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 March 28, 1998
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 April 30,
1998.
Class A Common Stock 236,572,031
Class B Common Stock 232,727,364
Page 1 of 18
The Exhibit index is located on page 16.
FOOD LION, INC.
INDEX TO FORM 10-Q
March 28, 1998
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Income for the
12 weeks ended March 28, 1998 and March 22, 1997 3
Consolidated Balance sheets as of March 28,
1998, January 3, 1998 and March 22, 1997 4
Consolidated Statements of Cash Flows for
12 weeks ended March 28, 1998
and March 22, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13
Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FOOD LION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 12 Weeks ended March 28, 1998 and March 22, 1997
(Dollars in thousands except per share data)
Restated
Mar 28, 1998 Mar 22, 1997 Mar 28, 1998 Mar 22, 1997
% %
<S> <C> <C> <C> <C>
Net sales $2,305,473 $2,276,746 100.00 100.00
Cost of goods sold 1,800,115 1,783,063 78.08 78.32
Gross profit 505,358 493,683 21.92 21.68
Selling and administrative expenses 336,295 346,841 14.59 15.23
Depreciation and amortization 52,418 48,697 2.27 2.14
Operating income 116,645 98,145 5.06 4.31
Interest expense 27,614 26,685 1.20 1.17
Income before income taxes 89,031 71,460 3.86 3.14
Provision for income taxes 33,797 27,869 1.47 1.22
Net income $ 55,234 $ 43,591 2.39 1.92
Basic and diluted earnings per share $ 0.12 $ 0.09
Dividends per share $ 0.04 $ 0.03
Weighted average number
of shares outstanding:
Class A 236,334,766 236,195,448
Class B 232,727,364 232,902,364
Total 469,062,130 469,097,812
</TABLE>
-3-
<TABLE>
FOOD LION, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
Restated
Mar 28, 1998 January 3, 1998 Mar 22, 1997
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 152,231 $ 56,147 $ 101,205
Receivables 157,306 166,790 142,509
Inventories 1,014,622 982,744 974,861
Prepaid expenses and other 28,031 28,234 30,463
Deferred tax asset 63,123 63,123 75,807
Total current assets 1,415,313 1,297,038 1,324,845
Property, at cost, less accumulated
depreciation 1,819,752 1,842,269 1,779,281
Deferred tax asset 51,980 51,980 8,619
Intangible assets 269,480 267,656 276,754
Total assets $3,556,525 $3,458,943 $3,389,499
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings $ - $ 80,000 $ 300,000
Accounts payable, trade 496,724 460,714 426,848
Accrued expenses 409,043 351,173 402,307
Capital lease obligations - current 20,915 20,427 21,452
Long term debt - current 2,580 2,525 988
Other liabilities - current 9,446 8,756 6,813
Income taxes payable 27,796 - ____ 20,868
Total current liabilities 966,504 923,595 1,179,276
Long-term debt 585,260 586,355 334,085
Capital lease obligations 505,479 489,928 470,545
Other liabilities 126,746 125,880 152,892
Total liabilities 2,183,989 2,125,758 2,136,798
Shareholders' Equity:
Class A non-voting common stock, $.50 par value 118,253 118,112 118,130
Class B voting common stock, $.50 par value 116,364 116,364 116,451
Additional capital 2,248 794 1,376
Retained earnings 1,135,671 1,097,915 1,016,744
Total shareholders' equity 1,372,536 1,333,185 1,252,701
Total liabilities and shareholders' equity $3,556,525 $3,458,943 $3,389,499
</TABLE>
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FOOD LION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 12 Weeks ended March 28, 1998 and March 22, 1997
(Dollars in thousands)
12 Weeks
Restated
Mar 28,1998 Mar 22,1997
Cash flows from operating activities
Net income $55,234 $43,591
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 52,418 48,697
(Gain) Loss on disposals of property (4,834) 1,515
Deferred income taxes - (5,850)
Changes in operating assets and liabilities:
Receivables 9,484 8,654
Inventories (31,878) 90,882
Prepaid expenses and other 203 3,197
Accounts payable and accrued expenses 93,880 (19,999)
Income taxes payable 27,796 15,290
Other liabilities 1,556 (1,847)
Total adjustments 148,625 140,539
Net cash provided by operating activities 203,859 184,130
Cash flows from investing activities
Capital expenditures (58,304) ( 53,464)
Proceeds from disposal of property 56,224 758
Net cash used in investing activities ( 2,080) ( 52,706)
Cash flows from financing activities
Net (payments)proceeds under short-term borrowings (80,000) 49,990
Principal payments on long-term debt (740) (161,011)
Principal payments under capital lease obligations (8,772) (5,591)
Dividends paid (17,474) (15,693)
Repurchase of common stock - (874)
Proceeds from issuance of common stock 1,291 589
Net cash used in financing activities (105,695) (132,590)
Net increase in cash and cash
equivalents 96,084 (1,166)
Cash and cash equivalents at beginning
of period 56,147 102,371
Cash and cash equivalents at end of period $152,231 $101,205
-5-
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 3, 1998 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:
Mar 28, 1998 Mar 22, 1997
Cash payments for income taxes $ 6,681 $18,144
Cash payments for interest,
net of amounts capitalized 18,390 21,326
Non-cash investing and financing activities:
Capitalized lease obligations
incurred for store properties 33,024 18,092
Capitalized lease obligations
terminated for store properties 8,213 11,509
Conversion of long-term debt
to stock 300 0
The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to
be cash equivalents.
During the first quarter additional Class A common stock of 37,974
shares was issued upon the conversion of $.3 million of long-term
debt. The convertible subordinated debentures are convertible
into shares of the Company's Class A non-voting common stock
-6-
at a conversion price of $7.90 per share, subject to adjustment
under certain circumstances.
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 86% of inventories, in 1998 and 1997,
respectively. Meat, produce and deli inventories are valued on the
first-in, first-out (FIFO) method. If the FIFO method
were used entirely,inventories would have been $117.9 million and
$107.5 million greater for the period ended March 28, 1998 and
March 22, 1997, respectively. Application of the LIFO method
resulted in increases in the cost of goods sold of $3.5
million and $3.0 million for the period ended March 28, 1998
and March 22, 1997, respectively.
4) Restatement of 1997 Financial Statements
The Company has determined that its financial statements for the
quarter ended March 22, 1997 should be restated to reflect
adjustments related to the acquisition of Kash n' Karry and
store closing costs. The impact of the restatement on
the consolidated statement of income for the quarter then ended is
as follows:
Amounts Restated
Previously Reported Amounts
Operating income $101,323 $98,145
Net income 45,529 43,591
Basic earnings per share $0.10 $0.09
5) Year 2000 Disclosure
The Company has and will continue to make certain investments in
software systems and applications to ensure the Company is year
2000 compliant. The financial impact to the Company has not been
and is not anticipated to be material to its financial position or
results of operations in any given year.
-7-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS (12 weeks ended March 28, 1998 compared to 12
weeks ended March 22, 1997)
The Company's sales for the first quarter of 1998 were $2.3 billion, an
increase of 1.3% over the corresponding period of the prior year. Sales
increased 5.0% over the first quarter of last year excluding 1997 sales
for stores in the Company's Southwest market which closed during the
fourth quarter of 1997. Same store sales increased 1.7%. First quarter
1998 sales were highlighted by an increase in both customer counts and
average sales per customer. The Company experienced the strongest sales
performance in Florida, Maryland, North Carolina and Virginia. Sales
were also positively impacted during March by a customer contest in
Food Lion stores which included a $1 million giveaway related to the
Company's MVP customer card program. In addition, sales trends improved
with the implementation in January of the Preferred Customer Club card,
a customer loyalty program for Kash n' Karry stores.
The Company's 1998 business plan includes opening 75 new stores,
closing 32 stores (approximately 14 of these closings will be
relocations) and renovating approximately 133 existing stores. With
this growth plan, the Company anticipates a net increase in store
square footage of 8.0% in 1998. As of March 28, 1998, the Company had
opened 14 new stores, closed seven stores (of which three were
relocations), and completed renovations of six existing stores.
Gross profit was 21.92% of sales for the first quarter this year
compared to 21.68% of sales for the same period last year. The increase
in gross profit is due to continued category management initiatives
particularly in the grocery and meat departments. Also the Company's
gross profits were positively impacted by its Kash n' Karry stores
which offer an expanded selection of higher margin non-food items in
their larger store format.
For the first quarter of 1998, selling and administrative expenses were
$336.3 million or 14.59% of sales as compared to 15.23% of sales in the
corresponding period of the prior year. The improvement in selling and
administrative expenses of 0.64% of sales is due to lower store
operating expenses resulting from (1) a continued focus on cost
containment, (2) improved sales performance, (3) the fourth quarter
1997 closing of the poor performing stores in the Company's Southwest
market, and (4) improvement in the cost structure at Kash n' Karry due
to the integration of all administrative functions during 1997.
The Company recorded $3.5 million in store closing costs (included in
Selling and Administrative Expenses on the Company's Consolidated
Statement of Income), related to planned store closings, during the
-8-
first quarter of 1998. These costs are included in Additions in the
table below.
Store Closing Costs Reduction Lease Accrued Total
(Dollars in millions) of Asset Liabilities Expenses
Values
Balance at Jan. 3, 1998 $103.8 $123.1 $7.4 $234.3
Additions 0.0 5.7 2.9 8.6
Reductions (65.9) (1.8) (2.4) (70.1)
Reclassifications .7 (1.4) .7 0.0
Recognition of unused 0.0 0.0 0.0 0.0
reserves
Balance at Mar. 28, 1998 $38.6 $125.6 $8.6 $172.8
Additions also include gains ($5.1 million) related to the disposal of
properties during the quarter. The Company recorded these gains to the
store closing reserve pending the results of disposition efforts on
remaining closed store properties.
Significant reductions in the Company's store closing costs relate to
the sale of 43 owned stores in the Southwest market, which the Company
exited in the fourth quarter of 1997. At the end of the first quarter
1998, 48 of the 61 stores in the Southwest market had been disposed (44
owned stores were sold, one store lease was terminated, one store lease
was assigned and two leased stores were subleased). The Company
continues to market its distribution center located in Roanoke, Texas.
As of March 28, 1998 the Company has received $78 million in proceeds
related to these disposition efforts since closing the stores in
November of 1997.
At the end of the first quarter of 1998 the Company had $172.8 million
in store closing costs related to 183 stores (174 leased and nine
owned)and two distribution centers. Disposition efforts on the
properties related to these stores (leases, equipment and store
buildings) began immediately following the store closing and will
continue until all related properties are disposed.
Depreciation and amortization of $52.4 million was 2.27% of sales
compared to 2.14% of sales in the first quarter of 1997. The 0.13% of
sales increase is due to leasehold improvements and equipment purchases
for new stores and renovations since the first quarter last year.
Interest expense as a percent of sales was 1.20% for first quarter 1998
compared to 1.17% for the corresponding period last year. The increase
in interest is due to the amortization of lease liabilities on
closed stores and an increase in interest expense on store capital
leases resulting from new store openings and renovations.
-9-
Net income for the quarter was $55.2 million or 2.39% of sales as
compared to 1.92% of sales in the restated first quarter of the prior
year. Basic and diluted earnings per share were $.12 as compared to
$.09 restated last year.
Liquidity and Capital Resources
Cash provided by operating activities totaled $203.9 million for the
12 weeks ended March 28, 1998 compared with $184.1 million for the same
period last year. The increase was primarily due to an increase in
accounts payable, accrued expenses and net income, offset by an
increase in inventory levels.
Capital expenditures totaled $58.3 million for the 12 weeks ended March
28, 1998 compared with $53.4 million for the same period in 1997. The
company opened 14 new stores, closed seven stores (including three
relocations), and completed the renovation of six existing stores
during the first quarter of 1998. Food Lion plans to open a total of
75 new stores in 1998 and to renovate approximately 133 stores. The
Company anticipates that the majority of the new stores will be opened
under conventional leasing arrangements.
Significant capital expenditures currently estimated for the remainder
of 1998 are $360 million. Capital expenditures for 1998 will be
financed through funds generated from operations, existing bank and
credit lines, and other debt, if necessary.
On April 27, 1998 the Company exercised its right to call all of its 5%
convertible subordinated debentures, orginally due in 2003. The
redemption date is May 27, 1998, and the bondholders' right to convert
debentures terminates on May 18, 1998. The redemption will be funded by
cash provided by operations. At March 28, 1998, the Company had $113.8
million outstanding related to these convertible debentures. The
conversion election will have no impact on the Company's basic and
diluted earnings per share calculations.
The Company maintains the following bank and credit lines:
$250 million commercial paper program under which no borrowings
were outstanding during the first quarters of 1998 and 1997.
A revolving credit facility with a syndicate of commercial banks
providing $700 million in committed lines of credit, of which $350
million expires in December, 1998 and the remaining $350 million will
expire in December, 2001. There were no outstanding borrowings as of
March 28, 1998, compared with $300 million outstanding as of March 22,
1997.
-10-
Additional short-term committed lines of credit totaling $35
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. There were no borrowings as of
March 28, 1998 or March 22, 1997. During the first quarter of 1998,
the Company had average borrowings of $6.3 million at a daily
weighted average interest rate of 5.61% with a maximum amount
outstanding of $20 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 first quarter were as follows (see
table below):
Informal Credit Arrangements
(dollars in millions) 1998 1997
Outstanding borrowings at end of first quarter $0 $0
Average borrowings $10.0 $ 0.2
Maximum amount outstanding $80.0 $20.0
Daily weighted average interest rate 5.66% 5.46%
During the first quarter of 1998, the Company did not purchase any
shares of Class A or Class B stock, under the Company's $100 million
stock repurchase plan which expired April 1998. 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. The Company's Board of Directors
renewed this program until May, 1999.
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
-11-
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.
-12-
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 10K
filed April 8, 1998 for the year ended January 3, 1998.
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 7,1998.
(b). Not applicable
(c). Matters voted upon at the meeting.
Election of Directors For Withheld Broker
Non-Votes
Pierre-Olivier Beckers 201,517,594 4,213,685 26,996,085
Dr. J. Kelly Collamore 201,670,587 4,060,692 26,996,085
JC Coppieters`T Wallant 201,431,095 4,300,184 26,996,085
William G. Ferguson 201,612,322 4,118,957 26,996,085
Dr.Bernard W. Franklin 201,534,759 4,196,520 26,996,085
Joseph C. Hall, Jr. 201,623,421 4,107,858 26,996,085
Margaret H. Kluttz 201,481,123 4,250,156 26,996,085
Dominique Raquez 201,508,584 4,222,695 26,996,085
Tom E. Smith 201,531,820 4,199,459 26,996,085
Gui de Vaucleroy 201,511,128 4,220,151 26,996,085
Appointment of For Against Abstain Broker
Independent Accountants Non-votes
Coopers & 205,391,501 135,923 203,855 26,996,085
Lybrand,L.L.P.
Item 5. Other Information
This item is not applicable.
-13-
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
27 Financial Data Schedule
(b). The Company did not file a report on Form 8-K for the period
ended March 28, 1998.
-14-
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: May 12, 1998 BY: Laura Kendall
Laura Kendall
Vice President of Finance
Chief Financial Officer
Principal Financial Officer
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EXHIBIT INDEX
SEQ. PAGE
EXHIBIT # DESCRIPTION NO.
27 Financial Data Schedule 17-18
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extractd from the
Consolidated Balance Sheets, the Consolidated Statements of Income and the
Consolidated Statement of Cash Flows and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> MAR-28-1998
<CASH> 152,231
<SECURITIES> 0
<RECEIVABLES> 157,306
<ALLOWANCES> 0
<INVENTORY> 1,014,622
<CURRENT-ASSETS> 1,415,313
<PP&E> 2,862,393
<DEPRECIATION> 1,042,641
<TOTAL-ASSETS> 3,556,525
<CURRENT-LIABILITIES> 966,504
<BONDS> 585,260
0
0
<COMMON> 236,865
<OTHER-SE> 1,135,671
<TOTAL-LIABILITY-AND-EQUITY> 3,556,525
<SALES> 2,305,473
<TOTAL-REVENUES> 2,305,473
<CGS> 1,800,115
<TOTAL-COSTS> 1,800,115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,614
<INCOME-PRETAX> 89,031
<INCOME-TAX> 33,797
<INCOME-CONTINUING> 55,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,234
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
