder's adjusted basis)
for purposes of the 10 percent or 20 percent tests described
above if the holder is able to establish the fair market value of
the Class A Common Stock as of such date to the satisfaction of
the IRS. An extraordinary dividend would also include any amount
treated as a dividend in the case of a redemption (i) that is not
pro rata as to all stockholders, (ii) that is in partial
liquidation of the Company, or (iii) that would not have been
treated as a dividend if any options had not been taken into
account under Section 318(a)(4) or Section 304(a) had not
applied, regardless of the relative size of the dividend and
regardless of the corporate holder's holding period for the Class
A Common Stock.
Disposition of Class A Common Stock
Subject to certain special rules under Section 302 of the
Code in the case of redemptions (whereunder the total proceeds
received by a seller of Class A Common Stock may be treated as a
dividend) and to the discussion of Section 1059 of the Code in
cases of certain "extraordinary dividends" under "Dividends on
Class A Common Stock" above, each holder of Class A Common Stock
into which the Debentures are converted, in general, will
recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Class A Common Stock, generally in an
amount equal to the difference between (i) the amount of cash
plus the fair market value of any property received, and (ii) the
holder's adjusted tax basis in the Class A Common Stock. Any
gain or loss recognized on the sale, exchange, redemption,
retirement or other disposition of Class A Common Stock should be
capital gain or loss (subject to certain exceptions that may
apply if the holder of Debentures converted into Class A Common
Stock acquired such Debentures at a market discount under
Sections 1276 through 1278 of the Code, and did not recognize the
accrued market discount at the time of the conversion). If, at
the time of the sale or exchange, the Class A Common Stock has
been held by an individual for (i) more than 18 months, then any
resulting gain generally will be taxed at a rate of 20 percent,
(ii) no more than 18 months, but more than 12 months, then any
resulting gain generally will be taxed at a rate of 28 percent,
or (iii) no more than 12 months, then any resulting gain or loss
will be taxed at ordinary income rates. Capital losses may be
used to offset capital gains and, to a limited extent, ordinary
income.
Backup Withholding
Federal "backup withholding" at a rate of 31 percent on
dividends, interest payments, and proceeds from a sale, exchange,
or redemption of Class A Common Stock or the Debentures through a
broker will apply unless the holder either (i) is a corporation
or comes within certain other exempt categories, and, when
required, demonstrates this fact, or (ii) provides a social
security number or other taxpayer identification number ("TIN"),
certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup
withholding rules. A holder who does not provide the Company
with its correct TIN also may be subject to penalties imposed by
the IRS. Any amount withheld from a payment to a holder under
the backup withholding rules is creditable against such holder's
federal income tax liability and may entitle such holder to a
refund, provided the required information is furnished to the
IRS.
The Company will report to the holders of the Class A Common
Stock and to the IRS the amount of any such reportable payments
for each calendar year and the amount of tax withheld, if any.
United States Aliens
The following is a discussion of the material U.S. federal
income and estate tax consequences of the acquisition, ownership
and disposition of Class A Common Stock acquired upon conversion
of Debentures generally applicable to United States Aliens. The
discussion does not address aspects of taxation other than
federal income and estate taxation and does not address all
aspects of federal income and estate taxation. The discussion
does not consider any specific facts or circumstances that may
apply to a particular United States Alien or under any particular
tax treaty. Accordingly, holders are urged to consult their tax
advisors regarding the U.S. federal, state, local, and foreign
income and other tax consequences of acquiring, holding and
disposing of Class A Common Stock, and whether such a United
States Alien would be treated as a resident of the United States
for federal income tax purposes.
Dividends
In general, and provided that an applicable tax treaty does
not provide otherwise, dividends paid to a United States Alien
that are not effectively connected with a trade or business
carried on by the United States Alien within the United States
will be subject to United States withholding tax at a rate of 30
percent of the gross amount thereof or a reduced rate under a
treaty if the payee files form W-8 or an acceptable substitute
with the withholding agent. Dividends effectively connected with
a U.S. trade or business of a United States Alien generally will
not be subject to withholding (if the United States Alien files
certain forms with the payor of the dividend) and generally will
be subject to U.S. federal income tax at the same rates and in
the same manner as if the income had been received by a U.S.
Holder. In the case of a foreign corporation, such effectively
connected income also may be subject to the branch profits tax.
United States Aliens should consult any applicable income tax
treaties, which may provide for rules different from those
described above. A United States Alien would be required to
satisfy certain certification requirements in order to claim
treaty benefits or to otherwise claim a reduction of or exemption
from withholding under the foregoing rules. Treasury Regulations
were recently adopted that will revise in certain respects the
rules applicable to United States Aliens who own Class A Common
Stock after 1998 (the "New Regulations"). In general, under the
New Regulations, the withholding agent must treat each partner of
a foreign partnership, rather than the partnership itself, as the
payee unless the foreign partnership has provided the withholding
agent with a withholding certificate certifying either that (i)
it has an agreement with the IRS to serve as a withholding agent
or (ii) the income is effectively connected with a U.S. trade or
business. Absent a valid withholding certificate from the
foreign partnership, the withholding agent must withhold from a
foreign partnership based on the tax status of each partner,
which is presumed to be foreign (and not entitled to the benefit
of any treaty) in the absence of documentary evidence (generally
on Form W-8) to the contrary. The New Regulations are effective
with respect to payments made after December 31, 1998.
Conversion into Class A Common Stock
Except with respect to interest paid in connection with a
conversion and except with respect to those payments of cash in
lieu of fractional shares of Class A Common Stock which are
treated as a dividend (see the discussion of redemptions under
"U.S. Holders - Conversion into Class A Common Stock," above), no
U.S. federal income tax will be imposed upon United States Aliens
in connection with the conversion of a Debenture into shares of
Class A Common Stock. However, any dividends paid on shares of
Class A Common Stock issued upon conversion of a Debenture will
be subject to U.S. withholding tax as described in this section.
Sale of Common Stock
Generally, a United States Alien will not be subject to U.S.
federal income tax on any gain realized upon the disposition of
his Class A Common Stock unless (i) the Company is or has been
during the five-year period ending on the date of disposition, a
"United States real property holding corporation" for federal
income tax purposes (which the Company has not been and does not
believe it is or will become in the future) and the United States
Alien held, directly or indirectly at any time during the five-
year period ending on the date of disposition, more than 5
percent of the Class A Common Stock; (ii) the gain actually is
effectively connected with a trade or business carried on by the
United States Alien within the United States (or, if a tax treaty
applies, is attributable to a permanent establishment); (iii) the
gain is not described in clause (ii) above, the United States
Alien is an individual who holds the Class A Common Stock as a
capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition, and either (a) such
individual has a "tax home" (as defined for U.S. Federal income
tax purposes) in the United States, or (b) the gain is
attributable to an office or other fixed place of business
maintained in the United States by such individual; or (iv) the
United States Alien is subject to tax pursuant to the Code
provisions applicable to certain U.S. expatriates.
In the case of a United States Alien described in clause
(ii) above, gain that is effectively connected with the conduct
of a trade or business within the United States by a United
States Alien will be subject to the same U.S. federal income tax
on net income as applies to United States persons (and, with
respect to corporate holders under certain circumstances, the
branch profits tax) but will not be subject to withholding. An
individual described in clause (iii) above generally will be
subject to tax at a 30 percent rate on any gain recognized on
such disposition, which may be offset by U.S. capital losses
(notwithstanding the fact that he or she is not considered a
resident of the United States). Thus, United States Aliens who
have spent 183 days or more in the United States in the taxable
year in which they contemplate a sale of the Class A Common Stock
are urged to consult their tax advisors as to the tax
consequences of such sale. United States Aliens should consult
applicable treaties, which may provide for different rules.
Legislative Developments
Legislation was proposed in 1990, 1992 and again in 1997
which, if enacted into law, would, under certain circumstances,
result in the imposition of United States federal income tax on
gain realized from the disposition of Class A Common Stock by
certain United States Aliens who own or owned 10 percent or more
of the Class A Common Stock.
Estate Tax
Class A Common Stock, owned or treated as owned by an
individual who is not a citizen or resident (as specially defined
for U.S. federal estate tax purposes) of the United States at the
time of death, will be includable in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable
tax treaty provides otherwise. Such individual's estate may be
subject to U.S. federal estate tax on the property includable in
the estate for U.S. federal estate tax purposes. Estates of
nonresident aliens are generally allowed a credit that is
equivalent to an exclusion of $60,000 of assets from the estate
for U.S. federal estate tax purposes.
Backup Withholding and Information Reporting
The Company must report annually to the IRS and to each
United States Alien the amount of dividends paid to, and the tax
withheld with respect to, each United States Alien. These
information reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax
treaty. Copies of these information returns also may be made
available under the provisions of a specific treaty or agreement
to the tax authorities in the country in which the United States
Alien resides. United States information reporting and backup
withholding tax (discussed above for U.S. Holders) generally will
not apply to dividends paid on Class A Common Stock to a United
States Alien either at an address outside the United States
(provided that the payor does not have definite knowledge that
the payee is a United States person) or if the dividends are
subject to withholding at the 30 percent rate (or lower treaty
rate) through the end of 1998. Effective in 1999, the rules
governing dividends will parallel the rules governing interest
payments paid to persons outside the United States and payor
reliance on a foreign address as proof of payee foreign status
will not be satisfactory. The new regulations require either
that (i) specific certifications be made (such as completion of a
valid Form W-8) or (ii) taxes be withheld on the payment to the
foreign person, in order for a payee to be considered a foreign
beneficial owner and not subject to backup withholding.
The payment of the proceeds from the disposition of Class A
Common Stock to or through the United States office of a broker
will be subject to information reporting and backup withholding
unless the owner, under penalties of perjury, certifies, among
other things, as to its status as a United States Alien or
otherwise establishes an exemption (and the broker has no actual
knowledge to the contrary). The payment of the proceeds from the
disposition of Class A Common Stock to or through a non-United
States office of a broker may be subject to information reporting
or backup withholding under certain circumstances. In the case of
proceeds from a sale of a share by a United States Alien paid to
or through the foreign office of a U.S. broker or a foreign
office of a foreign broker that is (i) a controlled foreign
corporation for U.S. tax purposes or (ii) a person 50 percent or
more of whose gross income for the three-year period ending with
the close of the taxable year preceding the year of payment (or
for the part of that period that the broker has been in
existence) is effectively connected with the conduct of a trade
or business within the United States, information reporting is
required unless the broker has documentary evidence in its files
that the payee is not a U.S. person and certain other conditions
are met, or the payee otherwise establishes an exemption.
Backup withholding tax is not an additional tax and may be
credited against a holder's U.S. federal income tax liability,
provided that required information is furnished to the IRS.
United States Aliens generally may obtain a refund of any excess
amount withheld under the backup withholding rules by filing the
appropriate refund claim with the IRS.
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO
THE PARTICULAR SITUATION OF SUCH INVESTOR, INCLUDING THE SPECIFIC
TAX CONSEQUENCES UNDER UNITED STATES FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS, OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF CLASS A COMMON STOCK.
LEGAL MATTERS
The validity of the Shares has been passed upon for the Company
by Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1333 New Hampshire
Avenue, N.W., Suite 400, Washington, DC 20036.
EXPERTS
The balance sheets as of January 3, 1998 and December 28,
1996, and the statements of income, shareholders' equity, and
cash flows and related financial statement schedules for each of
the three fiscal years in the period ended January 3, 1998,
incorporated by reference in this Prospectus, have been
incorporated herein in reliance on the report, which includes
an explanatory paragraph for the revision to the 1996 financial
statements to reflect adjustments related to store closing reserves,
of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The financial statements of the Company at January 3, 1998, and for
each of the three fiscal years in the period ended January 3, 1998,
which are incorporated herein by reference to Company's Annual
Report on Form 10-K for the year ended January 3, 1998, have
been audited by Coopers & Lybrand L.L.P., independent accountants, as
set forth in their report dated February 10, 1998.
SAFE HARBOR STATEMENT
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
uncertainties detailed from time-to-time in the Company's filings
with the Securities and Exchange Commission. In addition, with
respect to the anticipated proceeds from the disposition of
assets in the Southwest, additional factors that could cause
results to differ materially include conditions in the real
estate market and general economic conditions in the local
communities where the assets are located.
