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 27, 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 April 30, 1999.
Class A Common Stock 244,429,133
Class B Common Stock 229,399,364
Page 1 of 31
The Exhibit index is located on page 19.
FOOD LION, INC.
INDEX TO FORM 10-Q
March 27, 1999
Part I.
FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Income for the
12 weeks ended March 27, 1999 and March 28, 1998 3
Consolidated Balance Sheets as of March 27,
1999, January 2, 1999 and March 28, 1998 4
Consolidated Statements of Cash Flows for
12 weeks ended March 27, 1999 and March
28, 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security 17
Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FOOD LION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 12 Weeks ended March 27, 1999 and March 28, 1998
(Dollars in thousands except per share data)
<TABLE>
Mar 27, 1999 Mar 28, 1998 Mar 27, 1999 Mar 28, 1998
% %
<S> <C> <C> <C> <C>
Net sales $2,407,046 $2,305,473 100.00 100.00
Cost of goods sold 1,856,862 1,800,115 77.14 78.08
Gross profit 550,184 505,358 22.86 21.92
Selling and administrative expenses 373,842 336,295 15.53 14.59
Depreciation and amortization 57,459 52,418 2.39 2.27
Operating income 118,883 116,645 4.94 5.06
Interest expense 24,353 27,614 1.01 1.20
Income before income taxes 94,530 89,031 3.93 3.86
Provision for income taxes 35,922 33,797 1.50 1.47
Net income $ 58,608 $ 55,234 2.43 2.39
Basic and diluted earnings per share $ 0.12 $ 0.12
Dividends per share $ 0.04 $ 0.04
Weighted average number
of shares outstanding:
Class A 247,906,512 236,334,766
Class B 230,830,364 232,727,364
Total 478,736,876 469,062,130
</TABLE>
-3-
FOOD LION, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
(Unaudited)
Mar 27, 1999 January 2, 1999 Mar 28, 1998
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 184,690 $ 123,592 $ 176,155
Receivables 186,423 199,101 157,306
Inventories 1,090,980 1,103,635 1,014,622
Prepaid expenses 19,302 20,552 22,455
Deferred tax asset 65,397 65,397 63,123
Total current assets 1,546,792 1,512,277 1,433,661
Property, at cost, less accumulated
depreciation 1,926,031 1,897,080 1,819,752
Deferred tax asset 4,707 4,707 51,980
Intangible assets 256,524 258,402 269,480
Other assets 3,421 3,495 5,576
Total assets $3,737,475 $3,675,961 $3,580,449
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings $ - $ 61,000 $ -
Accounts payable, trade 545,480 545,015 520,648
Accrued expenses 418,308 360,105 409,043
Capital lease obligations - current 22,149 21,940 20,915
Long term debt - current 42,403 42,518 2,580
Other liabilities - current 10,136 9,839 9,446
Income taxes payable 35,262 - ____ 27,796
Total current liabilities 1,073,738 1,040,417 990,428
Long-term debt 429,208 429,763 585,260
Capital lease obligations 486,220 492,660 505,479
Other liabilities 110,635 114,199 126,746
Total liabilities 2,099,801 2,077,039 2,207,913
Shareholders' Equity:
Class A non-voting common stock, $.50 par value 123,957 123,946 118,253
Class B voting common stock, $.50 par value 115,415 115,415 116,364
Additional capital 60,457 60,332 2,248
Retained earnings 1,337,845 1,299,229 1,135,671
Total shareholders' equity 1,637,674 1,598,922 1,372,536
Total liabilities and shareholders' equity $3,737,475 $3,675,961 $3,580,449
</TABLE>
-4-
FOOD LION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 12 Weeks ended March 27, 1999 and March 28, 1998
(Dollars in thousands)
12 Weeks
Mar 27,1999 Mar 28,1998
Cash flows from operating activities
Net income $ 58,608 $ 55,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,459 52,418
Gain on disposals of property (312) (4,834)
Changes in operating assets and liabilities:
Receivables 12,678 9,484
Inventories 12,655 (31,878)
Prepaid expenses 1,250 59
Other assets 74 144
Accounts payable and accrued expenses 58,668 80,611
Income taxes payable 35,262 27,796
Other liabilities (3,267) 1,556
Total adjustments 174,467 135,356
Net cash provided by operating activities 233,075 190,590
Cash flows from investing activities
Capital expenditures (86,084) (58,304)
Proceeds from disposal of property 900 56,224
Net cash used in investing activities ( 85,184) ( 2,080)
Cash flows from financing activities
Net payments under short-term borrowings (61,000) (80,000)
Principal payments on long-term debt (670) (740)
Principal payments under capital lease obligations (5,267) (8,772)
Dividends paid (19,992) (17,474)
Proceeds from issuance of common stock 136 1,291
Net cash used in financing activities ( 86,793) (105,695)
Net increase in cash and cash
equivalents 61,098 82,815
Cash and cash equivalents at beginning
of period 123,592 93,340
Cash and cash equivalents at end of period $184,690 $176,155
-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 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:
Mar 27, 1999 Mar 28, 1998
Cash payments for income taxes $ 658 $ 6,681
Cash payments for interest,
net of amounts capitalized 16,145 18,390
Non-cash investing and financing activities:
Capitalized lease obligations
incurred for store properties 0 33,024
Capitalized lease obligations
terminated for store properties 964 8,213
Conversion of long-term debt
to stock 0 300
The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to
be cash equivalents.
-6-
3) Inventories
Inventories are stated at the lower of cost or market. Inventories
valued using the last-in, first-out(LIFO) method comprised approximately 86%
and 85% of inventories as of March 27, 1999 and March 28, 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 $140.5 million and $117.9 million greater as of March 27, 1999 and
March 28, 1998, respectively. Application of the LIFO method resulted in
increases in the cost of goods sold of $1.4 million and $3.5 million for the
periods ended March 27, 1999 and March 28, 1998, respectively.
4) Reclassification
Certain financial statement items have been reclassified to
conform to the current year's format.
-7-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS (12 weeks ended March 27, 1999 compared to 12 weeks
ended March 28, 1998)
The Company recorded earnings of $58.6 million for the first quarter
of 1999, an increase of 6.1% over the corresponding period of the prior
year. The first quarter of 1999 includes an after-tax charge of $2.4
million related to retirement benefits for the Company's former
President and Chief Executive Officer ("CEO") (see discussion below).
Excluding this charge, earnings would have been $61.0 million, representing
an increase of 10.5% over the first quarter of 1998.
Sales for the first quarter of 1999 were $2.4 billion, an increase
of 4.4% over the first quarter of 1998. The Company's first 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, sales increased 6.8% over the
first quarter of last year. Same store sales increased 2.0%. The
Company experienced the strongest same store sales performance in North
and South Carolina, Maryland, Delaware and Georgia.
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 first quarter of 1999 was to reduce reported sales by approximately
$54.0 million. This change does not impact the same store sales
calculation or the Company's net income, as gross profit and expense
dollars are the same under either method. The only difference is that
under the new method the discount granted is reflected in sales rather
than cost of goods sold under the original method. The following table
illustrates the impact of the change.
-8-
First Quarter of
1999 1999
1999 Dollars %
Dollars Comparable % Comparable
As to As to
Reported Qtr. 1- Reported Qtr. 1-
1998 1998
(Dollars and (New (Original (New (Original
shares in Method) Method) Method) Method)
thousands)
Net sales 2,407,046 2,461,014 100.00% 100.00%
Cost of goods sold 1,856,862 1,910,830 77.14 77.64
Gross profit 550,184 550,184 22.86 22.36
Selling and
administrative 373,842 373,842 15.53 15.20
expenses
Depreciation and
amortization 57,459 57,459 2.39 2.33
Operating income 118,883 118,883 4.94 4.83
Interest expense 24,353 24,353 1.01 0.99
Income before
income taxes 94,530 94,530 3.93 3.84
Provision for
income taxes 35,922 35,922 1.50 1.46
Net income $ 58,608 $ 58,608 2.43% 2.38%
Basic and diluted
earnings per share $ .12 $ .12
Weighted average
number of shares 478,737 478,737
outstanding
The Company's 1999 business plan includes opening 80 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 7.0% in 1999. As of March 27, 1999, the Company had opened 21
new stores, closed five stores (of which four were relocations), and
completed renovations of eight existing stores.
Gross profit was 22.86% of sales (22.36% adjusted to the original
method of reporting sales tax) for the first quarter this year compared to
21.92% of sales for the same period last year. The increase in gross
profit is due to continued category management initiatives particularly in
the perishable and grocery departments. The first quarter LIFO charge was
$1.4 million. The Company's internal testing for the first quarter
indicated minimal inflation. The current LIFO provision is adequate to
cover this level of inflation.
For the first quarter of 1999, selling and administrative expenses
were $373.8 million or 15.53% (15.20% adjusted for the original method of
reporting sales tax) of sales as compared to 14.59% of sales in the
corresponding period of the prior year. Excluding the one-time charge of
$3.9 million (before tax) related to retirement benefits for the
Company's former President and CEO (see discussion below), selling and
administrative expenses would have been 15.37% of sales (15.03%
adjusted for the original method of reporting sales tax). In addition to
the retirement costs, the increase in selling
-9-
and administrative expenses as a percentage of sales is due primarily to
increases in (1) store salaries and benefits as a result of a tightening
of the labor pool in key Southeast markets due to the low unemployment
rates in these areas, and (2) store rent due to the new store openings and
expansions of existing stores since the first quarter of last year.
On April 7, 1999, the Company announced the retirement of Tom E.
Smith, its President, CEO and Chairman of the Board of Directors. During
the first quarter, the Company recorded a $3.9 million before-tax charge
($2.4 million after-tax) related to Mr. Smith's retirement benefits.
These costs are included in selling and administrative expenses.
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 first quarter of 1999. These costs are
included in "Additions" in the table below.
Store Closing Costs
(Dollars in millions)
Reduction Lease Accrued
of Asset Liabilities Expenses Total
Values
Balance at
January 2, 1999 $15.8 $113.2 $1.1 $130.1
Additions .2 2.7 .6 3.5
Reductions -.6 -5.4 -.5 -6.5
Reclassifications 0.0 0.0 0.0 0.0
Recognition of
unused reserves 0.0 0.0 0.0 0.0
Balance at
March 27, 1999 $15.4 $110.5 $1.2 $127.1
Reductions include fees totaling $4 million related to the
termination of three store leases. The remaining $2.5 million relates to
(1) on-going rent payments made on lease obligations, (2) the sale of
assets associated with closed store properties, and (3) expenses arising
from contractual obligations.
During the first quarter of 1999, the Company closed five stores in
the normal course of business, of which four were relocations. The
revenues and operating results of these stores were not significant to the
Company's total revenues and operating results.
During the first quarter of 1999, the Company completed disposition
efforts related to three closed stores.
-10-
At the end of the first quarter of 1999 the Company had $127.1
million in store closing costs related to 127 stores (124 leased and 3
owned) and one distribution center. Disposition efforts on these
properties (leases, equipment and buildings) will continue until all are
disposed.
Depreciation and amortization of $57.5 million were 2.39% of sales
compared to 2.27% of sales in the first quarter of 1998. The 0.12% 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 1.01% for first quarter
1999 compared to 1.20% for the corresponding period last year. The
decrease in interest is primarily due to the conversion of the Company's
5% convertible subordinated debentures during the second quarter of 1998.
Net income for the quarter was $58.6 million or 2.43% of sales as
compared to $55.2 or 2.39% of sales in the first quarter of the prior
year. Basic and diluted earnings per share were $0.12 for both the first
quarter of 1999 and 1998. Excluding the one-time after-tax charge related
to retirement benefits of $2.4 million (see discussion above), net
income for the first quarter of 1999 would have been $61.0 million or
2.54% of sales, and basic and diluted earnings per share would have been
$0.13.
Liquidity and Capital Resources
Cash provided by operating activities totaled $233.1 million for the
12 weeks ended March 27, 1999, compared with $190.6 million for the same
period last year. The increase was primarily due to an increase in
operating income, a decrease in inventory levels, and an increase in
income taxes payable.
Capital expenditures totaled $86.1 million for the 12 weeks ended
March 27, 1999, compared with $58.3 million for the same period in 1998.
The Company opened 21 new stores, closed five stores (including four
relocations), and completed the renovation of eight existing stores during
the first quarter of 1999. Food Lion plans to open a total of 80 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.
During the quarter, the Company signed a contract to purchase 28
former A&P store locations for a total purchase price of $14.5 million.
The Company plans to open approximately ten of these stores over the next
two years, and has plans to sublease the remaining locations.
-11-
Capital expenditures currently estimated for 1999 are $390
million (including the A&P store purchase). 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 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 March 27, 1999, and March 28, 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. There were no borrowings as of March 27, 1999, or
March 28, 1998. During the first quarter of 1999, the Company had average
borrowings of $6.21 million at a daily weighted average interest rate of
5.03% 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 first quarter were as follows:
Informal Credit Arrangements
(Dollars in millions)
1999 1998
Outstanding borrowings
at the end of the first quarter $0.0 $0.0
Average borrowings $3.2 $10.0
Maximum amount outstanding $35.0 $80.0
Daily weighted average interest rate 5.09% 5.66%
During the first quarter of 1999, the Company did not purchase any shares of
Class A or Class B stock. The Board of Directors has approved
a renewal of the annual share repurchase program for 1999 in the amount of $100
million. 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.
-12-
Year 2000
In 1996, the Company began evaluating both its information technology
systems, and other systems and equipment in order to identify and adjust
date sensitive systems for Year 2000 compliance. As part of this
undertaking, the Company created a Year 2000 Project Team to address the
issues related to Year 2000 compliance. The Year 2000 Team is led by
representatives from the Company's Information Technology department and
includes key representatives from other areas of the Company. The Year
2000 Team has developed a three-phase plan to identify and remediate all
existing systems to ensure the Company's readiness for the century change.
These phases consist of assessment, system remediation and integration
testing.
Project Phase One primarily focused on assessing the business impact
of the century change on the Company's operating environment. This
assessment included information technology systems, non-information
technology systems and supply chain readiness. The assessment was
conducted based on an analysis of the Company's individual business
processes and the potential material risks associated with the Company's
operations. Project Phase Two primarily focused on code and system
conversion (remediation) of date impacted applications and systems.
Remediation or replacement was conducted for all information technology
and embedded systems impacted by Year 2000 issues. Project Phase Three
involves the execution of various testing protocol, analysis of test
results and the development of contingency plans for each of the impacted
systems.
The Company has completed Project Phase One for all systems and
Project Phase Two for all systems not scheduled for replacement. The
Company expects to complete installation of certain replacement systems
impacted by Year 2000 issues by mid-1999 and has included the cost of
these systems in its estimates for the Year 2000 Project. The Company has
commenced Project Phase Three, which includes testing and validation of
impacted systems, and anticipates this phase will be substantially
complete by mid-1999. However, the Company anticipates testing and
validation procedures, as well as development of contingency plans, will
continue throughout 1999.
Except for the cost of replacement systems, the Company will expense
the cost of the Year 2000 Project as incurred. The Company is funding the
costs associated with the Year 2000 Project through operating cash flows
and has not deferred any Information Technology projects in order to
complete the Year 2000 Project.
The Company estimates the total incremental cost of the Year 2000
Project is approximately $17.0 million which includes
-13-
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 first quarter of fiscal 1999, the
Company had incurred approximately $10.4 million of the total cost of the
Year 2000 project of which $2.9 million had been expensed as incurred and
$7.5 million had been capitalized for replacement systems.
The Company has not materially increased the number of its employees
in order to complete the Year 2000 Project. Although the Company has
utilized external contractors in various phases of the Year 2000 Project,
the Company does not consider any of these contracts or relationships
material for the completion of the Year 2000 Project. The Company has
assigned certain employees from its Information Technology department to
the Year 2000 Project (averaging approximately 20 employees during Phase
One and 22 employees during Phase Two of the project and less than 15
employees from its user departments). As discussed above, the Company has
created a Year 2000 Project Team composed of representatives from all
areas of the Company. Members of the Year 2000 Project Team have
completed the tasks associated with the Year 2000 Project as part of their
normal duties. Although the Company has discussed its Year 2000 Project
with certain of its consultants, third parties were not retained to
perform independent verification and validation processes regarding the
risks and cost estimates of the Year 2000 Project.
As part of the Year 2000 Project, the Company has identified
relationships with third parties, including vendors, suppliers, and
service providers, which the Company believes are critical to its business
operations. Although the Company considered several factors in
identifying these critical relationships, the Company has concentrated its
communication efforts, as discussed below, with suppliers and vendors from
whom the Company makes annual purchases in excess of $10 million. The
Company is in the process of communicating with these third parties
through questionnaires, letters and interviews in an effort to determine
the extent to which they are addressing their Year 2000 compliance issues.
Based on the responses received to date from these efforts, the Company
understands that all critical suppliers have indicated they anticipate
being Year 2000 compliant. A small percentage of these critical suppliers
have indicated they are Year 2000 compliant, however, a majority have
indicated they are still addressing Year 2000 issues. Where appropriate,
the Company has developed strategies to work with its suppliers to verify
Year 2000 readiness and create contingency plans as discussed below.
-14-
The Company has identified its operational and supply chain
activities as its most critical functions potentially impacted by Year
2000 issues. The Company will conduct testing within a parallel operating
environment created to simulate business processes and integrated systems
functionality, including front-end operations and supply chain activities.
Validation of integrated systems functionality will be performed by
comparing test results to actual processes and data.
The Company cannot assure that there will not be an adverse impact on
the Company if third parties do not appropriately address their Year 2000
issues in a timely manner. Such other possible consequences include, but
are not limited to, loss of communications with stores, loss of electric
power, and an inability to process customer transactions or otherwise
engage in similar normal business activities. As discussed below, the
Company has developed contingency plans with its critical suppliers in
order to arrange for the timely delivery of inventory. The Company will
continue to communicate with, assess and monitor the progress of these
third parties in resolving Year 2000 issues.
Although the Company does not believe the actual impact of any system
failures related to the century change will be material, the Company has
developed various contingency plans with its critical suppliers and
certain other vendors in order to assure the timely delivery of inventory
and prepare for normal business activities following the century change.
In the event the Company or a key supplier is adversely impacted by the
century change, the Company will implement its contingency plan for such
situation. These plans include alternate means of communication with
suppliers, such as facsimile, telephone and hand delivery, manual
operation of certain systems, as well as the implementation of certain
established ordering procedures. Under the terms of these established
ordering procedures, the Company's critical suppliers will provide
inventory to the Company based on historical ordering patterns. These
suppliers will also substitute products and adjust inventory levels of
substitute items based on the availability of certain products. The
Company will continue to develop and finalize the implementation of its
contingency plans with third parties throughout 1999.
The projections and project completion dates are based on
management's best estimates and may be updated from time to time
as additional information becomes available. This section discussing Year
2000 issues contains forward-looking statements (refer to "Other" below
which addresses forward-looking statements made by the Company).
-15-
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.
-16-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has had no significant developments related to legal matters since
the Item 3 disclosure included in the Company's Form 10K filed April 1, 1999 for
the year ended January 2, 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
This item is not applicable.
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10 Retirement Agreement
27 Financial Data Schedule
(b). The Company did not file a report on Form 8-K during the
period ended March 27, 1999.
-17-
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 5,1999 BY:Laura Kendall
Laura Kendall
Vice President of Finance
Chief Financial Officer
Principal Financial Officer
-18-
Exhibit Index
Exhibit Description Page No.
10 Retirement Agreement 20-29
27 Financial Data Schedule 30-31
-19-
<TABLE> <S> <C>
<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
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</TABLE>
RETIREMENT AGREEMENT
THIS AGREEMENT (this "Agreement"), made and entered into as
of this 7th day of April, 1999, by and between Food Lion, Inc., a
North Carolina corporation (the "Company"), and Tom E. Smith (the
"Executive"),
W I T N E S S E T H:
WHEREAS, the Executive is serving as the Chairman of the
Board of Directors, President and Chief Executive Officer of the
Company; and
WHEREAS, in recognition of the Executive's long and
distinguished service with the Company; and
WHEREAS, by mutual agreement between the Executive and the
Company, the Executive shall retire from the Company as of the
date hereof (the "Retirement Date") and the Executive's
employment with the Company and his service as Chairman shall
terminate as of such Retirement Date.
NOW, THEREFORE, for and in consideration of the mutual
promises, covenants and obligations contained herein, the Company
and the Executive agree as follows:
ARTICLE I: RETIREMENT AND CONSULTANCY
Section 1.1 Retirement. The Executive hereby retires and
resigns as an employee, officer and director of the Company and
its affiliates, effective as of the end of the meeting of the
Board of Directors of the Company held on the Retirement Date.
Notwithstanding any provision of the Employment Agreement between
the Company and the Executive dated August 1, 1991 (the
"Employment Agreement") to the contrary, such retirement and
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 Retirement Date.
Section 1.2 Consulting Services. The Executive agrees to
be available from time to time during the period beginning on the
Retirement Date and ending July 31, 2001, for consulting with the
Chief Executive Officer and the Chairman of the Company, as
either the Chief Executive Officer or the Chairman may reasonably
request. Reasonable unavailability of the Executive for such
consulting at any time shall not be deemed a breach of this
Agreement.
ARTICLE II: RETIREMENT PAYMENTS AND BENEFITS
Section 2.1 Retirement Payments. The Executive shall
continue to receive the annual salary he currently receives
through July 31, 2001. The Executive shall receive annual
bonuses of $432,315 (which would be the amount of his 1999 bonus)
through April 7, 2002. In addition, the Executive shall receive
$36,950 (the amount that would have been paid to the Executive as
a "wellness bonus" for 1999) annually through April 7, 2002.
Such annual salary and bonus payments shall be made on the same
schedule as currently made for the Executive and shall be
prorated as applicable.
Section 2.2 Options. As provided in the stock option
agreements governing such stock options, all vested stock options
held by the Executive as of the Retirement Date shall remain
exercisable for three months following the Retirement Date, and
thereafter any of such stock options that remain unexercised
shall terminate and cease to be exercisable. All other stock
options that have been granted to the Executive that vest on or
before December 31, 2000, shall remain outstanding and shall vest
on the same schedule as if the Executive had remained employed
with the Company through December 31, 2000, and, once each such
options are vested, shall remain exercisable for three months
following the respective vesting dates of each such options. As
of the Retirement Date, all stock options that have been granted
to the Executive that would vest after December 31, 2000, shall
terminate as of the Retirement Date. For purposes of
clarification, Schedule B attached hereto sets forth the stock
options that have been granted to the Executive as of the date
immediately prior to the Retirement Date and sets forth whether
such options will survive the Retirement Date.
Section 2.3 Restricted Stock. The Executive shall
continue to be vested in all restricted stock that has vested as
of the Retirement Date. All restricted stock under awards to the
Executive that vest on or before December 31, 2000, shall remain
outstanding following the Retirement Date and shall vest on the
same schedule as if the Executive had remained employed with the
Company through December 31, 2000. All restricted stock under
awards to the Executive that would vest after December 31, 2000,
shall be forfeited as of the Retirement Date. For purposes of
clarification, Schedule B attached hereto sets forth the
restricted stock that has been awarded to the Executive as of the
date immediately prior to the Retirement Date and sets forth
whether such restricted stock awards will survive the Retirement
Date.
Section 2.4. Put Right. The Executive shall have a one-
time right, exercisable within 30 trading days after the
Retirement Date, to sell to the Company, and, in the event the
Executive exercises such right, the Company shall be obligated to
purchase from the Executive for cash, up to 33% of the shares of
Class A Common Stock and Class B Common Stock of the Company
owned by the Executive on the date of exercise of such right (the
"Put"). The per share purchase price of the shares subject to
the Put shall be the average closing price of the Class A Common
Stock or Class B Common Stock, as the case may be, for the 30
trading days preceding the date of exercise as reported on NASDAQ
(National Market System). Payments by the Company pursuant to
the Put will be made within five business days of proper notice
of exercise of the Put by the Executive, subject to proper
delivery in proper form by the Executive of the relevant shares
of Common Stock
Section 2.5. Split-Dollar Life. The Company shall
continue to pay the premiums on and shall maintain in effect the
two split-dollar life insurance policies currently in effect with
respect to the Executive (Policy No. 2,161,371 and Policy No.
3123424) through December 31, 2001. As of December 31, 2001,
such insurance policies shall be transferred to the Executive,
and thereafter the Executive shall be responsible for all
premiums under such policies, and the Company shall waive its
right to receive reimbursement for premiums paid on such
policies.
Section 2.6 Company Benefits. For a period of three
years following the Retirement Date, the Executive shall be
entitled to participate in the benefit plans of the Company set
forth on Schedule A attached hereto. 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 and agreement.
In addition, following the Retirement 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 he remained employed by the Company through April
7, 2002. If the Company is unable to include the Executive and
his spouse in the Executive Medical Plan or the Food Lion Group
Benefit Plan, it shall secure similar benefits for the Executive
and his spouse for such three-year period. Following such three-
year period, the Executive shall receive COBRA continuation of
health care. As soon as practicable after the Retirement Date,
the Company shall transfer title to the vehicle currently used by
the Executive to the Executive. Thereafter, the Executive shall
be responsible for all maintenance, insurance and other expenses
relating to such vehicle, and the Company shall have no further
obligations with respect to such vehicle.
Section 2.7 Withholding of Taxes. The Company may
withhold from any benefits or compensation payable under this
Agreement all federal, state, city or other taxes as may be
required pursuant to any law or governmental regulation or
ruling.
Section 2.8 Miscellaneous. 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
Retirement Date.
ARTICLE III: CONFIDENTIAL INFORMATION
The Executive acknowledges that during his service and
employment with the Company as its Chairman, Chief Executive
Officer and President that he has been privy and made party to
confidential information, including but not limited to knowledge
or data relating to the Company and its businesses and
investments, information regarding vendors, employees, strategic
and business plans, and analysis of competitors ("Confidential
Information") and Trade Secrets (as defined below). Following
the Retirement Date, the Executive shall hold in a fiduciary
capacity for the benefit of the Company all Trade Secrets and
Confidential Information, which shall have been obtained by the
Executive during the Executive's employment by the Company and
which is not generally available public knowledge (other than by
acts by the Executive in violation of this Agreement). For three
years following the Retirement Date, the Executive shall not,
without the prior written consent of the Company or as may
otherwise be required by law or any legal process, or as is
necessary in connection with any adversarial proceeding against
the Company (in which case the Executive shall use his reasonable
best efforts in cooperating with the Company in obtaining a
protective order against disclosure by a court of competent
jurisdiction), communicate or divulge any such Trade Secrets or
Confidential Information to anyone other than the Company and
those designated by the Company. All records, files, drawings,
documents, models, equipment, and the like relating to the
Company's business, which the Executive has control over, shall
not be removed from the Company's premises and, if so removed,
shall be returned to the Company by the Retirement Date. The
Executive acknowledges that he has assigned to the Company all
rights to Trade Secrets and other products relating to the
Company's business developed by him alone or in conjunction with
others at any time while employed by the Company. For purposes
of this Agreement, Trade Secrets shall mean all information,
without regard to form, including, but not limited to, technical
or non-technical data, formulae, patterns, compilations,
programs, devices, methods, techniques, drawings, processes,
financial data, financial plans, business projects, product
plans, distribution lists or lists of actual or potential
customers, advertisers or suppliers which is not commonly known
by or available to the public and which information: (i) derives
economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure
or use and (ii) is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.
ARTICLE IV: NON-COMPETITION; NON-SOLICITATION; NON-DISPARAGEMENT
Section 4.1 Acknowledgements. The Executive acknowledges
(i) that during his service and employment as Chairman, Chief
Executive Officer and President of the Company, he required
special expertise and talent in conducting his duties and that
the Executive had substantial contacts with customers, suppliers,
advertisers and vendors of the Company and its affiliates; (ii)
that the Executive was placed in a position of trust and
responsibility and had access to a substantial amount of
Confidential Information and Trade Secrets and that the Company
placed him in such position and gave him access to such
information in reliance upon his agreement not to compete with
the Company during the time periods set forth below, including,
but not limited to, the review and preparation of strategic plans
and business strategies to expand the Company's business
operations; (iii) that due to the Executive's management and
supervising duties, the Executive is a repository of a
substantial portion of the goodwill of the Company and would have
an unfair advantage in competing with the Company; (iv) that due
to the Executive's special experience and talent, the breach of
this Article 4 cannot be reasonably or adequately compensated
solely by damages in an action at law; (v) that the Executive is
capable of competing with the Company and its subsidiaries; (vi)
that the Executive is capable of obtaining gainful employment
that does not violate the restrictions contained in this
Agreement; and (vii) that a material inducement for the Company
in executing this Agreement and making the payments hereunder was
the Executive's willingness to be bound by the terms of this
Article 4.
Section 4.2 Non-Competition. In light of the
acknowledgements set forth above and in consideration of the
payments made to the Executive hereunder, for three years
following the Retirement Date, the Executive shall not, directly
or indirectly, own, manage, operate, control, be employed by, or
perform services for any business, howsoever organized and in
whatsoever form, that engages in any retail or wholesale grocery
or supermarket business and which is located anywhere within the
continental United States.
Section 4.3. Non-Solicitation. To protect the goodwill of
the Company and the Company's legitimate business interests and
in consideration of the payments made to the Executive hereunder,
for three years after the Retirement Date, the Executive shall
not, directly or indirectly, solicit the customers, suppliers or
employees of the Company or its affiliates to terminate their
relationship with the Company or its affiliates (or to modify
such relationship in a manner that is adverse to the interests of
the Company or its affiliates), or to violate any valid contracts
they may have with the Company or its subsidiaries; provided,
however, that nothing in this Section 4.3 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.
Section 4.4. Non-Disparagement. Following the Retirement
Date, the Executive shall not disparage the Company or any of the
Company's subsidiaries, affiliates, and their respective
officers, directors, employees, agents, successors and assigns,
and the Company shall not disparage the Executive or any of his
representatives or agents, or any of their respective heirs and
assigns. A proceeding brought by any party to enforce its rights
shall not be deemed to be a breach of this Section 4.4.
Section 4.5. Miscellaneous. The Executive acknowledges
that the restrictions, prohibitions and other provisions of this
Article 4 are reasonable, fair and equitable in scope, term and
duration, are necessary to protect the legitimate business
interests of the Company and its affiliates and are a material
inducement to the Company to enter into this Agreement and make
the payments hereunder. It is the intention of the parties
hereto that the restrictions contained in this Article 4 be
enforceable to the fullest extent permitted by applicable law.
Therefore, if, at any time, the provisions of this Article 4
shall be determined to be invalid or unenforceable, by reason of
being vague or unreasonable as to area, duration or scope of
activity, this Article 4 shall be considered divisible and shall
become and be immediately amended to only such area, duration and
scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over
the matter and the Executive agrees that this Article 4 as so
amended shall be valid and binding as though any invalid or
unenforceable provision had not been included herein.
ARTICLE V: MISCELLANEOUS
Section 5.1 Remedy. Should the Executive engage in or
perform, either directly or indirectly, any of the acts
prohibited by Articles 3 and 4, it is agreed that the Company
shall be entitled to immediately withhold any payments or
benefits to be made to the Executive under Article 2 of this
Agreement and all outstanding stock options held by the Executive
shall immediately be canceled and cease to be exercisable (and to
the extent such payments and benefits have already been made, the
Executive shall immediately repay such amounts to the Company
upon such breach, including, but not limited to, any gain
realized upon the lapse of restricted stock or exercise of stock
options, as provided in Sections 2.2 and 2.3 hereof) and the
Company shall be entitled to full injunctive relief, to be issued
by any competent court of equity, enjoining and restraining the
Executive and each and every other person, firm, organization,
association, or corporation concerned therein, from the
continuance of such violative acts. The foregoing remedy shall
not be deemed to limit or prevent the exercise by the Company of
any or all further rights and remedies which may be available to
the Company hereunder or at law or in equity.
Section 5.2 Notices. For purposes of this Agreement,
notices and all other communications provided for herein shall be
in writing and shall be deemed to have been duly given when
personally delivered, sent by facsimile or when mailed by United
States registered or certified mail, return receipt requested,
postage prepaid, addressed to such address or sent to such
facsimile number as each party may furnish to the other in
writing from time to time.
Section 5.3 Applicable Law, Jurisdiction and Venue. This
Agreement is entered into under, and shall be governed for all
purposes by, the laws of the State of North Carolina. In any
such litigation, each party hereto waives personal service of any
summons, complaint or other process and agrees that the service
thereof may be made by certified mail directed to such party at
his or its address for purposes of notice under Section 5.1
hereof.
Section 5.4 No Waiver. No failure by either party hereto
at any time to give notice of any breach by the other party of,
or to require compliance with, any condition or provision of this
Agreement shall (i) be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time or (ii) preclude insistence upon strict
compliance in the future.
Section 5.5 Severability. If a court of competent
jurisdiction determines that any provision of this Agreement is
invalid or unenforceable, then the invalidity or unenforceability
of that provision shall not affect the validity or enforceability
of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
Section 5.6 Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be deemed to be
an original, but all of which together will constitute one and
the same Agreement.
Section 5.7 Headings. The paragraph headings have been
inserted for purposes of convenience and shall not be used for
interpretive purposes.
Section 5.8 Gender and Plurals. Wherever the context so
requires, the masculine gender includes the feminine or neuter,
and the singular number includes the plural and conversely.
Section 5.9 Affiliate. As used in this Agreement, unless
otherwise indicated, "affiliate" shall mean any person or entity
which directly or indirectly through any one or more
intermediaries owns or controls, is owned or controlled by, or is
under common ownership or control with the Company.
Section 5.10 Assignment. This Agreement is binding on the
Executive 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 the
Executive hereunder are fully discharged. No rights or
obligations of the Executive hereunder may be assigned by the
Executive to any other person or entity, except by will or the
laws of descent and distribution. In the event of the
Executive's death prior to receipt by the Executive of all
amounts payable by the Company hereunder, such amounts shall be
payable to the Executive's designated beneficiaries on the same
schedule as provided for in this Agreement.
Section 5.11 Entire Agreement. Except as otherwise
specifically provided herein, this Agreement constitutes the
entire agreement of the parties with regard to the subject matter
hereof, contains all the covenants, promises, representations,
warranties and agreements between the parties with respect to the
Executive's resignation of employment with the Company, and
amends and supersedes all prior employment or severance
agreements between the Executive and the Company or any of its
predecessors, including, but not limited to, the Employment
Agreement. The Executive acknowledges and agrees that the
consideration provided for herein is adequate consideration for
the Executive waiving his rights under the Employment Agreement.
Except as otherwise provided herein, each party to this Agreement
acknowledges that no representation, inducement, promise or
agreement, oral or written, has been made by either party, or by
anyone acting on behalf of either party, which is not embodied
herein, and that no agreement, statement, or promise relating to
the Executive's resignation of employment with the Company, which
is not contained in this Agreement, shall be valid or binding.
Any modification of this Agreement will be effective only if it
is in writing and signed by the party to be charged..
Section 5.12 Arbitration. Except as otherwise necessary
to secure the remedy specified in Section 5.1 of this Employment
Agreement, any dispute arising between the Company and the
Executive with respect to the performance or interpretation of
this Retirement Agreement shall be submitted to arbitration in
Salisbury, 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.
ARTICLE VI: EXECUTIVE ACKNOWLEDGEMENTS
The Executive acknowledges that:
(a) He has read and understands the terms of this
Agreement and has voluntarily agreed to their terms without
coercion or undue persuasion by the Company or any officer,
director or other agent thereof;
(b) He has been encouraged by the Company to seeks,
and has sought, competent legal counsel in his review and
consideration of this Agreement and its terms; and
(c) This Agreement does not purport to waive, and does
not waive, any rights the Executive may have which arise
after the date on which this Agreement is finally executed.
[The next page is the signature page]
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
FOOD LION, INC.
By: \s\ William G. Ferguson
William G. Ferguson,
Chairman Senior Management Compensation
Committee
\s\ Tom E. Smith
Tom E. Smith, Individually
SCHEDULE A
Food Lion Group Benefit Plan (including life insurance coverage
but excluding disability coverage)
Executive Medical Plan
Financial planning services up to $1,500 per year, reduced in
1999 for the value of any services already received
SCHEDULE B
STOCK OPTIONS
Grant No. Grant No. of Amount and Exercise Survives
Date Options Date of Price Retirement
Granted Vesting Date
4241 11/6/91 75,000 60,000 vested $12.4166 Yes
7,500 on 11/6/99 Yes
7,500 on 11/6/00 Yes
4242 5/3/96 246,607 82,202 on 5/3/99 $7.3750 Yes
82,202 on 5/3/00 Yes
82,203 on 5/3/01 No
4243 5/1/97 342,598 114,199 on 5/1/00 $6.6875 Yes
114,199 on 5/1/01 No
114,200 on 5/1/02 No
41704 5/7/98 225,662 75,220 on 5/7/01 $10.2200 No
75,221 on 5/7/02 No
75,221 on 5/7/03 NO
RESTRICTED STOCK
Grant No. Grant No. of Amount and Survives
Date Options Date of Retirement
Granted Vesting Date
41175 5/3/96 47,031 11,758 vested Yes
11,758 on 5/3/99 Yes
11,758 on 5/3/00 Yes
11,757 on 5/3/01 No
41332 5/1/97 68,227 17,057 on 5/1/99 Yes
17,057 on 5/1/00 Yes
17,057 on 5/1/01 No
17,056 on 5/1/02 No
41705 5/7/98 45,596 11,399 on 5/7/00 Yes
11,399 on 5/7/01 No
11,399 on 5/7/02 No
11,399 on 5/7/03 No
