SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999. Commission File No. 0-6080
F O O D L I O N, INC.
(Exact name of registrant as specified in its charter)
Incorporated in North Carolina 56-0660192
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 1330, 2110 Executive Drive
Salisbury, North Carolina 28145-1330
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code--
(704) 633-8250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.50 per share
Class B Common Stock, par value $.50 per share
(Title of Class)
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 the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[x]
The aggregate market value of the voting and non-voting stock held by non-
affiliates of the Registrant based on the price of such stock at the close of
business on March 26, 1999, was $1,033,294,366 and $1,457,690,498, respectively.
For purposes of this report and as used herein, the term "non-affiliate"
includes all shareholders of the Registrant other than Directors, executive
officers, and other senior management of the Registrant and persons holding more
than five per cent of the outstanding voting stock of the Registrant.
Outstanding shares of common stock of the Registrant as of March 26, 1999.
Class A Common Stock - 247,914,301
Class B Common Stock - 230,830,364
Exhibit index is located on sequential page 16 hereof.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Form
10-K:
1. Annual Report to Shareholders for the fiscal year ended January 2, 1999,
or is incorporated by reference in Part II hereof.
2. Proxy Statement for the 1999 Annual Meeting of Shareholders of the
Company to be held on May 6, 1999, or is incorporated by reference in
Part III hereof.
PART I
Item 1. Business.
Food Lion, Inc. (the "Company") engages in one line of business, the
operation of retail food supermarkets in the southeastern and Mid-Atlantic
regions of the United States. The Company was incorporated in North Carolina in
1957 and maintains its corporate headquarters in Salisbury, North Carolina.
The Company's stores, which are operated under the names of "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 health
and beauty care, prescriptions, 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 the private
labels of "Food Lion" and "Kash n' Karry." The Company offers over 30,000 Stock
Keeping Units (SKU's) in its Food Lion locations and over 35,000 in its Kash n'
Karry locations. The Company's current Food Lion store prototype is a 38,000
square foot model. The current Kash n' Karry store prototype is a 46,000 square
foot model.
The products sold by the Company are purchased through a centralized buying
department at the Company's headquarters. The centralization of the buying
function allows the management of the Company to establish long-term
relationships with many vendors providing various alternatives for sources of
product supply.
The business in which the Company is engaged is highly competitive and
characterized by low profit margins. The Company competes with national,
regional and local supermarket chains, supercenters, discount food stores,
single unit stores, convenience stores, warehouse clubs and drug stores. The
Company will continue to develop and evaluate new retailing strategies that will
respond to its customers' needs. Seasonal changes have no material effect on
the operation of the Company's supermarkets.
As of January 2, 1999, 1,207 supermarkets were in operation as follows:
Delaware 12 North Carolina 409
Florida 186 Pennsylvania 7
Georgia 56 South Carolina 112
Kentucky 12 Tennessee 81
Maryland 49 Virginia 266
West Virginia 17
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As of March 26, 1999, the Company had opened 21 supermarkets since January 2,
1999, closed one supermarket, relocated four supermarkets and had signed leases
for 16 supermarkets which are expected to open in either 1999 or 2000.
Warehousing and distribution facilities, including its transportation
fleet, are owned and operated by the Company and are located in Green Cove
Springs and Plant City, Florida; Salisbury and Dunn, North Carolina;
Greencastle, Pennsylvania; Elloree, South Carolina; Clinton, Tennessee; and
Disputanta, Virginia.
As of January 2, 1999, the Company employed 32,991 full-time and 59,134
part-time employees.
The following table shows the number of stores opened, closed and relocated, and
the number of stores open at the end of each year, for the past three years.
# Stores # Stores #Stores # Stores Opened
Opened Closed Relocated Year-end
1998 79 (12) (17) 1,207
1997 164 (a) (94) (b) (25) 1,157
1996 64 ( 3) (22) 1,112
(a) Includes 100 stores acquired from Kash n' Karry
(b) Includes 61 Southwest store closings
Item 2. Properties.
Supermarkets operated by the Company in the southeastern and Mid-Atlantic
states average 32,218 square feet in size. The Company's current Food Lion
store prototype retail format is a 38,000 square foot model with a deli/bakery
department. The current Kash n' Karry store prototype is a 46,000 square foot
model. All of the Company's supermarkets are self-service stores which have off-
street parking facilities. With the exception of operating 66 owned
supermarkets, the Company occupies its various supermarket premises under lease
agreements providing for initial terms of up to 30 years, with options generally
ranging from five to twenty years.
At the end of 1998 the Company had $21.0 million (net book value) in
property held for sale.
The following table identifies the location and square footage of distribution
centers and office space operated by the Company as of January 2, 1999.
Location of
Property Square Footage
Distribution Center #1 Salisbury, NC 1,630,233
Distribution Center #2 Disputanta, VA 1,123,718
Distribution Center #3 Elloree, SC 1,098,612
Distribution Center #4 Dunn, NC 1,224,652
Distribution Center #5 Green Cove Springs, FL 832,109
Distribution Center #6 Clinton, TN 833,042
Distribution Center #7 Greencastle, PA 1,236,124
Distribution Center #8 Plant City, FL 759,546
Corporate Headquarters Salisbury, NC 271,592
9,009,628
-3-
Item 3. Legal Proceedings.
The Company has had no significant developments related to legal matters since
the Item 1 disclosure included in the Company's Form 10-Q for the quarter ended
September 12, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
This item is not applicable.
Executive Officers of the Registrant
The names and ages of the current executive officers of the Company and their
positions as of March 26, 1999, are set forth below. The footnotes following
the table below include the business experience during the past five years for
each executive officer who has been employed by the Company for fewer than five
years. Unless otherwise indicated by footnote, each of the executive officers
served in various managerial capacities with the Company over the past five
years. None of the executive officers named below is related to any other
executive officer or director by blood, marriage or adoption. Officers serve at
the discretion of the Board of Directors.
Name and all Positions with Age Year First Year First
the Company Held at March Elected Elected to
26, 1999 Officer Present
Office
Tom E. Smith 57 1974 1981
President and Chief
Executive Officer
Joseph C. Hall, Jr. 49 1988 1995
Senior Vice President and
Chief Operating Officer
R. William McCanless 41 1993 1995
Senior Vice President,
Chief Administrative
Officer
and Secretary
Pamela K. Kohn 34 1995 1997
Senior Vice President of
Merchandising
A. Edward Benner, Jr. 57 1980 1996
Vice President and Chief
Information Officer
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Robert J. Brunory 44 1994 1994
Vice President
Procurement/Category
Management
Michael D. Byars 40 1997 1997
Vice President
of Operations, Food Lion,
Kash n' Karry Division
Robert E. Crosslin (1) 44 1997 1997
Vice President of
Distribution
W. Bruce Dawson 46 1995 1995
Vice President of
Operations/
Northern Division
Keith M. Gehl 40 1997 1997
Vice President of Real
Estate and
Store Development
Carol M. Herndon 36 1991 1994
Corporate Controller and
Director of Accounting
Richard A. James 39 1997 1997
Director of Finance and
Treasurer
L. Darrell Johnson 46 1997 1997
Vice President of Human
Resources
Laura C. Kendall (2) 47 1997 1997
Vice President of Finance
and Chief Financial Officer
C. Dave Morgan 48 1997 1997
Vice President of
Operations/
Southern Division
Elwyn G. Murray, III 32 1998 1998
Vice President of Marketing
Lester C. Nail (3) 39 1995 1995
Vice President Legal
Affairs
and Assistant Secretary
Thomas J. Robinson 38 1997 1997
Vice President of
Operations/
Central Division
Natalie M. Taylor 39 1997 1997
Vice President of Diversity
-5-
(1) Mr.Crosslin joined Food Lion in October 1996 and served as Corporate
Transportation Manager until his promotion to Vice President in May 1998. Prior
to joining Food Lion in 1996, Mr. Crosslin served as Director of Fleet Services
to Ralphs Grocery Company.
(2) Ms. Kendall served as the Chief Financial Officer for F&M Distributors
prior to joining Food Lion. From 1995 until March of 1997, she was the
presiding officer overseeing the liquidation process for F&M Distributors.
(3) Prior to joining Food Lion in 1995, Mr. Nail served as Corporate Counsel to
Wal-Mart Stores, Inc.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The information pertaining to the Class A and Class B Common Stock price
range, dividends and record holders discussed beneath the headings "Market Price
of Common Stock" and "Dividends Declared Per Share of Common Stock" in the
Annual Report to Shareholders for the fiscal year ended January 2, 1999, is
hereby incorporated by reference.
Item 6. Selected Financial Data.
The information set forth beneath the heading "Ten Year Summary of
Operations" in the Annual Report to Shareholders for the fiscal year ended
January 2, 1999, is hereby incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information set forth beneath the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
to Shareholders for the fiscal year ended January 2, 1999, is hereby
incorporated by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements, including the accompanying notes and results by
quarter, set forth beneath the headings "Consolidated Statements of Income",
"Consolidated Balance Sheets", "Consolidated Statements of Cash Flows",
"Consolidated Statements of Shareholders' Equity", "Notes to Consolidated
Financial Statements" and "Results by Quarter" in the Annual Report to
Shareholders for the fiscal year ended January 2, 1999, are hereby incorporated
by reference.
-6-
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.
This item is not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information pertaining to nominees for election as directors set forth
beneath the heading "Election of Directors" in the Proxy Statement for the 1999
Annual Meeting of Shareholders to be held May 6, 1999 is incorporated by
reference. Information concerning the Company's executive officers is contained
under the heading "Executive Officers of the Registrant" in Part I of this
report.
Item 11. Executive Compensation.
The information pertaining to executive compensation set forth beneath the
headings "Executive Compensation" and "Report of the Senior Management
Compensation Committee, Stock Option Committee and Board of Directors" in the
Proxy Statement for the 1999 Annual Meeting of Shareholders to be held on May 6,
1999, is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information pertaining to security ownership of certain beneficial
owners and management set forth beneath the heading "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement for the 1999
Annual Meeting of Shareholders to be held on May 6, 1999, is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
set forth beneath the headings "Employment Plans and Agreements - Low Interest
Loan Plan", "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" in the Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held May 6, 1999, is hereby incorporated by reference.
-7-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements are incorporated by
reference in Item 8 hereof from the Annual Report to
Shareholders for the fiscal year ended January 2, 1999:
ANNUAL REPORT
PAGE NO.
Consolidated Statements of Income for the fiscal
years ended January 2, 1999, January 3, 1998 and
December 28, 1996 20
Consolidated Balance Sheets, as of January 2,
1999 and January 3, 1998 21
Consolidated Statements of Cash Flows for the
fiscal years ended January 2, 1999, January 3, 1998
and December 28, 1996 22
Consolidated Statements of Shareholders' Equity
for the fiscal years ended January 2, 1999,
January 3, 1998 and December 28, 1996 23
Notes to Consolidated Financial Statements 24-29
Results by Quarter (unaudited) 31
10-K
PAGE NO.
2. Other:
Report of Independent Accountants 15
All other schedules are omitted since the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
-8-
With the exception of the financial statements listed in the above index,
the information referred to in Items 5, 6, 7 and the supplementary quarterly
financial information referred to in Item 8, all of which is included in the
portions of the Annual Report to Shareholders for the fiscal year ended January
2, 1999 and incorporated by reference into this Form 10-K Annual Report, the
Annual Report to Shareholders for the fiscal year ended January 2, 1999 is not
to be deemed "filed" as part of this report.
3. Exhibits:
Exhibit No.
3(a) Articles of Incorporation, together with all
amendments thereto (through May 5, 1988)
(incorporated by reference to Exhibit 3(a) of the
Company's Annual Report on Form 10-K dated March
24, 1992)
3(b) Bylaws of the Company effective July 3, 1997
4(a) Indenture dated as of August 15, 1991, between
the Company and the Bank of New York, Trustee,
providing for the issuance of an unlimited amount
of Debt Securities in one or more series (incorpo-
rated by reference to Exhibit 4(a) of the Company's
Annual Report on Form 10-K dated March 24, 1992)
4(b) Form of Food Lion, Inc. Medium Term Note (Global
Fixed Rate) (incorporated by reference to Exhibit
4(b) of the Company's Annual Report on Form 10-K
dated March 24, 1992)
10(a) Low Interest Loan Plan (incorporated by reference
to Exhibit 19(a) of the Company's Report on Form
8-K dated October 27, 1986)
10(b) Form of Deferred Compensation Agreement
(incorporated by reference to Exhibit 19(b) of
the Company's Report on Form 8-K dated October 27,
1986)
10(c) Form of Salary Continuation Agreement (incorporated
by reference to Exhibit 19(c) of the Company's
report on Form 8-K dated October 27, 1986)
10(d) 1994 Shareholders' Agreement dated as of the 15th
day of September 1994 among Etablissements Delhaize
Freres et Cie "Le Lion" S.A., Delhaize The Lion
America, Inc., and the Company (incorporated by
reference to Exhibit 10 of the Company's Report on
Form 8-K dated October 7, 1994)
-9-
10(e) Proxy Agreement dated January 4, 1991, between
Etablissements Delhaize Freres et Cie "Le Lion"
S.A. and Delhaize The Lion, America, Inc.
(incorporated by reference to Exhibit 10(e) of
the Company's Annual Report on Form 10-K dated
March 25, 1991)
10(f) Employment Agreement dated August 1, 1991, between
the Company and Tom E. Smith (incorporated by
reference to Exhibit 10(h) of the Company's Annual
Report on Form 10-K dated March 24, 1992)
10(g) Stock Purchase Agreement dated June 30, 1981,
between the Company and Ralph W. Ketner
(incorporated by reference to Exhibit 10(j) of
the Company's Annual Report on Form 10-K dated
April 1, 1987)
10(h) Amended and Restated Food Lion, Inc. 1983
Employee Stock Option Plan (incorporated by
reference to Exhibit 10(k) of the Company's Annual
Report on Form 10-K dated March 24, 1992)
10(i) 1991 Employee Stock Option Plan of Food Lion,
Inc. (incorporated by reference to Exhibit 10(l) of
the Company's Annual Report on Form 10-K dated
March 24, 1992)
10(j) Split Dollar Life Insurance Agreement between the
Company and Tom E. Smith (incorporated by
reference to Exhibit 10(o) of the Company's
Annual Report on Form 10-K dated April 1, 1987)
10(k) Split Dollar Life Insurance Agreement between the
Company and Tom E. Smith issued May 25, 1988
(incorporated by reference to Exhibit 10(w) of the
Company's Annual Report on Form 10-K dated March
20, 1989)
10(l) Letter Agreement dated May 10, 1990, between the
Company and Ralph W. Ketner (incorporated by
reference to Exhibit 10(q) of the Company's Annual
Report on Form 10-K dated March 25, 1991)
10(m) U.S. Distribution Agreement dated August 20, 1991,
between the Company and Goldman, Sachs & Co. and
Merrill Lynch & Co. relating to the sale of up to
$300,000,000 in principal amount of the Company's
Medium-Term Notes (incorporated by reference to
Exhibit 10(p) of the Company's Annual Report on
Form 10-K dated March 24, 1992)
10(n) License Agreement between the Company and
Etablissements Delhaize Freres Et Cie "Le Lion"
S.A. dated January 1, 1983 (incorporated by
reference to Exhibit 10(t) of the Company's
Annual Report on Form 10-K dated March 31, 1994)
-10-
10(o) 1996 Employee Stock Incentive Plan of Food Lion,
Inc. (incorporated by reference to Exhibit 10(a)
of the Company's Quarterly Report on Form 10-Q
dated July 30, 1996)
10(p) Key Executive Annual Incentive Bonus Plan
(incorporated by reference to Exhibit 10(b)
of the Company's Quarterly Report on Form
10-Q dated July 30, 1996)
10(q) Profit Sharing Restoration Plan effective as
of May 4, 1995 (incorporated by reference to
Exhibit 10(c) of the Company's 10-Q A dated
August 13, 1996)
10(r) Supplemental Executive Retirement Plan effective
as of May 4, 1995 (incorporated by reference to
Exhibit 10(d) of the Company's 10-Q A dated
August 13, 1996)
10(s) Employee Severance Agreement dated September 5,
1996, between the Company and Dan A. Boone
(incorporated by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q dated
October 16, 1996)
10(t) Employment Agreement dated as of February 27, 1997,
between Joseph C. Hall, Jr. and the Company
(incorporated by reference to Exhibit 10(w) of
the Company's Annual Report on Form 10-K dated
March 27, 1997)
10(u) Employment Agreement dated as of February 27, 1997,
between R. William McCanless and the Company
(incorporated by reference to Exhibit 10(x) of the
Company's Annual Report on Form 10-K dated
March 27, 1997)
10(v) Agreement and Plan of Merger dated as of October
31, 1996, among the Company, KK Acquisition Corp.
and Kash n' Karry Food Stores, Inc. (incorporated
by reference to Exhibit 2 of the Company's Report
on Form 8-K dated October 31, 1996)
10(w) Stockholders' Agreement, dated as of October 31,
1996, among the Company, KK Acquisition Corp.,
Kash n' Karry Food Stores, Inc. and the stockholders
of Kash n' Karry Food Stores, Inc. signatory thereto
(incorporated by reference to Exhibit 10 of the
Company's Report on Form 8-K dated October 31, 1996)
10(x) License Agreement, dated as of June 19, 1997,
among the Company, Kash n' Karry Food Stores, Inc.,
and Etablissements Delhaize Freres Et Cie "Le Lion" S.A.
(incorporated by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q dated
July 25, 1997)
-11-
10(y) Food Lion Inc. and The Bank of New York, Trustee,
First Supplement Indenture dated as of April 21, 1997
(incorporated by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q dated
May 2, 1997)
10(z) Underwriting Agreement dated as of April 16, 1997,
between Food Lion, Inc. and Salomon Brothers, Inc.
for itself and as representative for NationsBanc
Capital Markets Inc. (incorporated by reference to
Exhibit 10(b) of the Company's Quarterly Report
on Form 10-Q dated May 2, 1997)
10(aa) Deferral Agreement and Election, dated as of December
18, 1997, by and between Tom E. Smith and the Company
(incorporated by reference to 10(ac) of the Company's
Annual Report on Form 10-K dated April 8, 1998)
10(ab) Employment Agreement, dated as of October 1, 1997,
between Pamela K. Kohn and the Company (incorporated by
reference to 10(ad) of the Company's Annual Report on
Form 10-K dated April 8, 1998)
10(ac) Employment Agreement, dated as of October 1, 1997,
between A. Edward Benner and the Company (incorporated
by reference to 10(ae) of the Company's Annual Report
on Form 10-K dated April 8, 1998)
10(ad) Agreement, dated as of January 4, 1998, between
Etablissements Delhaize Freres et Cie "Le Lion"
S.A. and the Company (incorporated by reference to
10(af) of the Company's Annual Report on Form 10-K
dated April 8, 1998)
10(ae) Credit Agreement dated as of December 15, 1998, among the
Company, the lenders party thereto, and The Chase Manhattan
Bank, N.A., as Documentation Agent
13 Portions of the Annual Report to Shareholders for the fiscal
year ended January 2, 1999
21 Subsidiaries of Registrant
23 Consent of Independent Accountants
27 Financial Data Schedules
99 Undertaking of the Company to file exhibits
pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K
(b) Reports on Form 8-K:
The Company did not file a report on Form 8-K during the
fiscal year ended January 2, 1999.
-12-
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: By
Tom E. Smith
President, Chief Executive
Officer, Principal
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: By
Tom E. Smith
President, Chief Executive
Officer, Principal
Executive Officer and Director
Date: By
Pierre-Olivier Beckers
Director
Date: By
Dr. Jacqueline K. Collamore
Director
Date: By
Jean-Claude Coppieters t' Wallant
Director
Date: By
William G. Ferguson
Director
Date: By
Dr. Bernard Franklin
Director
Date: By
Joseph C. Hall
Senior Vice President of Operations
Director
Date: By
Margaret H. Kluttz
Director
Date: By
Dominque Raquez
Director
Date: By
Gui de Vaucleroy
Director
-13-
Date: By
R. William McCanless
Chief Administrative Officer
and Secretary
Date: 8/17/99 By /s/ Laura Kendall
Laura Kendall
Vice President of Finance
Chief Financial Officer
Principal Accounting Officer
-14-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Food Lion, Inc.:
In our opinion, the consolidated financial statements of Food Lion, Inc. and
subsidiaries, which financial statements are included on pages 20 through 29 of
the 1998 Annual Report to Shareholders of Food Lion, Inc. incorporated by
reference herein, present fairly, in all material respects, the financial
position of Food Lion, Inc. and subsidiaries at January 2, 1999 and January 3,
1998, and the results of its operations and its cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles . These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Charlotte, North Carolina
February 10, 1999
PRICEWATERHOUSECOOPERS LLP
-15-
EXHIBIT INDEX
to
ANNUAL REPORT ON FORM 10-K of
Food Lion, Inc.
For the fiscal Year Ended January 2, 1999
Sequential
Exhibit No. Description Page No.
3(a) Articles of Incorporation, together with all
amendments thereto (through May 5, 1988)
(incorporated by reference to Exhibit 3(a)
of the Company's Annual Report on Form 10-K
dated March 24, 1992)
3(b) Bylaws of the Company effective July 3, 1997 20-33
4(a) Indenture dated as of August 15, 1991, between the
Company and the Bank of New York, Trustee,
providing for the issuance of an unlimited amount
of Debt Securities in one or more series
(incorporated by reference to Exhibit 4(a) of the
Company's Annual Report on Form 10-K dated March
24, 1992)
4(b) Form of Food Lion, Inc. Medium Term Note (Global
Fixed Rate) (incorporated by reference to Exhibit 4(b)
of the Company's Annual Report on Form 10-K dated
March 24, 1992)
10(a) Low Interest Loan Plan (incorporated by reference to
Exhibit 19(a) of the Company's Report on Form 8-K
dated October 27, 1986)
10(b) Form of Deferred Compensation Agreement
(incorporated by reference to Exhibit 19(b) of the
Company's Report on Form 8-K dated October 27, 1986)
10(c) Form of Salary Continuation Agreement (incorporated
by reference to Exhibit 19(c) of the Company's Report
on Form 8-K dated October 27, 1986)
10(d) 1994 Shareholders' Agreement dated as of the 15th day
of September 1994 among Etablissements Delhaize Freres
et Cie "Le Lion" S.A., Delhaize The Lion America, Inc.,
and the Company (incorporated by reference to Exhibit 10
of the Company's Report on Form 8-K dated October 7, 1994)
10(e) Proxy Agreement dated January 4, 1991, between
Etablissements Delhaize Freres et Cie "Le Lion"
S.A. and Delhaize The Lion America, Inc. (incorporated
by reference to Exhibit 10(e) of the Company's Annual
Report on form 10-K dated March 25, 1991)
-1-
10(f) Employment Agreement dated August 1, 1991, between
the Company and Tom E. Smith (incorporated by
reference to Exhibit 10(h) of the Company's Annual
Report on Form 10-K dated March 24, 1992)
10(g) Stock Purchase Agreement dated June 30, 1981, between
the Company and Ralph W. Ketner (incorporated by
reference to Exhibit 10(j) of the Company's Annual
Report on Form 10-K dated April 1, 1987)
10(h) Amended and Restated Food Lion, Inc. 1983 Employment
Stock Option Plan (incorporated by reference to
Exhibit 10(k) of the Company's Annual Report on Form
10-K dated March 24, 1992)
10(i) 1991 Employee Stock Option Plan of Food Lion, Inc.
(incorporated by reference to Exhibit 10(l) of the
Company's Annual Report on Form 10-K dated March 24,
1992)
10(j) Split Dollar Life Insurance Agreement between the
Company and Tom E. Smith (incorporated by reference
to Exhibit 10(o) of the Company's Annual Report on
Form 10-K dated April 1, 1987)
10(k) Split Dollar Life Insurance Agreement between
the Company and Tom E. Smith issued May 25, 1988
(incorporated by reference to Exhibit 10(w) of
the Company's Annual report on Form 10-K dated
March 20, 1989)
10(l) Letter Agreement dated May 10, 1990. between the
Company and Ralph W. Ketner (incorporated by
reference to Exhibit 10(q) of the Company's
Annual Report on Form 10-K dated March 25, 1991)
10(m) U.S. Distribution Agreement dated August 20, 1991,
between the Company and Goldman, Sachs & Co and
Merrill Lynch & Co. relating to the sale of up to
$300,000,000 in principal amount to the Company's
Medium-Term Notes (incorporated by reference to
Exhibit 10(p) of the Company's Annual Report on
Form 10-K dated March 24, 1992)
10(n) License Agreement between the Company and
Etablissements Delhaize Freres Et Cie "Le Lion" S.A.
dated January 1, 1983 (incorporated by reference to
Exhibit 10(t) of the Company's Annual Report on Form
10-K dated March 31, 1994)
10(o) 1996 Employee Stock Incentive Plan of Food Lion, Inc.
(incorporated by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q dated July 30, 1996)
10(p) Key Executive Annual Incentive Bonus Plan (incorporated
by reference to Exhibit 10(b) of the Company's Quarterly
Report on Form 10-Q dated July 30, 1996)
-2-
10(q) Profit Sharing Restoration Plan effective as of May 4,
1995 (incorporated by reference to Exhibit 10(c) of the
Company's 10-Q A dated August 13, 1996)
10(r) Supplemental Executive Retirement Plan effective as of
May 4, 1995 (incorporated by reference to Exhibit 10(d)
of the Company's 10-Q A dated August 13, 1996)
10(s) Employee Severance Agreement dated September 5, 1996,
between the Company and Dan A. Boone (incorporated by
reference to Exhibit 10 of the Company's Quarterly Report
on Form 10-Q dated October 16, 1996)
10(t) Employment Agreement dated as of February 27, 1997,
between Joseph C. Hall, Jr. and the Company (incorporated by
reference to Exhibit 10(w) of the Company's Annual Report
on Form 10-K dated March 27, 1997)
10(u) Employment Agreement dated as of February 27, 1997,
between R. William McCanless and the Company (incorporated
by reference to Exhibit 10(x) of the Company's Annual Report
on Form 10-K dated March 27, 1997)
10(v) Agreement and Plan of Merger dated as of October 31, 1996,
among the Company, KK Acquisition Corp. and Kash n' Karry
Food Stores, Inc. (incorporated by reference to Exhibit 2 of
the Company's Report on Form 8-K dated October 31, 1996)
10(w) Stockholders' Agreement, dated as of October 31, 1996,
among the Company, KK Acquisition Corp., Kash n' Karry
Food Stores, Inc. and the stockholders of Kash n' Karry
Food Stores, Inc. signatory thereto (incorporated by
reference to Exhibit 10 of the Company's Report on Form
8-K dated October 31, 1996)
10(x) License agreement, dated as of June 19, 1997, among
the Company, Kash n' Karry Food Stores, Inc., and
Etablissements Delhaize Freres Et Cie "Le Lion" S.A.
(incorporated by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q dated
July 25, 1997)
10(y) Food Lion Inc. and The Bank of New York, Trustee, First
Supplement Indenture dated as of April 21, 1997
(incorporated by reference to Exhibit 10(a) of the
Company's Quarterly Report on Form 10-Q dated
May 2, 1997)
10(z) Underwriting Agreement dated as of April 16, 1997,
between Food Lion, Inc. and Salomon Brothers, Inc.
for itself and as representative for NationsBanc
Capital Markets Inc. (incorporated by reference to
Exhibit 10(b) of the Company's Quarterly Report
on Form 10-Q dated May 2, 1997)
-3-
10(aa) Deferral Agreement and Election, dated as of
December 18, 1997, by and between Tom E. Smith and
the Company (incorporated by reference to Exhibit
10 (ac) of the Company's Annual Report on Form 10-K
dated April 8, 1998)
10(ab) Employment Agreement, dated as of October 1,1997,
between Pamela K. Kohn and the Company. (incorporated
by reference to Exhibit 10 (ad) of the Company's Annual
Report on Form 10-K dated April 8, 1998)
10(ac) Employment Agreement, dated as of October 1, 1997,
between A. Edward Benner and the Company (incorporated
by reference to Exhibit 10 (ae) of the Company's Annual
Report on Form 10-K dated April 8, 1998)
10(ad) Agreement, dated as of January 4, 1998, between
Etablissements Delhaize Freres et Cie "Le Lion"
S.A. and the Company. (incorporated
by reference to Exhibit 10 (af) of the Company's Annual
Report on Form 10-K dated April 8, 1998)
10(ae) Credit Agreement dated as of December 15, 1998, among the
Company, the lenders party thereto, and The Chase Manhattan Bank,
as Administrative Agent, and Wachovia Bank, N.A., as
Documentation Agent. 34-145
13 Portions of the Annual Report to Shareholders for the
fiscal year ended January 2, 1999 147-179
21 Subsidiaries of Registrant 180
23 Consent of Independent Accountants 181
27 Financial Data Schedules 182-183
99 Undertaking of the Company to file exhibits pursuant
to Item 601(b)(4)(iii)(A) of Regulation S-K 184
(b) Reports on Form 8-K:
The Company did not file a report on Form 8-K during the fiscal
year ended January 2, 1999.
-4-
Exhibit 13
Portions of the Annual Report to Shareholders for the fiscal year ended January
2, 1999
Ten Year Summary of Operations
(Dollars in thousands 1998 1997 1996
except per share amounts) (52 weeks) (53 weeks) (52 weeks)
Financial Data:
1. Net sales $ 10,219,474 10,194,385 9,005,932
2. Same store sales percent
change % 2.57 0.22 5.70
3. Cost of goods sold $ 7,925,844 7,975,659 7,087,177
4. Selling and administrative
expenses $ 1,770,314 1,736,559 1,490,878
5. Asset impairment reserve $ 0 0 22,187
6. Store closing charge/(income) $ 0 84,402 (27,600)
7. Operating income $ 523,316 397,765 433,290
8. Depreciation and amortization $ 236,021 219,833 165,286
9. Interest expense $ 95,334 115,389 80,520
10. Income before income taxes $ 427,982 282,376 352,770
11. Net income $ 272,585 172,250 215,220
12. Current assets $ 1,512,277 1,328,511 1,539,039
13. Non-current assets $ 2,163,684 2,167,625 2,052,496
14. Total assets $ 3,675,961 3,496,136 3,591,535
15. Current liabilities $ 1,040,417 960,788 1,248,028
16. Long-term debt $ 429,763 586,355 495,111
17. Capital lease obligations,
deferred taxes and other
liabilities $ 606,859 615,808 623,308
18. Shareholders' equity $ 1,598,922 1,333,185 1,225,088
19. Cash dividends
Class A $ 36,832 31,825 26,436
Class B $ 34,439 30,923 25,874
20. Weighted average shares
outstanding (000) 478,084 468,916 470,216
21. Earnings per share (a) $ .57 .37 .46
22. Dividends per share (a) $ .149 .134 .111
23. Book value per share (a) $ 3.34 2.84 2.61
24. Asset turnover x 2.85 2.88 2.89
25. Return on sales % 2.67 1.69 2.39
26. Return on assets % 7.60 4.86 6.90
27. Return on equity % 18.59 13.47 18.49
28. Equity ratio % 43.50 38.13 34.11
29. Return on investment % 18.64 15.81 18.61
30. Current ratio x 1.45 1.38 1.23
Other Data:
31. Store count 1,207 1,157 1,112
32. Stores opened/acquired 79 164 64
33. Stores relocated (17) (25) (22)
34. Stores closed (12) (94) (3)
35. Total stores square
footage (000) 38,887 36,107 32,615
36. Capital expenditures $ 356,058 346,134 283,564
37. Number of employees 92,125 83,871 73,170
38. Number of Deli/Bakery departments 1,099 1,008 888
39. Recapitalization and
stock splits
-18-
(Dollars in thousands 1995 1994
except per share amounts) (52 weeks) (52 weeks)
Financial Data:
1. Net sales $ 8,210,884 7,932,592
2. Same store sales percent
change % 2.33 3.34
3. Cost of goods sold $ 6,516,637 6,323,693
4. Selling and administrative
expenses $ 1,337,702 1,269,637
5. Asset impairment reserve $ 0 0
6. Store closing charge/(income) $ 0 0
7. Operating income $ 356,545 339,262
8. Depreciation and amortization $ 146,170 139,834
9. Interest expense $ 73,484 86,564
10. Income before income taxes $ 283,061 252,698
11. Net income $ 172,361 152,898
12. Current assets $ 1,149,235 1,125,471
13. Non-current assets $ 1,496,030 1,356,470
14. Total assets $ 2,645,265 2,481,941
15. Current liabilities $ 698,695 690,062
16. Long-term debt $ 355,300 355,300
17. Capital lease obligations,
deferred taxes and other
liabilities $ 488,760 409,226
18. Shareholders' equity $ 1,102,510 1,027,353
19. Cash dividends
Class A $ 23,621 22,021
Class B $ 22,672 21,131
20. Weighted average shares
outstanding (000) 481,154 483,708
21. Earnings per share (a) $ .36 .32
22. Dividends per share (a) $ .096 .089
23. Book value per share (a) $ 2.29 2.12
24. Asset turnover x 3.20 3.18
25. Return on sales % 2.10 1.93
26. Return on assets % 6.72 6.13
27. Return on equity % 16.18 15.72
28. Equity ratio % 41.68 41.39
29. Return on investment % 17.31 16.69
30. Current ratio x 1.64 1.63
Other Data:
31. Store count 1,073 1,039
32. Stores opened/acquired 47 30
33. Stores relocated (12) (3)
34. Stores closed (1) (84)
35. Total stores square
footage (000) 30,056 27,335
36. Capital expenditures $ 219,905 117,312
37. Number of employees 69,345 64,840
38. Number of Deli/Bakery departments 733 575
39. Recapitalization and
stock splits
-18-
Ten Year Summary of Operations
(Dollars in thousands 1993 1992 1991
except per share amounts) (52 weeks) (53 weeks) (52 weeks)
Financial Data:
1. Net sales $7,609,817 7,195,923 6,438,507
2. Same store sales percent
change % (2.58) (0.42) 2.68
3. Cost of goods sold $6,121,274 5,759,534 5,102,977
4. Selling and administrative
expenses $1,239,348 1,096,727 960,423
5. Asset impairment reserve $ 0 0 0
6. Store closing charge/(income) $ 170,500 0 0
7. Operating income $ 78,695 339,662 375,107
8. Depreciation and amortization $ 143,042 121,616 104,614
9. Interest expense $ 72,343 49,057 34,436
10. Income before income taxes $ 6,352 290,605 340,671
11. Net income $ 3,852 178,005 205,171
12. Current assets $1,135,200 1,147,849 982,112
13. Non-current assets $1,368,483 1,373,643 1,037,180
14. Total assets $2,503,683 2,521,492 2,019,292
15. Current liabilities $ 619,271 986,274 676,768
16. Long-term debt $ 569,350 240,537 240,810
17. Capital lease obligations,
deferred taxes and other
liabilities $ 397,508 338,962 270,659
18. Shareholders' equity $ 917,554 955,719 831,055
19. Cash dividends
Class A $ 21,483 27,355 24,393
Class B $ 20,603 26,457 23,638
20. Weighted average shares
outstanding (000) 483,701 483,663 483,516
21. Earnings per share (a) $ .01 .37 .42
22. Dividends per share (a) $ .087 .111 .099
23. Book value per share (a) $ 1.90 1.98 1.72
24. Asset turnover x 3.03 3.17 3.58
25. Return on sales % .05 2.47 3.19
26. Return on assets % .15 7.84 11.40
27. Return on equity % .41 19.92 27.28
28. Equity ratio % 36.65 37.90 41.16
29. Return on investment % 5.68 20.02 26.09
30. Current ratio x 1.83 1.16 1.45
Other Data:
31. Store count 1,096 1,012 881
32. Stores opened/acquired 100 140 111
33. Stores relocated (4) (4) (6)
34. Stores closed (12) (5) (2)
35. Total stores square
footage (000) 28,950 26,428 22,480
36. Capital expenditures $ 159,857 402,327 305,879
37. Number of employees 65,494 59,721 53,583
38. Number of Deli/Bakery departments 553 446 279
39. Recapitalization and
stock splits 3 for 2
-19-
(Dollars in thousands 1990 1989
except per share amounts) (52 weeks) (52 weeks)
Financial Data:
1. Net sales $5,584,410 4,717,066
2. Same store sales percent
change % 4.50 8.60
3. Cost of goods sold $4,447,177 3,772,473
4. Selling and administrative
expenses $ 820,175 684,938
5. Asset impairment reserve $ 0 0
6. Store closing charge/(income) $ 0 0
7. Operating income $ 317,058 259,655
8. Depreciation and amortization $ 81,432 65,042
9. Interest expense $ 32,587 29,180
10. Income before income taxes $ 284,471 230,475
11. Net income $ 172,571 139,775
12. Current assets $ 787,869 671,207
13. Non-current assets $ 791,996 610,470
14. Total assets $1,579,865 1,281,677
15. Current liabilities $ 597,392 510,838
16. Long-term debt $ 91,721 95,774
17. Capital lease obligations,
deferred taxes and other
liabilities $ 217,694 136,611
18. Shareholders' equity $ 673,058 538,454
19. Cash dividends
Class A $ 21,926 16,549
Class B $ 21,082 15,971
20. Weighted average shares
outstanding (000) 483,210 482,964
21. Earnings per share (a) $ .36 .29
22. Dividends per share (a) $ .089 .067
23. Book value per share (a) $ 1.39 1.11
24. Asset turnover x 3.90 3.98
25. Return on sales % 3.09 2.96
26. Return on assets % 12.06 11.79
27. Return on equity % 28.49 28.84
28. Equity ratio % 42.60 42.01
29. Return on investment % 29.33 28.85
30. Current ratio x 1.32 1.31
Other Data:
31. Store count 778 663
32. Stores opened/acquired 121 105
33. Stores relocated (5) (8)
34. Stores closed (1) (1)
35. Total stores square
footage (000) 19,424 16,326
36. Capital expenditures $ 206,391 147,810
37. Number of employees 47,276 40,736
38. Number of Deli/Bakery departments 183 149
39. Recapitalization and
stock splits
-19-
Notes to Ten Year Summary of Operations
(a) Amounts are based upon the weighted average number of the Class A and
Class B common shares outstanding.
DEFINITIONS
Line
20. Weighted average shares outstanding: Weighted average shares outstanding
have been restated to reflect the stock split in 1992.
21. Earnings per share: Net income per common share (line 11/line 20).
22. Dividends per share: Cash dividends per common share (line 19/line 20).
23. Book value per share: Book value of shareholders' equity per common
share (line 18/line 20).
24. Asset turnover: The ratio of sales per dollar of assets employed during
the year. It is calculated by dividing sales by the average total assets
(line 1/line 14).
25. Return on sales: The percentage of net income earned on each dollar of
sales (line 11/line 1).
26. Return on assets: The percentage of net income earned on average total
assets (line 11/line 14).
27. Return on equity: The percentage of net income earned on average
shareholders' equity (line 11/line 18).
28. Equity ratio: Shows the share of total assets of the business owned by
the shareholders as opposed to outside sources. It is calculated by
dividing year-end shareholders' equity by year-end total assets
(line 18/line 14).
29. Return on investment: The percentage of net income, excluding interest
expense, to invested capital ([line 11 + line 9] / [average line 16 +
average line 18]).
30. Current ratio: The ratio of current assets to current liabilities
(line 12/ line 15).
31. Store count: Number of stores operating at year-end.
37. Number of employees: Number of full-time and part-time employees at
year-end.
38. Number of Deli/Bakery departments: Number of stores with Deli/Bakery
departments at year end.
-19-
Consolidated Statements of Income
Year Ended Year Ended Year Ended
January 2, January 3, December 28,
(Dollars in thousands 1999 1998 1996
except per share amounts)
Net sales $10,219,474 $10,194,385 $9,005,932
Cost of goods sold 7,925,844 7,975,659 7,087,177
Selling and administrative
expenses 1,770,314 1,736,559 1,490,878
Asset impairment reserve - - 22,187
Store closing charge/(income) - 84,402 (27,600)
Operating income 523,316 397,765 433,290
Interest expense 95,334 115,389 80,520
Income before income taxes 427,982 282,376 352,770
Provision for income taxes 155,397 110,126 137,550
Net income $ 272,585 $ 172,250 $ 215,220
Earnings per share:
Basic $.57 $.37 $.46
Diluted $.57 $.36 $.45
(Results as a percentage
of net sales)
Net sales 100.00% 100.00% 100.00%
Cost of goods sold 77.56 78.24 78.69
Selling and administrative
expenses 17.32 17.04 16.56
Asset impairment reserve - - .25
Store closing charge/(income) - .82 (.31)
Operating income 5.12 3.90 4.81
Interest expense .93 1.13 .89
Income before income taxes 4.19 2.77 3.92
Provision for income taxes 1.52 1.08 1.53
Net income 2.67% 1.69% 2.39%
The accompanying notes are an integral part of the consolidated financial
statements.
-20-
Consolidated Balance Sheets
January 2, January 3,
(Dollars in thousands 1999 1998
except per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 123,592 $ 93,340
Receivables 199,101 166,790
Inventories 1,103,635 982,744
Prepaid expenses 20,552 22,514
Deferred tax asset 65,397 63,123
Total current assets 1,512,277 1,328,511
Property, at cost, less accumulated
depreciation 1,897,080 1,842,269
Deferred tax asset 4,707 51,980
Intangible assets less accumulated amortization 258,402 267,656
Other assets 3,495 5,720
Total assets $3,675,961 $3,496,136
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 61,000 $ 80,000
Accounts payable, trade 545,015 497,907
Accrued expenses 360,105 351,173
Capital lease obligations - current 21,940 20,427
Long term debt - current 42,518 2,525
Other liabilities - current 9,839 8,756
Total current liabilities 1,040,417 960,788
Long-term debt 429,763 586,355
Capital lease obligations 492,660 489,928
Other liabilities 114,199 125,880
Total liabilities 2,077,039 2,162,951
Shareholders' equity:
Class A non-voting common stock,
$.50 par value; authorized 1,500,000,000
shares; issued and outstanding 247,893,000
shares at January 2, 1999 and
236,224,000 shares at January 3, 1998 123,946 118,112
Class B voting common stock, $.50
par value; authorized 1,500,000,000 shares;
issued and outstanding 230,830,000 shares at
January 2, 1999 and 232,727,000 shares at
January 3, 1998 115,415 116,364
Additional capital 60,332 794
Retained earnings 1,299,229 1,097,915
Total shareholders' equity 1,598,922 1,333,185
Total liabilities and
shareholders' equity $3,675,961 $3,496,136
The accompanying notes are an integral part of the consolidated financial
statements.
-21-
Consolidated Statements of Cash Flows
January 2, January 3,
1999 1998
(Dollars in thousands)
Cash flows from operating activities
Net income $272,585 $172,250
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 236,021 219,833
(Gain)loss on disposals of property (8,953) 964
Store closing charge - 84,402
Asset impairment reserve - -
Deferred income taxes 44,999 (36,527)
Changes in operating assets
and liabilities net of effect of
acquisition of subsidiary:
Receivables (32,311) (15,627)
Inventories (120,891) 82,999
Prepaid expenses 1,962 8,377
Other assets 2,225 (2,951)
Accounts payable and accrued expenses 56,040 (116,816)
Income taxes payable - (5,578)
Other liabilities (10,598) (36,416)
Total adjustments 168,494 182,660
Net cash provided by operating
activities 441,079 354,910
Cash flows from investing activities
Capital expenditures (356,058) (346,134)
Proceeds from sale of property 109,850 32,572
Investment in subsidiary, net of cash received - -
Net cash used in investing
activities (246,208) (313,562)
Cash flows from financing activities
Net (payments) proceeds under short-term
borrowings (19,000) (170,010)
Principal payments on long-term debt (6,154) (212,027)
Proceeds from issuance of long-term debt - 304,823
Principal payments under capital
lease obligations (22,172) (22,076)
Dividends paid (71,271) (62,748)
Repurchase of common stock (50,192) (2,960)
Proceeds from issuance of common stock 4,170 1,555
Net cash (used in) provided by
financing activities (164,619) (163,443)
Net increase (decrease) in cash and
cash equivalents 30,252 (122,095)
Cash and cash equivalents at beginning
of year 93,340 215,435
Cash and cash equivalents at end of year $123,592 $ 93,340
The accompanying notes are an integral part of the consolidated financial
statements
-22-
Consolidated Statements of Cash Flows
December 28,
1996
(Dollars in thousands)
Cash flows from operating activities
Net income $215,220
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 165,286
Loss on disposals of property 466
Store closing (income) (27,600)
Asset impairment reserve 22,187
Deferred income taxes (23,450)
Changes in operating assets
and liabilities:
Receivables (50,845)
Inventories (90,484)
Prepaid expenses (6,940)
Other assets 409
Accounts payable and accrued expenses 184,415
Income taxes payable 5,578
Other liabilities 34,099
Total adjustments 213,121
Net cash provided by operating
activities 428,341
Cash flows from investing activities
Capital expenditures (283,564)
Proceeds from sale of property 27,464
Investment in subsidiary, net of cash received (99,852)
Net cash used in investing
activities (355,952)
Cash flows from financing activities
Net proceeds under short-term
borrowings 250,000
Principal payments on long-term debt (65,656)
Proceeds from issuance of long-term debt -
Principal payments under capital
lease obligations (17,764)
Dividends paid (52,310)
Repurchase of common stock (44,345)
Proceeds from issuance of common stock 3,086
Net cash provided by
financing activities 73,011
Net increase in cash and cash
equivalents 145,400
Cash and cash equivalents at beginning
of year 70,035
Cash and cash equivalents at end of year $215,435
The accompanying notes are an integral part of the consolidated financial
statements
-22-
Consolidated Statements of Shareholders' Equity
Class A Class B
(Dollars and shares in thousands Common Stock Common Stock
except per share amounts) Shares Amount Shares Amount
Balances December 30, 1995 238,509 $119,255 236,625 $118,313
Cash dividends declared:
Class A - $.1120 per share
Class B - $.1104 per share
Sale of stock 587 293 - -
Repurchase of common stock (3,047) (1,524) (3,723) (1,862)
Converted debt 117 59
Net income
Balances December 28, 1996 236,166 118,083 232,902 116,451
Cash dividends declared:
Class A - $.1348 per share
Class B - $.1328 per share
Sale of stock 293 147 - -
Repurchase of common stock (235) (118) (175) (87)
Net income
Balances January 3, 1998 236,224 118,112 232,727 116,364
Cash dividends declared:
Class A - $.1500 per share
Class B - $.1480 per share
Sale of stock 746 373 - -
Repurchase of common stock (3,086) (1,543) (1,897) (949)
Restricted shares 29 14
Converted debt 13,980 6,990
Net income
Balances January 2, 1999 247,893 $123,946 230,830 $115,415
The accompanying notes are an integral part of the consolidated financial
statements
-23-
Additional Retained
Capital Earnings Total
Balances December 30, 1995 - $864,942 $1,102,510
Cash dividends declared:
Class A - $.1120 per share (26,436) (26,436)
Class B - $.1104 per share (25,874) (25,874)
Sale of stock 2,793 - 3,086
Repurchase of common stock (1,953) (39,006) (44,345)
Converted debt 868 927
Net income 215,220 215,220
Balances December 28, 1996 1,708 988,846 1,225,088
Cash dividends declared:
Class A - $.1348 per share (31,825) (31,825)
Class B - $.1328 per share (30,923) (30,923)
Sale of stock 1,408 1,555
Repurchase of common stock (2,322) (433) (2,960)
Net income 172,250 172,250
Balances January 3, 1998 794 1,097,915 1,333,185
Cash dividends declared:
Class A - $.1500 per share (36,832) (36,832)
Class B - $.1480 per share (34,439) (34,439)
Sale of stock 3,585 3,958
Repurchase of common stock (47,700) - (50,192)
Restricted shares 198 212
Converted debt 103,455 110,445
Net income 272,585 272,585
Balances January 2, 1999 $60,332 $1,299,229 $1,598,922
-23-
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Operations
As of January 2, 1999, the Company operated 1,207 retail food supermarkets and
eight distribution centers in 11 states in the Southeast and Mid-Atlantic United
States. The Company's stores, which are operated under the names of "Food Lion"
and "Kash n' Karry," sell a wide variety of groceries, produce, meats, dairy
products, seafood, frozen foods, deli/bakery and non-food items, such as health
and beauty care, prescriptions, and other household and personal products.
Principles of Consolidation
The consolidated financial statements include the accounts of Food Lion, Inc.
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Operating Segment
The Company engages in one line of business, the operation of general food
supermarkets.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to December 31. The years
ended January 2, 1999 and December 28, 1996 each included 52 weeks. The year
ended January 3, 1998 included 53 weeks. The 1998 disclosed amounts represent
the year ended January 2, 1999.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Inventories valued using
the last-in, first out (LIFO) method comprised approximately 87% 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 $139.1 million and $114.4 million
greater in 1998 and 1997, respectively. Application of the LIFO method resulted
in increases in the cost of goods sold of $24.7, $10.0 and $10.2 million for
1998, 1997 and 1996, respectively.
-24-
Statements of Cash Flows
Selected cash payments and non-cash activities were as follows:
(Dollars in thousands) 1998 1997 1996
Cash payments for income taxes $127,352 $158,543 $154,791
Cash payments for interest,
net of amounts capitalized 103,820 108,743 76,631
Non-cash investing and financing activities:
Capitalized lease obligations
incurred for store properties 62,608 80,207 130,899
Capitalized lease obligations
terminated for store properties 30,026 31,633 25,710
Capitalized lease obligations terminated
for store equipment 6,165 7,148 -
Conversion of long term debt to stock 110,445 - 927
Property
Property is stated at historical cost and depreciated on a straight-line basis
over the estimated service lives of assets, generally as follows:
Buildings 40 years
Furniture, fixtures and equipment 3 - 10 years
Leasehold improvements 8 years
Vehicles 7 years
Property under capital leases Lease term
Annually, the value of all long-lived assets is reviewed by store, in
conjunction with the Company's compliance with Financial Accounting Standards
Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" (FASB No.121).
Intangible Assets
Intangible assets primarily include goodwill, tradenames and favorable leasehold
interests, all of which have been acquired in conjunction with purchase business
combinations. Intangible assets are amortized on a straight-line basis over the
estimated useful lives.
The Company evaluates the period of amortization for intangible assets, on an
ongoing basis, to determine whether current circumstances warrant revised
estimates of useful lives. In addition, the Company evaluates, on an ongoing
basis, the carrying value of intangible assets based on projections of
undiscounted cash flows. If impairment is identified, the Company compares the
asset's future discounted cash flows to its current carrying value and records
specific provisions as appropriate.
Deferred Income Taxes
Deferred tax liabilities or assets are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse.
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale to the
Company's customers.
Cost of Goods Sold
Purchases are recorded net of cash discounts.
Advertising Costs
Advertising costs are expensed as incurred.
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Capitalized Interest
The Company capitalizes interest costs incurred to bring certain assets to their
intended use.
Store Opening Costs
Costs associated with the opening of new stores are expensed as incurred.
Store Closing Costs
When a decision is made to close a store, the Company records a charge to cover
the estimated costs of the planned store closing including (1) the
unrecoverable portion of the present value of the remaining lease payments on
leased stores (recorded in Other Liabilities on the Company's Consolidated
Balance Sheet), (2) the write down of store assets (building, equipment, etc.)
to reflect estimated realizable values (recorded as a reduction of the
recorded asset cost on the Company's Consolidated Balance Sheet), and (3) other
costs associated with the store closing (recorded in Accrued Expenses on the
Company's Consolidated Balance Sheet).
The Company intends to close stores within a year after the decision to close
is made.
Recoverable and realizable values are determined based on historical disposition
of similar assets and current economic conditions, and are
reviewed as new information becomes available or economic conditions change.
The Company makes adjustments to the valuation reserves as needed.
At the store closing date, the Company discontinues depreciation on all assets
related to closed store properties. Disposition efforts on these assets begin
immediately following the store closing.
Significant cash outflows associated with store closings relate to ongoing rent
payments on leased stores. The principal portion of the rent payments is charged
against the lease liability established for closed stores (discussed above),
while the interest portion of the rent payments is recorded against current year
earnings in Interest Expense.
Self Insurance
The Company is self-insured for workers' compensation, general liability and
vehicle accident claims. The self-insurance liability is determined actuarially,
based on claims filed and an estimate of claims incurred but not yet reported.
Maximum per occurrence is $500,000 for workers' compensation, $600,000 for
general liability and $750,000 for vehicle liability. The Company is insured for
covered costs in excess of these limits.
Self insurance expense related to the above totaled $34.2 million in 1998, $32.9
million in 1997, and $30.4 million in 1996. Total claim payments were $31.2
million in 1998, $30.3 million in 1997, and $25.8 million in 1996.
Earnings Per Share
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding (478,084,000 shares in 1998, 468,916,000 shares in 1997 and
470,216,000 shares in 1996). Diluted earnings per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding and the weighted average number of potential common
shares outstanding. The common stock equivalents that were added to the weighted
average shares outstanding for purposes of diluted EPS were 1,037,000, 737,000
and 573,000 for outstanding stock options in 1998, 1997 and 1996, respectively.
Additionally, common stock equivalents in 1997 and 1996 included 14,440,000
shares issuable upon conversion of 5% convertible subordinated debentures due
2003. During the second quarter of 1998, the Company's convertible subordinated
debentures were redeemed.
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Reclassification
Certain financial statement items have been reclassified to conform to the
current year's format.
2. Acquisitions
On December 18, 1996, the Company acquired all of the outstanding shares of Kash
n' Karry Food Stores, Inc. ("Kash n' Karry"), a Florida-based supermarket
retailer which operated 100 stores, for $121.6 million. The Company began
reporting consolidated results of operations, including Kash n' Karry, in the
first quarter of 1997.
The Kash n' Karry acquisition was accounted for using the purchase method of
accounting, and, accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based upon their respective fair values at
the date of acquisition (see Note 15 regarding store closing reserves
established at the date of acquisition). In accordance with Accounting
Principles Board Opinion No. 17, the Company determined that the balance of the
purchase price (goodwill, including tradenames) had an unlimited useful life,
and as a result, established a 40-year straight-line amortization period for
these intangible assets.
The net purchase price was initially allocated as follows:
(Dollars in thousands)
Property, plant and equipment $103,078
Other assets 49,229
Intangible assets 269,348
Long-term debt (230,836)
Other liabilities, net ( 90,967)
Purchase price less cash received $ 99,852
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and Kash n' Karry as if the acquisition had occurred
as of the beginning of fiscal 1996. The pro forma results include revised
depreciation expense based on the fair market value of the property and
equipment acquired, the amortization of intangibles arising from the
transaction, and the adjustments to interest expense resulting from the
refinancing of Kash n' Karry's long term debt. This pro forma financial
information is presented for informational purposes only and may not be
indicative of what the actual consolidated results of operations would have been
if the acquisition had been effective at the beginning of fiscal 1996.
Year ended
(Dollars in thousands) December 28,1996
Sales $9,945,888
Net income 204,722
Earnings per share $.44
-25-
3. Property
Property consists of the following:
(Dollars in thousands) 1998 1997
Land and improvements $ 103,820 $ 160,543
Buildings 377,736 397,496
Furniture, fixtures and equipment 1,343,514 1,265,085
Vehicles 100,370 98,529
Leasehold improvements 478,848 361,278
Construction in progress (estimated
costs to complete and equip at
January 2, 1999 are $80.0 million) 44,895 41,488
2,449,183 2,324,419
Less accumulated depreciation 1,012,193 941,298
1,436,990 1,383,121
Property under capital leases 584,931 569,855
Less accumulated depreciation 124,841 110,707
460,090 459,148
$1,897,080 $1,842,269
At January 2, 1999 and January 3, 1998, the Company had $21.0 million and $99.4
million (net book value), respectively, in property held for sale.
4. Intangible Assets
Intangible assets is comprised of the following:
(Dollars in thousands) 1998 1997
Goodwill $203,286 $205,809
Tradenames 58,000 58,000
Leasehold interests 18,438 15,312
279,724 279,121
Accumulated amortization 21,322 11,465
$258,402 $267,656
During 1998, changes in Goodwill arose primarily from adjustments to reduce
store closing reserves for Kash n' Karry, originally established at the
acquisition date, to reflect updated recoverable values and costs related to the
Company's current plans to close stores as part of the acquisition strategy.
5. Accrued Expenses
Accrued expenses consist of the following:
(Dollars in thousands) 1998 1997
Employee benefit plan $100,647 $100,634
Self insurance 76,207 75,735
Payroll 66,887 37,410
Reserves for store closings 1,126 7,436
Other 115,238 129,958
$360,105 $351,173
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6. Employee Benefit Plan
The Company has a non-contributory retirement plan covering all Food Lion
employees with one or more years of service. Employees' benefits under the plan
become vested after five years of consecutive service. Forfeitures of the plan
are treated as contributions and are allocated to the remaining participants at
year end. The plan provides benefits to participants upon death, retirement or
termination of employment with the Company. Contributions to the retirement
plan are determined by the Company's Board of Directors. Expense related to the
plan totaled $94.9 million in 1998, $97.8 million in 1997 and $94.9 million in
1996.
7. Long-Term Debt
Long-term debt consists of the following:
(Dollars in thousands) 1998 1997
Medium-term notes, due from 1999 to
2006. Interest ranges from 8.32%
to 8.73%. $150,300 $150,300
Debt Securities, due 2007. Interest
is at 7.55%. 150,000 150,000
Debt Securities, due 2027. Interest
is at 8.05%. 150,000 150,000
Convertible subordinated debentures
converted May 1998. - 114,073
Mortgage payables due from 1999 through
2003. Interest ranges from 7.50% to 10.35%. 19,029 20,043
Other 2,952 4,464
472,281 588,880
Less current portion 42,518 2,525
$429,763 $586,355
-25-
During the second quarter of 1998, the Company redeemed its outstanding
convertible subordinated debentures totaling $113.8 million through either (1)
payment to the bond holders at 101% of the principal together with accrued
interest or (2) conversion of the debentures into shares of the Company's Class
A Stock. Most bond holders elected conversion resulting in the issuance of 13.9
million shares of Class A Common Stock. The Company paid $3.8 million in
principal, premium and accrued interest to remaining bond holders.
At January 2, 1999, $23.2 million (net book value) in property was pledged as
collateral for mortgage payables.
At January 2, 1999 and January 3, 1998, the Company estimated that the fair
value of its long-term debt was approximately $522.0 million and $641.3 million,
respectively. The fair value of the Company's long-term debt is estimated based
on the current rates offered to the Company for debt of the same remaining
maturities.
Approximate maturities of long-term debt in the years 1999 through 2003 are
$42.5, $2.8, $106.3, $1.6 and $11.0 million, respectively.
8. Credit Arrangements
The Company maintains a revolving credit facility with a syndicate of commercial
banks providing $625.0 million in committed lines of credit, which will expire
on December 13, 1999. These lines replaced the previous $700.0 million revolving
credit facility. There were no borrowings outstanding under each of the
facilities for the years ended January 2, 1999 and January 3, 1998.
Additionally, the Company had other committed short-term lines of credit with
banks totaling $20.0 million, of which $20.0 million was outstanding at January
2, 1999. There were no borrowings outstanding at January 3, 1998. During 1998,
the Company had average borrowings of $100,000 at a daily weighted average
interest rate of 5.37% with a maximum amount outstanding of $20.0 million.
The Company has a $250.0 million commercial paper program. No borrowings were
outstanding during the years ended January 2, 1999 and January 3, 1998.
In addition, the Company has periodic short-term borrowings under other informal
arrangements. Outstanding borrowings under these arrangements were $41.0
million at January 2, 1999 at an average interest rate of 5.64% and $80.0
million at January 3, 1998 at an average interest rate of 6.09%.
9. Leases
The Company's stores operate principally in leased premises. Lease terms for
open stores generally range from 10 to 20 years with renewal options ranging
from five to 20 years. The average remaining lease term for closed stores is
nine years. The following schedule shows, as of January 2, 1999, the future
minimum lease payments under capital leases, together with the present value of
net minimum lease payments, and operating leases that have initial or remaining
non-cancelable lease terms in excess of one year.
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Capital Operating Leases
(Dollars in thousands) Leases Open Stores Closed Stores
1999 $ 83,463 $ 149,181 $ 19,920
2000 83,208 148,371 19,535
2001 82,627 147,330 19,145
2002 82,599 145,408 18,724
2003 82,354 142,018 17,964
Thereafter 845,502 1,234,793 128,053
Total minimum payments 1,259,753 $1,967,101 $223,341
Less estimated executory
costs 59,864
Net minimum lease payments 1,199,889
Less amount representing
interest 685,289
Present value of net minimum
lease payments $ 514,600
Minimum payments have not been reduced by minimum sublease income of $22.8
million due in the future over the term of non-cancelable subleases.
Total rent payments for operating leases, excluding those with terms of one year
or less, is as follows:
(Dollars in thousands) 1998 1997 1996
Minimum rents $172,481 $133,786 $137,157
Contingent rents,
based on sales 255 371 680
$172,736 $134,157 $137,837
In addition, the Company has signed lease agreements for additional store
facilities, the construction of which were not complete at January 2, 1999. The
leases expire on various dates extending to 2023 with renewal options generally
ranging from 10 to 20 years. Total future minimum rents under these agreements
are approximately $673 million.
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10. Income Taxes
Provisions for income taxes for 1998, 1997 and 1996 consist of the following:
(Dollars in thousands) Current Deferred Total
1998
Federal $ 95,839 $40,199 $136,038
State 14,559 4,800 19,359
$110,398 $44,999 $155,397
1997
Federal $119,553 $(30,327) $ 89,226
State 27,100 ( 6,200) 20,900
$146,653 $(36,527) $110,126
1996
Federal $134,000 $(19,550) $114,450
State 27,000 ( 3,900) 23,100
$161,000 $(23,450) $137,550
The Company's effective tax rate varied from the federal statutory rate as
follows:
1998 1997 1996
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 2.9 4.8 4.3
Federal refund (1.7) 0.0 0.0
Other 0.1 (0.8) (0.3)
36.3% 39.0% 39.0%
Deferred income tax expense relates to the following:
(Dollars in thousands) 1998 1997 1996
Excess tax depreciation $21,868 $ 8,892 $ 2,774
Provision for store closings 11,745 (43,041) 7,793
Excess interest and depreciation
over rent paid on capital leases (2,743) (4,604) (3,003)
Excess tax loss/(gain) 14,964 (4,372) (9,277)
Accrued expenses 6,342 (2,258) (3,251)
Tax loss carryforwards - (1,959) -
Asset impairment reserve 184 4,892 (8,713)
Other (7,361) 5,923 (9,773)
$44,999 $(36,527) $(23,450)
The components of deferred income tax assets and liabilities at January 2, 1999
and January 3, 1998 are as follows:
(Dollars in thousands) 1998 1997
Current assets:
Inventories $ 14,818 $ 10,436
Accrued expenses 50,579 52,692
Provision for store closings 0 (5)
Total current assets 65,397 63,123
Non-current assets/(liability):
Depreciation (142,389) (105,483)
Leases 43,560 50,937
Provision for store closings 73,777 76,970
Tax loss carryforwards 22,737 22,737
Other deferred charges 7,022 6,819
Total non-current assets 4,707 51,980
Net deferred taxes $ 70,104 $ 115,103
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As of January 2, 1999, the Company had net operating loss carryforwards for tax
purposes of approximately $56 million related to Kash n' Karry. Due to certain
change of ownership requirements of Section 382 of the Internal Revenue Code,
utilization of the Kash n' Karry net operating losses is expected to be limited
to approximately $3.6 million or $6.9 million per year, depending upon the year
in which the loss was generated. If the full amount of the limitation is not
used in any year, the amount not used increases the allowable limit in the
subsequent year. Loss carryovers will expire during the years 2006 through 2011.
11. Other Liabilities
Other liabilities consist of the following:
(Dollars in thousands) 1998 1997
Remaining lease liability - closed stores $113,161 $123,105
Other 10,877 11,531
124,038 134,636
Less current portion 9,839 8,756
$114,199 $125,880
The Company uses an 8% discount rate to calculate the present value of the
remaining rent payments on closed stores.
12. Stock Options and Restricted Stock Plans
The Company has a stock option plan under which options to purchase up to 10
million shares of Class A common stock may be granted to officers and key
employees at prices equal to fair market value on the date of the grant. Options
become exercisable as determined by the Stock Option Committee of the Board of
Directors of the Company on the date of grant, provided that no
option may be exercised more than ten years after the date of grant.
In addition, the Company established a restricted stock plan in 1996 for
executive employees pursuant to the 1996 Stock Incentive Plan. Under this stock
plan, the Company issued 161,545 shares in 1998 (26,760 shares forfeited),
196,003 shares in 1997 (10,524 shares forfeited), and 133,393 shares in 1996
(1,803 shares forfeited). Currently, the Company has 423,034 shares of
restricted Class A Common Stock outstanding under the plan. These shares of
stock will vest over five years from grant date. The weighted average grant date
fair value for these shares is $8.14, $7.03 and $7.43 for 1998, 1997 and 1996,
respectively. At January 2, 1999, 28,820 of these restricted shares had been
issued.
Changes in the shares reserved for outstanding options and restricted stock as
of January 2, 1999, and related weighted average exercise price are presented
below:
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Weighted
Average
Shares Exercise Price
1998
Outstanding at beginning of year 3,322,792 $6.63
Granted 1,180,589 8.73
Exercised (771,135) 5.10
Forfeited/expired (490,060) 6.43
Outstanding at end of year 3,242,186 7.14
Options exercisable at end of year 136,604 8.77
1997
Outstanding at beginning of year 2,553,835 $6.08
Granted 1,401,509 8.13
Exercised (289,833) 5.27
Forfeited/expired (342,719) 11.35
Outstanding at end of year 3,322,792 6.63
Options exercisable at end of year 958,595 5.71
1996
Outstanding at beginning of year 2,658,069 $5.97
Granted 931,715 7.38
Exercised (587,795) 6.19
Forfeited/expired (448,154) 11.35
Outstanding at end of year 2,553,835 6.08
Options exercisable at end of year 1,367,820 5.75
As of January 2, 1999, there were 5,111,257 shares of Class A common stock
available for future grants.
The following table summarizes options outstanding and options exercisable as of
January 2, 1999, and the related weighted average remaining contractual life
(years) and weighted average exercise price (excluding restricted stock).
Options Outstanding
Range of Weighted
exercise Number Weighted Average
prices Outstanding Average Exercise
Remaining Price
Contractual
Life
$ 5.12 - $7.70 1,674,269 7.4 $ 6.86
$ 7.71 - $11.55 1,069,883 8.6 10.03
$11.56 - $12.42 75,000 2.8 12.42
$ 5.12 - $12.42 2,819,152 7.7 $ 8.21
Options Exercisable
Range of exercise Weighted
prices Number Average
Exercise
Exercisable Price
$ 5.12 - $ 7.70 76,571 $ 5.92
$ 7.71 - $11.55 33 8.56
$11.56 - $12.42 60,000 12.42
$ 5.12 - $12.42 136,604 $ 8.77
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The weighted average fair value at date of grant for options granted during
1998, 1997, and 1996 was $2.62, $2.14, and $2.35 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1998 1997 1996
Expected dividend yield (%) 1.50 1.50 1.50
Expected volatility (%) 30.00 25.00 25.00
Risk-free interest rate (%) 5.60 6.50 6.60
Expected term (years) 5.0 5.5 5.5
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock options
granted in 1998, 1997 or 1996. Had compensation cost
been determined based on the fair value at the grant date consistent with the
provisions of this statement, the Company's pro forma net earnings and earnings
per share would have been as follows:
(Dollars in thousands,
except per share data) 1998 1997 1996
Net earnings - as reported $272,585 $172,250 $215,220
Net earnings - pro forma 272,144 171,656 214,986
Basic earnings per share - as reported 0.57 0.37 0.46
Basic earnings per share - pro forma 0.57 0.37 0.46
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13. Common Stock
On January 2, 1999, approximately 23.2% and 14.4% of the issued and outstanding
Class A non-voting common stock and 24.7% and 27.5% of the issued and
outstanding Class B voting common stock was held, respectively, by
Etablissements Delhaize Freres et Cie "Le Lion" S.A. (Delhaize) and Delhaize The
Lion America, Inc., a wholly owned subsidiary of Delhaize (Detla). In the
aggregate, Delhaize and Detla owned approximately 52.2% of the Class B voting
common stock and 37.6% of the Class A non-voting common stock.
Holders of Class B common stock are entitled to one vote for each share of Class
B common stock held, while holders of Class A common stock are not entitled to
vote except as required by law.
The Board of Directors of the Company may declare dividends with respect to
Class A common stock without declaring and paying any dividends with respect to
the Class B common stock. When dividends are declared with respect to the Class
B common stock, the Board of Directors of the Company must declare a greater per
share dividend to the holders of Class A common stock.
14. Interest Expense
Interest expense consists of the following:
(Dollars in thousands) 1998 1997 1996
Interest on capital leases $58,774 $ 56,809 $46,767
Other interest(net of $2.4, $2.0 and
$1.5 million capitalized in
1998, 1997 and 1996, respectively)
36,560 58,580 33,753
$95,334 $115,389 $80,520
15. Reserves for Closed Stores
(Dollars in millions)
Reduction Lease Accrued
of Asset Liabilities Expenses Total
Values
Balance at December 30,1995 $ 58.2 $ 67.0 $ 20.5 $145.7
Additions 20.2 92.3 1.4 113.9
Reductions (31.2) (9.2) (1.8) (42.2)
Recognition of unused reserves (8.5) 0.0 (19.1) (27.6)
Balance at December 28,1996 38.7 150.1 1.0 189.8
Additions 98.8 22.6 13.7 135.1
Reductions (12.9) (20.0) (3.6) (36.5)
Recognition of unused reserves (20.8) (29.6) (3.7) (54.1)
Balance at January 3,1998 103.8 123.1 7.4 234.3
Additions 2.7 19.2 9.4 31.3
Reductions (90.7) (21.9) (15.7) (128.3)
Recognition of unused reserves 0.0 (7.2) 0.0 (7.2)
Balance at January 2, 1999 $ 15.8 $113.2 $ 1.1 $130.1
1998 Activity:
During the year, the Company recorded $15.2 million in store closing costs
(included in Selling and Administrative Expenses on the Company's Consolidated
Statement of Income), related to 26 stores which the Company plans to close in
the normal course of business generally over the next 12 months. These costs are
included in the "Additions" line in the table above.
-28-
Significant additions also include gains ($11.1 million) related to the disposal
of various properties ($5.1 million) and the sale of the Company's distribution
center in the Southwest market ($6 million).
Significant reductions in the reserves for closed stores in 1998 include $89.9
million for the disposition of 51 owned stores and the distribution center
facility in the Southwest market, which the Company closed in 1997 (see
discussion under 1997 Activity). Other significant reductions include (1)
ongoing rent payments of $7.3 million made on remaining lease obligations, (2)
fees of $17.5 million for lease terminations, and (3) incremental direct costs
to dispose of closed store properties and expenses arising from contractual
obligations totaling $13.2 million.
The Kash n' Karry acquisition strategy included plans to close 23 stores in
conjunction with the Company's store relocation program, and as a result of
identifying underperforming units that did not meet operating expectations. The
purchase price allocation included $52.3 million in reserves related to these
stores. Through the end of 1998 the Company had closed 13 of these store
locations. The Company made a decision in 1998 not to close three of the
original 23 stores due to improved performance. The original estimated store
closing costs related to these three stores totals $7.2 million and comprises
the unused reserves recognized as a reduction to Goodwill in fiscal 1998. The
Company plans to close seven additional stores (six are intended to close by
the end of 1999, while one is intended to close by the end of the year 2000). It
has taken the Company longer than anticipated to execute this store closing plan
due to a strategic repositioning of the Kash n' Karry stores and a thorough
review of the impact of such store closings on plans for neighboring Food Lion
store locations.
During 1998, the Company closed 29 stores in the normal course of business,
including 17 relocation closings and 12 closings due to poor performance. The
revenues and operating results of these stores were not significant to the
Company's total revenues and operating results.
During 1998, the Company completed disposition efforts related to 74 closed
stores.
At the end of 1998, the Company had $130.1 million in store closing costs
related to 157 stores and one closed distribution center. Of the 157 stores, 131
stores are closed, while 26 stores are scheduled to close over the next 12
months.
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1997 Activity:
During 1997, the Company recorded a pre-tax charge of $116.5 million related to
the divestiture of its Southwest market. This charge included the write-down of
store and distribution center assets to reflect estimated realizable values
($92.1 million), the present value (calculated by applying an 8% discount rate)
of remaining rent payments on leased stores ($17.1 million) included in Other
Liabilities above, and other costs associated with the store closings. These
other costs include legal fees, commissions, severance costs, and certain other
costs to sell the related assets and/or expenses arising from contractual
obligations ($7.3 million) included in Accrued Expenses above. The Southwest
market had negatively impacted the Company's operating results by approximately
$0.01 per share annually.
During 1997, the Company reduced store closing costs by $54.1 million in unused
reserves which arose primarily from changes in estimated liabilities on
remaining lease obligations and in estimated recoverable values of owned
properties. Of this amount, $14.4 million related to stores closed in previous
years, and $17.7 million related to the 1997 store closings in the Southwest
market. These unused reserves were recorded into income. The remaining $22.0
million related to Kash n' Karry store closings and was reflected as an
adjustment to Goodwill.
The remaining 1997 activity represents store closing costs incurred, the
disposition of properties held for sale, and payments made on remaining lease
obligations, related to store closings in the normal course of business.
During 1997, the Company closed 58 stores in the normal course of business
including 25 relocation closings and 33 closings due to poor performance. The
revenues and operating results of these stores were not significant to the
Company's total revenues and operating results.
During 1997, the Company completed disposition efforts related to 33 closed
stores.
1996 Activity:
Significant additions to the reserve represent store closing reserves for Kash
n' Karry established at the date of acquisition.
During 1996, the Company recognized $27.6 million in unused reserves related to
a $170.5 million pre-tax store closing charge against 1993 earnings.
The remaining 1996 activity relates to store closings in the normal course of
business and represents store closing costs incurred, the disposition of
properties held for sale, and payments made on remaining lease obligations.
During 1996, the Company closed 25 stores in the normal course of business
including 22 relocation closings and three closings due to poor performance. The
revenues and operating results of these stores were not significant to the
Company's total revenues and operating results.
During 1996, the Company completed disposition efforts related to 39 closed
stores.
-29-
16. Commitments and Contingencies
The Company is involved in various claims and lawsuits arising out of the normal
conduct of its business. Although the ultimate outcome of these legal
proceedings cannot be predicted with certainty, the management of the Company
believes that the resulting liability, if any, will not have a material effect
upon the Company's consolidated financial statements or liquidity.
-29-
Report of Independent Accountants
To the Shareholders of Food Lion, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity, and cash flows present
fairly, in all material respects, the financial position of Food Lion, Inc. and
subsidiaries (the "Company") at January 2, 1999 and January 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 10, 1999
-30-
Results by Quarter
(unaudited)
(Dollars in thousands except per share amounts)
1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
(12 Weeks) (12 Weeks) (12 Weeks) (16 Weeks)
Net sales $2,305,473 $2,353,260 $2,378,922 $3,181,819
Cost of goods sold 1,800,115 1,826,657 1,843,988 2,455,084
Selling and
administrative 388,713 406,621 411,820 563,160
expenses
Operating income 116,645 119,982 123,114 163,575
Net income $ 55,234 $ 60,033 $ 72,769 $ 84,549
Basic and
diluted earnings
per common share $0.12 $0.13 $0.15 $0.18
(Dollars in thousands except per share amounts)
1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
(12 Weeks) (12 Weeks) (12 Weeks) (17 Weeks)*
Net sales $2,276,746 $2,324,719 $2,366,905 $3,226,015
Cost of goods sold 1,783,063 1,821,049 1,853,473 2,518,074
Selling and
administrative 395,538 397,563 398,212 545,246
expenses
Store closing
charge/(income) 0 0 96,414 (12,012)
Operating income 98,145 106,107 18,806 174,707
Net income(loss) $ 43,591 $ 47,791 $ ( 6,382) $ 87,250
Basic and
diluted earnings
per common share $0.09 $0.10 $(0.01) $0.19
*Note: The 1998 fourth quarter comprised 16 weeks; the 1997 fourth quarter
comprised 17 weeks.
-31-
Market Price of Common Stock
Year Ended January 2, 1999 Year Ended January 3, 1998
Class A Class B Class A Class B
Quarter High Low High Low High Low High Low
First 11.25 8.47 11.38 8.13 9.78 7.63 10.13 8.00
Second 10.88 9.25 11.06 9.13 8.25 6.47 8.38 6.56
Third 11.44 8.81 11.06 9.00 7.50 6.94 7.56 6.91
Fourth 11.06 8.38 10.81 7.88 8.75 7.44 8.53 7.44
The Company's Class A and Class B common stock trade on the Nasdaq stock market
under the symbols: FDLNA and FDLNB, respectively. Price quotations are reported
on the Nasdaq national market system. The closing market prices per share for
both Class A and Class B common stock at January 2, 1999 were $10.63 and $10.06,
respectively compared with $8.50 and $8.31, respectively for both Class A and
Class B common stock at January 3, 1998. The over-the-counter quotations
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions. On March 19, 1999, there
were 24,319 holders of record of Class A common stock and 16,676 holders of
record of Class B common stock. The closing market prices per share for the
Class A and the Class B common stock at March 19, 1999 were $9.47 and $9.31,
respectively.
Dividends Declared Per Share of Common Stock
Year Ended January 2, 1999 Year Ended January 3, 1998
Quarter Class A Class B Class A Class B
First $.0375 $.0370 $.0337 $.0332
Second .0375 .0370 .0337 .0332
Third .0375 .0370 .0337 .0332
Fourth .0375 .0370 .0337 .0332
Total $.1500 $.1480 $.1348 $.1328
-31-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company posted a record level of sales and earnings during
1998. Sales totaled $10.2 billion as earnings reached $272.6 million.
The Company was able to achieve these strong operating results despite
highly competitive conditions. In addition, the Company was able to
accomplish these results while preserving its continued commitment to
delivering low price leadership to its customers in all markets.
During 1998, the Company complimented its guarantee of low price
leadership with increased variety and selection, which not only
addressed the demands of its customers but also helped to boost
operating profits. Finally, the Company's continued focus on gaining
operating efficiencies and increased productivity through its low cost
structure rounded out the completion of Food Lion's most successful
year.
During 1998, the Company opened 79 new stores and closed 29
existing stores (including 17 relocations). As a result, at the end of
1998, the Company operated 1,207 stores compared with 1,157 stores in
operation at the end of 1997. The Company renovated 141 existing
stores in 1998.
Sales
Sales were $10.2 billion for the 52 weeks of fiscal 1998 compared
with $10.2 billion during the 53 week period of fiscal 1997, and $9.0
billion for the 52 week period in 1996, resulting in annual increases
of 0.2%, 13.2% and 9.7%, respectively. The Company's 1998 total sales
are not comparable to 1997 total sales due to (1) the extra week
included in fiscal 1997, (2) $249.1 million in prior year sales from
stores in the Southwest market which closed during the fourth quarter
of 1997 and (3) a change in the method of collecting sales tax on
products discounted through the MVP customer ("MVP") and Preferred
customer ("PCC") loyalty card programs. On a comparable basis, total
sales increased 6.1% for fiscal 1998. In 1998, same store sales
increased 2.6% as compared with increases of 0.2% for 1997 and 5.7% for
1996.
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
fiscal 1998 was to reduce reported sales by approximately $127.1
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 as opposed to in
cost of goods sold under the original method. The following table
illustrates the impact of the change.
Fiscal 1998 1998
1998 Dollars % %
Dollars Comparable Comparable
As to 1996 - As to 1996 -
Reported 1997 Reported 1997
(Dollars and shares (New (Original (New (Original
in thousands) Method) Method) Method) Method)
Net sales $10,219,474 $10,346,538 100.00% 100.00%
Cost of goods sold 7,925,844 8,052,908 77.56 77.83
Selling and 1,770,314 1,770,314 17.32 17.11
administrative
expenses
Operating income 523,316 523,316 5.12 5.06
Interest expense 95,334 95,334 .93 .92
Income before income 427,982 427,982 4.19 4.14
taxes
Provision for income 155,397 155,397 1.52 1.51
taxes
Net income $272,585 $272,585 2.67% 2.63%
Basic and diluted
earnings per share $.57 $.57
Weighted average
number of shares 478,084 478,084
outstanding
During 1998, the sales increase of 6.1% (on a comparable basis)
resulted from the Company's new store additions and renovations of
existing stores, as well as category management and marketing
initiatives. The Company opened 79 new stores in 1998 and closed 29
existing stores (including 17 relocations), a net increase of 50
stores. Store renovations also increased sales, as 141 existing stores
were renovated to update equipment and properties, and in many
locations, to add square footage and deli/bakery departments. The
Company's stores currently have an average age of only five years,
compared with an industry average of seven years, as a result of its
continued aggressive new store construction and renovation program.
The Company continued to enhance the Food Lion MVP Customer card
program and implemented the Kash n' Karry Preferred Customer Club card
(PCC) program in 1998. These programs, which are primarily vendor
supported, reward customers with additional discounts on the Company's
everyday low prices on a selection of featured items. Up to 1,500
items are highlighted on the programs each week. In 1998, the Company
created special promotions for customer card users, including the MVP
Million Dollar Giveaway and direct mail offers, which have resulted in
increased card usage and higher sales. During 1999, the Company plans
increased usage of the expansive MVP and PCC customer databases to
support targeted marketing efforts.
The 1999 business plan currently includes opening 80 new stores
(approximately 20 of these will replace older stores) and renovating
approximately 140 existing stores. The Company is committed to a
growth strategy, which includes plans to open new stores and strengthen
existing stores through renovations in order to maintain a competitive
edge in its current markets. In addition, the Company will continue to
evaluate its store base and may close stores to take advantage of
relocation opportunities or to eliminate operating losses in
underperforming stores. The Company's growth strategy is flexible, and
the Company will listen to its consumers and revise its strategy
accordingly in an effort to meet current and future customer needs.
Gross Profit
In fiscal 1998, gross profit was 22.44% (22.17% adjusted to the
original method of reporting sales tax) of sales compared with 21.76%
and 21.31% in 1997 and 1996, respectively. The gross profit increase
of 0.68% (0.41% increase on a comparable basis) of sales in 1998 is
attributable to a continued focus on category management initiatives
(merchandising stores for maximum performance). Product analysis,
selection and strategic pricing all contributed to gross profit
increases in the grocery, perishable and meat departments in 1998. In
addition, gross profits were positively impacted by the Company's
private label sales, which currently represent 16.0% of consolidated
total sales.
The LIFO charge, as a percentage of sales, decreased gross profit
by 0.24% in 1998, 0.10% in 1997 and 0.11% in 1996. Current year
inflation totaled 2.3% due primarily to the increase in the cost of
cigarettes imposed by tobacco manufacturers during 1998. Cigarette
costs increased $6.35 per carton, or 49% during 1998. Excluding
cigarettes, all other merchandise categories experienced little or no
inflation. The 1998 inflation rate excluding the cigarette cost
increase was 0.7%.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of sales were
17.32% in 1998 (17.11% adjusted to the original method of reporting
sales tax) and 17.04% and 16.56% in 1997 and 1996, respectively. The
comparable decrease is attributable to decreases in 1) administrative
costs, due to having Kash n' Karry fully integrated for the entire year
of 1998 compared with only five months in 1997, and 2) a decrease in
advertising costs as the Company increased the number of vendor-
supported marketing programs. These decreases were partially offset by
an increase in store utilities and an increase in store rent expense
related primarily to 72 new leased stores and expansions of existing
stores.
The Company believes it is important to maintain flexibility with
regard to expense levels and will take advantage of additional
opportunities to grow sales profitably through new marketing and
customer service programs. The Company expects to continue to perform
at an expense ratio in the range of 15.0% - 15.5%.
Food Lion's 1998 business plan reflected the Company's commitment
to maintaining its existing store base as 141 store renovations were
completed in 1998 compared with 99 in 1997 and 124 in 1996. The Company
anticipates completing approximately 140 renovations to existing
stores in 1999. Store renovations result in an average sales increase
of 10% - 20% in the year following the renovation. The Company plans to
continue an aggressive renovation program to maintain a modern and
convenient shopping environment for customers in all stores.
Store Closings
With over 1,200 retail outlets, the Company must constantly
evaluate its store base, and make decisions about store openings and
closings that are in the best interest of shareholders. These store
closings consist of both relocations, where a new store is opened to
replace an older location in the same neighborhood, and the closing of
stores due to poor performance. During 1998, 29 stores were closed in
the normal course of business as discussed above. The average cost to
close a store as part of the Company's normal business strategy is
approximately $500,000 to $1,000,000. During 1998, the Company
recorded $15.2 million in store closing costs (included in Selling and
administrative expenses on the Company's Consolidated Statement of
Income), related to planned store closings (see Note 15 to the
consolidated financial statements).
In 1997, the Company recorded a pre-tax charge of $116.5 million
related to the divestiture of its Southwest market. This charge
included the write-down of store and distribution center assets to
reflect estimated realizable values ($92.1 million), the present value
(calculated by applying an 8% discount rate) of remaining rent payments
on leased stores ($17.1 million), and other costs associated with the
store closings such as legal fees, commissions, severance costs, and
certain other costs to sell the related assets and/or expenses arising
from contractual obligations ($7.3 million). The Southwest market had
negatively impacted the Company's operating results by approximately
$0.01 per share annually.
Significant cash outflows associated with store closings relate to
on going rent payments on leased stores. These rent payments are
funded by income from operations. The projected rental payments on
closed stores are included in Note 9 to the consolidated financial
statements.
At the end of each year, the value of all owned assets related to
store properties remaining to be disposed is reviewed in conjunction
with the Company's compliance with Financial Accounting Standards Board
Statement no. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("FASB no. 121"). No
adjustments were recorded during 1998.
Interest Expense
Interest expense as a percent of sales was 0.93% in 1998 and 1.13%
and 0.89% in 1997 and 1996, respectively. During 1998, the Company
reached an agreement with the U.S. Internal Revenue Service ("IRS")
regarding its examination of tax years 1991-1994. As a result of this
agreement, the Company received a refund related to tax paid in
previous years. The refund included $7.2 million in tax (recorded
during the year as a reduction to the Provision for Income Taxes) and
related interest income of $7.6 million (recorded during the year as a
reduction to Interest expense). In addition, Interest expense was
impacted by (1) the conversion of the Company's convertible
subordinated debentures in 1998, and (2) the pre-payment of $50 million
in note purchase agreements in late 1997.
LIFO
The LIFO reserve increased $24.7 million in 1998 as compared with
increases of $10.0 million in 1997 and $10.3 million in 1996. The 1998
increase was primarily due to a significant increase in cigarette costs
(see discussion above). In 1997, increased coffee, paper and cigarette
costs were the primary contributors to the LIFO increase, while in
1996, the increased costs of grocery, frozen food and dairy items
supported the LIFO increase.
Income Taxes
The provision for income taxes was $155.4 million in 1998, $110.1
million in 1997 and $137.6 million in 1996. The Company's effective tax
rate was 36.3% in 1998 and 39.0% in 1997 and 1996. The effective tax
rate for 1998 was reduced by a $7.2 million tax refund received from
the IRS (see discussion above under Interest Expense). The Company
expects its continuing effective tax rate to be 38%.
Liquidity and Capital Resources
Cash provided by operating activities was $441.1 million in 1998
compared with $354.9 million in 1997 and $428.3 million in 1996. The
increase in 1998 was due to improved earnings, an increase in inventory
levels, net of trade payables, an increase in accrued expenses, and a
reduction in deferred taxes. The increase in 1997 over the prior years
was due primarily to a decrease in inventory levels resulting from
continued inventory management efforts, the consolidation of the Kash
n' Karry warehouse operation into Food Lion's Plant City, Florida
distribution center, and closing the Southwest distribution center.
The decrease in 1996 from 1995 was primarily due to increased inventory
levels, net of trade payables, resulting from the Kash n' Karry
acquisition and increased receivables.
Cash flows used in investing activities decreased to $246.2
million in 1998 compared with $313.6 million in 1997 and $356.0 million
in 1996. The decrease in investing activities in 1998 compared to 1997
is the result of an increase in the proceeds received from the
disposition of the assets related to stores in the Southwest market.
The decrease in investing activities in 1997 compared to 1996 reflects
the investment in Kash n' Karry during 1996, partially offset by an
increase in capital expenditures in 1997. In December of 1996, Food
Lion purchased the stock of Kash n' Karry for $121.6 million.
Capital expenditures increased to $356.1 million in 1998, compared
with $346.1 million in 1997 and $283.6 million in 1996. During 1998,
the Company equipped a total of 79 new stores and renovated 141
existing stores (including expanding square footage and adding
deli/bakeries in many of these stores). During 1997, the Company
equipped a total of 64 new stores and renovated 99 existing stores
(including expanding square footage and adding deli/bakeries in most of
these stores). During 1996, the Company equipped a total of 55 new
stores and renovated 124 existing stores (including expansions in the
majority of these stores) and implemented debit/credit and on-line
communication technology in its Food Lion stores.
Total store square footage increased 7.7% from 36.1 million in
1997 to 38.9 million in 1998. The total distribution space operated by
the Company was 8.7 million square feet at the end of both 1998 and
1997, compared with 10.7 million at the end of 1996. The decrease in
distribution space from 1996 to 1997 was the result of closing the
distribution center in the Company's Southwest market, and the
consolidation of the Kash n' Karry warehouse operation into Food Lion's
Plant City, Florida distribution center.
In 1999, the Company plans to continue its three-fold growth plan,
which focuses on a combination of new store openings and renovations,
as well as growth through acquisitions, as appropriate. The Company
anticipates opening 80 new stores (20 of these will replace older
stores) and renovating approximately 140 stores in 1999. The Company
anticipates that the majority of the new stores will be opened under
conventional leasing arrangements and, as a result, the impact on
liquidity of owning stores will be insignificant in 1999. Capital
expenditures for 1999 are expected to total $390 million, which
includes approximately $160 million for store expansion and new store
construction and $160 million to equip new and renovated stores.
The Company plans to finance capital expenditures for 1999 through
funds generated from operations and existing bank and credit lines.
The Company will consider the possibility of sale-leaseback
transactions on certain free-standing Company-owned stores in the
future if advantageous opportunities are presented by potential
lessors.
Cash flows used in financing activities increased to $164.6
million in 1998, compared with $163.4 million in 1997 and cash provided
from financing of $73.0 in 1996. The increase in 1998 was primarily
the result of shares purchased under the Company's share repurchase
plan as described below, partially offset by a decrease in net payments
on debt. The increase in cash used in 1997 compared to 1996 was
related primarily to principal payments on debt.
Under the Company's current share repurchase program, which
expires in May 1999, the Company may repurchase up to $100.0 million in
outstanding securities. The share repurchase program allows the
Company the flexibility to repurchase securities as it deems
appropriate in the best interests of its shareholders and in
consideration of all other possible uses of funds generated by
operations. During 1998, the Company expended $50.2 million (including
commissions) for the purchase of Class A and Class B shares, as part of
its repurchase program compared to $3.0 million in 1997, and $44.3
million in 1996. See table below.
Class A Class B
1998
Shares purchased 3,085,700 1,897,000
Average purchase $10.37 $ 9.60
price
Total purchased $31,998,709 $18,211,200
1997
Shares purchased 235,000 175,000
Average purchase $ 7.34 $ 7.06
price
Total purchased $1,724,900 $1,235,000
1996
Shares purchased 3,047,000 3,722,250
Average purchase $ 5.89 $ 7.09
price
Total purchased $17,946,830 $26,390,753
Additional purchases may be made in the open market under the current
program as deemed in the best interest of shareholders.
Debt
In 1998, the Company redeemed its outstanding convertible
subordinated debentures totaling $113.8 million through either (1)
payment to the bond holders at 101% of the principal together with
accrued interest or (2) conversion of the debentures into shares of the
Company's Class A Stock at $7.90 per share. Most bond holders elected
conversion resulting in the issuance of 13.9 million shares of Class A
Common Stock with $3.8 million in principal, premium and accrued
interest paid to the remaining bond holders. The conversion election
had no impact on the Company's basic or diluted earnings per share.
The Company currently has outstanding medium-term notes of $150.3
million due from 1999 to 2006 at interest rates of 8.32% to 8.73%.
Additionally, the Company has long-term debt securities of $300.0
million of which $150.0 million is due 2007 at 7.55% and $150.0 million
matures in 2027 at an interest rate of 8.05%.
In December 1998, the Company replaced its $700.0 million
revolving credit facility. The current credit facility with a syndicate
of commercial banks provides for $625.0 million in committed lines of
credit, which will expire on December 13, 1999. As of January 2, 1999,
the Company had no outstanding borrowings related to this credit
facility.
The Company also maintains additional committed lines of credit
totaling $20.0 million, which are available when needed. The Company is
not required to maintain compensating balances related to these lines
of credit, and borrowings may occur periodically. As of January 2,
1999, the Company had outstanding borrowings of $20.0 million. During
1998, the Company had average borrowings of $100,000 at a daily
weighted average interest rate of 5.37% with a maximum amount
outstanding of $20.0 million.
The Company has a $250.0 million commercial paper program, of
which no borrowings were outstanding at January 2, 1999, January 3,
1998, and December 28, 1996, nor used during these years.
Finally, the Company has periodic short-term borrowings under
informal credit arrangements which are available to the Company at the
discretion of the lender (see table below):
Informal Credit Arrangements
(Dollars in millions)
1998 1997 1996
Outstanding borrowings at year end $41.0 $80.0 $0.0
Average borrowings 12.2 8.2 3.0
Maximum amount outstanding 100.0 80.0 55.0
Daily weighted average
interest rate 5.47% 5.76% 5.48%
Self Insurance
The Company is self-insured for its workers' compensation, general
liability and vehicle accident claims. The Company establishes
reserves based on an independent actuary's valuation of open claims
reported and an estimate of claims incurred but not yet reported. It
is possible that the final resolution of some of these claims may
require significant expenditures by the Company in excess of its
existing reserves, over an extended period of time, and in a range of
amounts that cannot be reasonably estimated.
Impact of Inflation
During 1998, the inflation rate on merchandise purchases was 2.3%.
Inventory and labor, the Company's primary costs, increase with
inflation and, where possible, will be recovered through operating
efficiencies and gross profits.
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 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 fiscal year 1998, the Company had
incurred approximately $8.9 million of the total cost of the Year 2000
project of which $2.8 million had been expensed as incurred and $6.1
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.
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).
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.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Food Lion, Inc. on Form S-8 (File Nos. 33-18796,33-18797
and 33-03669) and Form S-3 (File Nos. 33-40457,33-50037 and 33-49620)
of our report dated February 10, 1999, on our audits of the
consolidated financial statements of Food Lion, Inc. and subsidiaries
as of January 2, 1999, and January 3, 1998, and for the fiscal years
ended January 2, 1999, January 3, 1998, and December 28, 1996, which
report is included in this Annual Report on Form 10-K/A.
PRICEWATERHOUSECOOPERS, LLP
Charlotte, North Carolina
August 17, 1999
