-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PxWv0PxYuspu0WhrgEBWIYyWQ+7I8DG9u7lRBLnZPp888Gv1Qt2YJMRz2g++H4ef wMOl8B24MoyXsbSjoYkdOw== 0000037912-99-000013.txt : 19990506 0000037912-99-000013.hdr.sgml : 19990506 ACCESSION NUMBER: 0000037912-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD LION INC CENTRAL INDEX KEY: 0000037912 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 560660192 STATE OF INCORPORATION: NC FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06080 FILM NUMBER: 99611639 BUSINESS ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 BUSINESS PHONE: 7046338250 MAIL ADDRESS: STREET 1: P O BOX 1330 STREET 2: 2110 EXECUTIVE DR CITY: SALISBURY STATE: NC ZIP: 28145 FORMER COMPANY: FORMER CONFORMED NAME: FOOD TOWN STORES INC DATE OF NAME CHANGE: 19830510 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 27, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........to........... Commission File number 0-6080 FOOD LION, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0660192 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1330, 2110 Executive Drive, Salisbury, NC 28145-1330 (Address of principal executive office) (Zip Code) (704) 633-8250 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Outstanding shares of common stock of the Registrant as of April 30, 1999. Class A Common Stock 244,429,133 Class B Common Stock 229,399,364 Page 1 of 31 The Exhibit index is located on page 19. FOOD LION, INC. INDEX TO FORM 10-Q March 27, 1999 Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Income for the 12 weeks ended March 27, 1999 and March 28, 1998 3 Consolidated Balance Sheets as of March 27, 1999, January 2, 1999 and March 28, 1998 4 Consolidated Statements of Cash Flows for 12 weeks ended March 27, 1999 and March 28, 1998 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-16 Part II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security 17 Holders Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 19 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 12 Weeks ended March 27, 1999 and March 28, 1998 (Dollars in thousands except per share data) Mar 27, 1999 Mar 28, 1998 Mar 27, 1999 Mar 28, 1998 % % Net sales $2,407,046 $2,305,473 100.00 100.00 Cost of goods sold 1,856,862 1,800,115 77.14 78.08 Gross profit 550,184 505,358 22.86 21.92 Selling and administrative expenses 373,842 336,295 15.53 14.59 Depreciation and amortization 57,459 52,418 2.39 2.27 Operating income 118,883 116,645 4.94 5.06 Interest expense 24,353 27,614 1.01 1.20 Income before income taxes 94,530 89,031 3.93 3.86 Provision for income taxes 35,922 33,797 1.50 1.47 Net income $ 58,608 $ 55,234 2.43 2.39 Basic and diluted earnings per share $ 0.12 $ 0.12 Dividends per share $ 0.04 $ 0.04 Weighted average number of shares outstanding: Class A 247,906,512 236,334,766 Class B 230,830,364 232,727,364 Total 478,736,876 469,062,130
-3- FOOD LION, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) Mar 27, 1999 January 2, 1999 Mar 28, 1998 Assets Current assets: Cash and cash equivalents $ 184,690 $ 123,592 $ 176,155 Receivables 186,423 199,101 157,306 Inventories 1,090,980 1,103,635 1,014,622 Prepaid expenses 19,302 20,552 22,455 Deferred tax asset 65,397 65,397 63,123 Total current assets 1,546,792 1,512,277 1,433,661 Property, at cost, less accumulated depreciation 1,926,031 1,897,080 1,819,752 Deferred tax asset 4,707 4,707 51,980 Intangible assets 256,524 258,402 269,480 Other assets 3,421 3,495 5,576 Total assets $3,737,475 $3,675,961 $3,580,449 Liabilities and Shareholders' Equity Current Liabilities: Short-term borrowings $ - $ 61,000 $ - Accounts payable, trade 545,480 545,015 520,648 Accrued expenses 418,308 360,105 409,043 Capital lease obligations - current 22,149 21,940 20,915 Long term debt - current 42,403 42,518 2,580 Other liabilities - current 10,136 9,839 9,446 Income taxes payable 35,262 - ____ 27,796 Total current liabilities 1,073,738 1,040,417 990,428 Long-term debt 429,208 429,763 585,260 Capital lease obligations 486,220 492,660 505,479 Other liabilities 110,635 114,199 126,746 Total liabilities 2,099,801 2,077,039 2,207,913 Shareholders' Equity: Class A non-voting common stock, $.50 par value 123,957 123,946 118,253 Class B voting common stock, $.50 par value 115,415 115,415 116,364 Additional capital 60,457 60,332 2,248 Retained earnings 1,337,845 1,299,229 1,135,671 Total shareholders' equity 1,637,674 1,598,922 1,372,536 Total liabilities and shareholders' equity $3,737,475 $3,675,961 $3,580,449
-4- FOOD LION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the 12 Weeks ended March 27, 1999 and March 28, 1998 (Dollars in thousands) 12 Weeks Mar 27,1999 Mar 28,1998 Cash flows from operating activities Net income $ 58,608 $ 55,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,459 52,418 Gain on disposals of property (312) (4,834) Changes in operating assets and liabilities: Receivables 12,678 9,484 Inventories 12,655 (31,878) Prepaid expenses 1,250 59 Other assets 74 144 Accounts payable and accrued expenses 58,668 80,611 Income taxes payable 35,262 27,796 Other liabilities (3,267) 1,556 Total adjustments 174,467 135,356 Net cash provided by operating activities 233,075 190,590 Cash flows from investing activities Capital expenditures (86,084) (58,304) Proceeds from disposal of property 900 56,224 Net cash used in investing activities ( 85,184) ( 2,080) Cash flows from financing activities Net payments under short-term borrowings (61,000) (80,000) Principal payments on long-term debt (670) (740) Principal payments under capital lease obligations (5,267) (8,772) Dividends paid (19,992) (17,474) Proceeds from issuance of common stock 136 1,291 Net cash used in financing activities ( 86,793) (105,695) Net increase in cash and cash equivalents 61,098 82,815 Cash and cash equivalents at beginning of period 123,592 93,340 Cash and cash equivalents at end of period $184,690 $176,155 -5- Notes to Consolidated Financial Statements (Dollars in thousands) 1) Basis of Presentation: The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures normally required by generally accepted accounting principles or those normally made in the Annual Report on Form 10-K of Food Lion, Inc. (the "Company"). Accordingly, the reader of this Form 10-Q should refer to the Company's Form 10-K for the year ended January 2, 1999 for further information. The financial information has been prepared in accordance with the Company's customary accounting practices and has not been audited. In the opinion of management, the financial information includes all adjustments consisting of normal recurring adjustments necessary for a fair presentation of interim results. 2) Supplemental Disclosure of Cash Flow Information: Selected cash payments and non-cash activities during the period were as follows: Mar 27, 1999 Mar 28, 1998 Cash payments for income taxes $ 658 $ 6,681 Cash payments for interest, net of amounts capitalized 16,145 18,390 Non-cash investing and financing activities: Capitalized lease obligations incurred for store properties 0 33,024 Capitalized lease obligations terminated for store properties 964 8,213 Conversion of long-term debt to stock 0 300 The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. -6- 3) Inventories Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first-out(LIFO) method comprised approximately 86% and 85% of inventories as of March 27, 1999 and March 28, 1998, respectively. Meat, produce and deli inventories are valued on the first-in, first-out (FIFO) method. If the FIFO method were used entirely, inventories would have been $140.5 million and $117.9 million greater as of March 27, 1999 and March 28, 1998, respectively. Application of the LIFO method resulted in increases in the cost of goods sold of $1.4 million and $3.5 million for the periods ended March 27, 1999 and March 28, 1998, respectively. 4) Reclassification Certain financial statement items have been reclassified to conform to the current year's format. -7- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS (12 weeks ended March 27, 1999 compared to 12 weeks ended March 28, 1998) The Company recorded earnings of $58.6 million for the first quarter of 1999, an increase of 6.1% over the corresponding period of the prior year. The first quarter of 1999 includes an after-tax charge of $2.4 million related to retirement benefits for the Company's former President and Chief Executive Officer ("CEO") (see discussion below). Excluding this charge, earnings would have been $61.0 million, representing an increase of 10.5% over the first quarter of 1998. Sales for the first quarter of 1999 were $2.4 billion, an increase of 4.4% over the first quarter of 1998. The Company's first quarter 1999 sales are not comparable to 1998 due to a change in the method of collecting sales tax on products discounted through the MVP customer ("MVP") and Preferred Customer Club ("PCC") loyalty card programs (see discussion below). On a comparable basis, sales increased 6.8% over the first quarter of last year. Same store sales increased 2.0%. The Company experienced the strongest same store sales performance in North and South Carolina, Maryland, Delaware and Georgia. Beginning in May 1998, after receiving permission from all state departments of revenue, the Company began collecting sales tax on the net sales price, after considering the MVP/PCC discount granted, rather than the full retail price of the MVP/PCC items. The related impact to the first quarter of 1999 was to reduce reported sales by approximately $54.0 million. This change does not impact the same store sales calculation or the Company's net income, as gross profit and expense dollars are the same under either method. The only difference is that under the new method the discount granted is reflected in sales rather than cost of goods sold under the original method. The following table illustrates the impact of the change. -8- First Quarter of 1999 1999 1999 Dollars % Dollars Comparable % Comparable As to As to Reported Qtr. 1- Reported Qtr. 1- 1998 1998 (Dollars and (New (Original (New (Original shares in Method) Method) Method) Method) thousands) Net sales 2,407,046 2,461,014 100.00% 100.00% Cost of goods sold 1,856,862 1,910,830 77.14 77.64 Gross profit 550,184 550,184 22.86 22.36 Selling and administrative 373,842 373,842 15.53 15.20 expenses Depreciation and amortization 57,459 57,459 2.39 2.33 Operating income 118,883 118,883 4.94 4.83 Interest expense 24,353 24,353 1.01 0.99 Income before income taxes 94,530 94,530 3.93 3.84 Provision for income taxes 35,922 35,922 1.50 1.46 Net income $ 58,608 $ 58,608 2.43% 2.38% Basic and diluted earnings per share $ .12 $ .12 Weighted average number of shares 478,737 478,737 outstanding The Company's 1999 business plan includes opening 80 new stores, closing 35 existing stores (approximately 20 of these closings will be relocations) and renovating approximately 140 existing stores. With this growth plan, the Company anticipates a net increase in store square footage of 7.0% in 1999. As of March 27, 1999, the Company had opened 21 new stores, closed five stores (of which four were relocations), and completed renovations of eight existing stores. Gross profit was 22.86% of sales (22.36% adjusted to the original method of reporting sales tax) for the first quarter this year compared to 21.92% of sales for the same period last year. The increase in gross profit is due to continued category management initiatives particularly in the perishable and grocery departments. The first quarter LIFO charge was $1.4 million. The Company's internal testing for the first quarter indicated minimal inflation. The current LIFO provision is adequate to cover this level of inflation. For the first quarter of 1999, selling and administrative expenses were $373.8 million or 15.53% (15.20% adjusted for the original method of reporting sales tax) of sales as compared to 14.59% of sales in the corresponding period of the prior year. Excluding the one-time charge of $3.9 million (before tax) related to retirement benefits for the Company's former President and CEO (see discussion below), selling and administrative expenses would have been 15.37% of sales (15.03% adjusted for the original method of reporting sales tax). In addition to the retirement costs, the increase in selling -9- and administrative expenses as a percentage of sales is due primarily to increases in (1) store salaries and benefits as a result of a tightening of the labor pool in key Southeast markets due to the low unemployment rates in these areas, and (2) store rent due to the new store openings and expansions of existing stores since the first quarter of last year. On April 7, 1999, the Company announced the retirement of Tom E. Smith, its President, CEO and Chairman of the Board of Directors. During the first quarter, the Company recorded a $3.9 million before-tax charge ($2.4 million after-tax) related to Mr. Smith's retirement benefits. These costs are included in selling and administrative expenses. The Company recorded $3.5 million in store closing costs (included in Selling and Administrative Expenses on the Company's Consolidated Statement of Income)during the first quarter of 1999. These costs are included in "Additions" in the table below. Store Closing Costs (Dollars in millions) Reduction Lease Accrued of Asset Liabilities Expenses Total Values Balance at January 2, 1999 $15.8 $113.2 $1.1 $130.1 Additions .2 2.7 .6 3.5 Reductions -.6 -5.4 -.5 -6.5 Reclassifications 0.0 0.0 0.0 0.0 Recognition of unused reserves 0.0 0.0 0.0 0.0 Balance at March 27, 1999 $15.4 $110.5 $1.2 $127.1 Reductions include fees totaling $4 million related to the termination of three store leases. The remaining $2.5 million relates to (1) on-going rent payments made on lease obligations, (2) the sale of assets associated with closed store properties, and (3) expenses arising from contractual obligations. During the first quarter of 1999, the Company closed five stores in the normal course of business, of which four were relocations. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During the first quarter of 1999, the Company completed disposition efforts related to three closed stores. -10- At the end of the first quarter of 1999 the Company had $127.1 million in store closing costs related to 127 stores (124 leased and 3 owned) and one distribution center. Disposition efforts on these properties (leases, equipment and buildings) will continue until all are disposed. Depreciation and amortization of $57.5 million were 2.39% of sales compared to 2.27% of sales in the first quarter of 1998. The 0.12% of sales increase is due to leasehold improvements and equipment purchases for new stores and renovations since the first quarter last year. Interest expense as a percent of sales was 1.01% for first quarter 1999 compared to 1.20% for the corresponding period last year. The decrease in interest is primarily due to the conversion of the Company's 5% convertible subordinated debentures during the second quarter of 1998. Net income for the quarter was $58.6 million or 2.43% of sales as compared to $55.2 or 2.39% of sales in the first quarter of the prior year. Basic and diluted earnings per share were $0.12 for both the first quarter of 1999 and 1998. Excluding the one-time after-tax charge related to retirement benefits of $2.4 million (see discussion above), net income for the first quarter of 1999 would have been $61.0 million or 2.54% of sales, and basic and diluted earnings per share would have been $0.13. Liquidity and Capital Resources Cash provided by operating activities totaled $233.1 million for the 12 weeks ended March 27, 1999, compared with $190.6 million for the same period last year. The increase was primarily due to an increase in operating income, a decrease in inventory levels, and an increase in income taxes payable. Capital expenditures totaled $86.1 million for the 12 weeks ended March 27, 1999, compared with $58.3 million for the same period in 1998. The Company opened 21 new stores, closed five stores (including four relocations), and completed the renovation of eight existing stores during the first quarter of 1999. Food Lion plans to open a total of 80 new stores in 1999 and renovate approximately 140 stores. The Company anticipates that the majority of the new stores will be opened under conventional leasing arrangements. During the quarter, the Company signed a contract to purchase 28 former A&P store locations for a total purchase price of $14.5 million. The Company plans to open approximately ten of these stores over the next two years, and has plans to sublease the remaining locations. -11- Capital expenditures currently estimated for 1999 are $390 million (including the A&P store purchase). Capital expenditures for 1999 will be financed through funds generated from operations and existing bank and credit lines. The Company maintains the following bank and credit lines: $250.0 million commercial paper program under which no borrowings were outstanding during the first quarters of 1999 and 1998. A revolving credit facility with a syndicate of commercial banks providing $625.0 million in committed lines of credit which expires in December 1999. There were no outstanding borrowings as of March 27, 1999, and March 28, 1998. Additional short-term committed lines of credit totaling $20.0 million which are available when needed. The Company is not required to maintain compensating balances related to these lines of credit, and borrowings may occur periodically. There were no borrowings as of March 27, 1999, or March 28, 1998. During the first quarter of 1999, the Company had average borrowings of $6.21 million at a daily weighted average interest rate of 5.03% with a maximum amount outstanding of $20.0 million. Periodic short-term borrowings may be placed under informal credit arrangements, which are available to the Company at the discretion of the lender. Borrowings for the first quarter were as follows: Informal Credit Arrangements (Dollars in millions) 1999 1998 Outstanding borrowings at the end of the first quarter $0.0 $0.0 Average borrowings $3.2 $10.0 Maximum amount outstanding $35.0 $80.0 Daily weighted average interest rate 5.09% 5.66% During the first quarter of 1999, the Company did not purchase any shares of Class A or Class B stock. The Board of Directors has approved a renewal of the annual share repurchase program for 1999 in the amount of $100 million. Purchases of Class A and/or Class B Common Stock may be made in the open market, as deemed in the best interest of shareholders. -12- Year 2000 In 1996, the Company began evaluating both its information technology systems, and other systems and equipment in order to identify and adjust date sensitive systems for Year 2000 compliance. As part of this undertaking, the Company created a Year 2000 Project Team to address the issues related to Year 2000 compliance. The Year 2000 Team is led by representatives from the Company's Information Technology department and includes key representatives from other areas of the Company. The Year 2000 Team has developed a three-phase plan to identify and remediate all existing systems to ensure the Company's readiness for the century change. These phases consist of assessment, system remediation and integration testing. Project Phase One primarily focused on assessing the business impact of the century change on the Company's operating environment. This assessment included information technology systems, non-information technology systems and supply chain readiness. The assessment was conducted based on an analysis of the Company's individual business processes and the potential material risks associated with the Company's operations. Project Phase Two primarily focused on code and system conversion (remediation) of date impacted applications and systems. Remediation or replacement was conducted for all information technology and embedded systems impacted by Year 2000 issues. Project Phase Three involves the execution of various testing protocol, analysis of test results and the development of contingency plans for each of the impacted systems. The Company has completed Project Phase One for all systems and Project Phase Two for all systems not scheduled for replacement. The Company expects to complete installation of certain replacement systems impacted by Year 2000 issues by mid-1999 and has included the cost of these systems in its estimates for the Year 2000 Project. The Company has commenced Project Phase Three, which includes testing and validation of impacted systems, and anticipates this phase will be substantially complete by mid-1999. However, the Company anticipates testing and validation procedures, as well as development of contingency plans, will continue throughout 1999. Except for the cost of replacement systems, the Company will expense the cost of the Year 2000 Project as incurred. The Company is funding the costs associated with the Year 2000 Project through operating cash flows and has not deferred any Information Technology projects in order to complete the Year 2000 Project. The Company estimates the total incremental cost of the Year 2000 Project is approximately $17.0 million which includes -13- equipment and software replacements, reprogramming, systems testing, and outside consulting services. Approximately $4.0 million of the total cost for the Year 2000 Project is related to reprogramming or remediation of existing software and new systems, while the remaining cost of approximately $13.0 million is related to the implementation of certain replacement systems. At the end of the first quarter of fiscal 1999, the Company had incurred approximately $10.4 million of the total cost of the Year 2000 project of which $2.9 million had been expensed as incurred and $7.5 million had been capitalized for replacement systems. The Company has not materially increased the number of its employees in order to complete the Year 2000 Project. Although the Company has utilized external contractors in various phases of the Year 2000 Project, the Company does not consider any of these contracts or relationships material for the completion of the Year 2000 Project. The Company has assigned certain employees from its Information Technology department to the Year 2000 Project (averaging approximately 20 employees during Phase One and 22 employees during Phase Two of the project and less than 15 employees from its user departments). As discussed above, the Company has created a Year 2000 Project Team composed of representatives from all areas of the Company. Members of the Year 2000 Project Team have completed the tasks associated with the Year 2000 Project as part of their normal duties. Although the Company has discussed its Year 2000 Project with certain of its consultants, third parties were not retained to perform independent verification and validation processes regarding the risks and cost estimates of the Year 2000 Project. As part of the Year 2000 Project, the Company has identified relationships with third parties, including vendors, suppliers, and service providers, which the Company believes are critical to its business operations. Although the Company considered several factors in identifying these critical relationships, the Company has concentrated its communication efforts, as discussed below, with suppliers and vendors from whom the Company makes annual purchases in excess of $10 million. The Company is in the process of communicating with these third parties through questionnaires, letters and interviews in an effort to determine the extent to which they are addressing their Year 2000 compliance issues. Based on the responses received to date from these efforts, the Company understands that all critical suppliers have indicated they anticipate being Year 2000 compliant. A small percentage of these critical suppliers have indicated they are Year 2000 compliant, however, a majority have indicated they are still addressing Year 2000 issues. Where appropriate, the Company has developed strategies to work with its suppliers to verify Year 2000 readiness and create contingency plans as discussed below. -14- The Company has identified its operational and supply chain activities as its most critical functions potentially impacted by Year 2000 issues. The Company will conduct testing within a parallel operating environment created to simulate business processes and integrated systems functionality, including front-end operations and supply chain activities. Validation of integrated systems functionality will be performed by comparing test results to actual processes and data. The Company cannot assure that there will not be an adverse impact on the Company if third parties do not appropriately address their Year 2000 issues in a timely manner. Such other possible consequences include, but are not limited to, loss of communications with stores, loss of electric power, and an inability to process customer transactions or otherwise engage in similar normal business activities. As discussed below, the Company has developed contingency plans with its critical suppliers in order to arrange for the timely delivery of inventory. The Company will continue to communicate with, assess and monitor the progress of these third parties in resolving Year 2000 issues. Although the Company does not believe the actual impact of any system failures related to the century change will be material, the Company has developed various contingency plans with its critical suppliers and certain other vendors in order to assure the timely delivery of inventory and prepare for normal business activities following the century change. In the event the Company or a key supplier is adversely impacted by the century change, the Company will implement its contingency plan for such situation. These plans include alternate means of communication with suppliers, such as facsimile, telephone and hand delivery, manual operation of certain systems, as well as the implementation of certain established ordering procedures. Under the terms of these established ordering procedures, the Company's critical suppliers will provide inventory to the Company based on historical ordering patterns. These suppliers will also substitute products and adjust inventory levels of substitute items based on the availability of certain products. The Company will continue to develop and finalize the implementation of its contingency plans with third parties throughout 1999. The projections and project completion dates are based on management's best estimates and may be updated from time to time as additional information becomes available. This section discussing Year 2000 issues contains forward-looking statements (refer to "Other" below which addresses forward-looking statements made by the Company). -15- Other Information provided by the Company, including written or oral statements made by its representatives, may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as expansion and growth of the Company's business, future capital expenditures and the Company's business strategy, are forward-looking statements. In reviewing such information, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking statements. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. Many of these factors have previously been identified in filings or statements made by or on behalf of the Company, including filings with the Securities and Exchange Commission of Forms 10-Q, 10-K and 8-K. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward- looking statements include: changes in the general economy or in the Company's primary markets, changes in consumer spending, competitive factors, the nature and extent of continued consolidation in the industry, changes in the rate of inflation, changes in state or federal legislation or regulation, adverse determinations with respect to litigation or other claims, inability to develop new stores or complete remodels as rapidly as planned, stability of product costs -- supply or quality control problems with the Company's vendors, and issues and uncertainties related to Year 2000 detailed from time-to-time in the Company's filings with the Securities and Exchange Commission. -16- Part II OTHER INFORMATION Item 1. Legal Proceedings The Company has had no significant developments related to legal matters since the Item 3 disclosure included in the Company's Form 10K filed April 1, 1999 for the year ended January 2, 1999. Item 2. Change in Securities This item is not applicable. Item 3. Defaults Upon Senior Securities This item is not applicable. Item 4. Submission of Matters to a Vote of Security Holders This item is not applicable. Item 5. Other Information This item is not applicable. Item 6. Exhibits and Reports on Form 8-K (a). Exhibits 10 Retirement Agreement 27 Financial Data Schedule (b). The Company did not file a report on Form 8-K during the period ended March 27, 1999. -17- SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. FOOD LION, INC. Registrant DATE:May 5,1999 BY:Laura Kendall Laura Kendall Vice President of Finance Chief Financial Officer Principal Financial Officer -18- Exhibit Index Exhibit Description Page No. 10 Retirement Agreement 20-29 27 Financial Data Schedule 30-31 -19- EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, the Consolidated Statements of Operations and the Consolidated Statement of Cash Flows and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS JAN-01-2000 JAN-03-1999 MAR-27-1999 184,690 0 186,423 0 1,090,980 1,546,792 3,100,695 1,174,664 3,737,475 1,073,738 429,208 0 0 299,829 1,337,845 3,737,475 2,407,046 2,407,046 1,856,862 1,856,862 0 0 24,353 94,530 35,922 58,608 0 0 0 58,608 .12 .12
EX-10 3 RETIREMENT AGREEMENT THIS AGREEMENT (this "Agreement"), made and entered into as of this 7th day of April, 1999, by and between Food Lion, Inc., a North Carolina corporation (the "Company"), and Tom E. Smith (the "Executive"), W I T N E S S E T H: WHEREAS, the Executive is serving as the Chairman of the Board of Directors, President and Chief Executive Officer of the Company; and WHEREAS, in recognition of the Executive's long and distinguished service with the Company; and WHEREAS, by mutual agreement between the Executive and the Company, the Executive shall retire from the Company as of the date hereof (the "Retirement Date") and the Executive's employment with the Company and his service as Chairman shall terminate as of such Retirement Date. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the Company and the Executive agree as follows: ARTICLE I: RETIREMENT AND CONSULTANCY Section 1.1 Retirement. The Executive hereby retires and resigns as an employee, officer and director of the Company and its affiliates, effective as of the end of the meeting of the Board of Directors of the Company held on the Retirement Date. Notwithstanding any provision of the Employment Agreement between the Company and the Executive dated August 1, 1991 (the "Employment Agreement") to the contrary, such retirement and resignation shall not be deemed to be a breach by the Executive of the Employment Agreement, and the Employment Agreement shall terminate as of the Retirement Date. Section 1.2 Consulting Services. The Executive agrees to be available from time to time during the period beginning on the Retirement Date and ending July 31, 2001, for consulting with the Chief Executive Officer and the Chairman of the Company, as either the Chief Executive Officer or the Chairman may reasonably request. Reasonable unavailability of the Executive for such consulting at any time shall not be deemed a breach of this Agreement. ARTICLE II: RETIREMENT PAYMENTS AND BENEFITS Section 2.1 Retirement Payments. The Executive shall continue to receive the annual salary he currently receives through July 31, 2001. The Executive shall receive annual bonuses of $432,315 (which would be the amount of his 1999 bonus) through April 7, 2002. In addition, the Executive shall receive $36,950 (the amount that would have been paid to the Executive as a "wellness bonus" for 1999) annually through April 7, 2002. Such annual salary and bonus payments shall be made on the same schedule as currently made for the Executive and shall be prorated as applicable. Section 2.2 Options. As provided in the stock option agreements governing such stock options, all vested stock options held by the Executive as of the Retirement Date shall remain exercisable for three months following the Retirement Date, and thereafter any of such stock options that remain unexercised shall terminate and cease to be exercisable. All other stock options that have been granted to the Executive that vest on or before December 31, 2000, shall remain outstanding and shall vest on the same schedule as if the Executive had remained employed with the Company through December 31, 2000, and, once each such options are vested, shall remain exercisable for three months following the respective vesting dates of each such options. As of the Retirement Date, all stock options that have been granted to the Executive that would vest after December 31, 2000, shall terminate as of the Retirement Date. For purposes of clarification, Schedule B attached hereto sets forth the stock options that have been granted to the Executive as of the date immediately prior to the Retirement Date and sets forth whether such options will survive the Retirement Date. Section 2.3 Restricted Stock. The Executive shall continue to be vested in all restricted stock that has vested as of the Retirement Date. All restricted stock under awards to the Executive that vest on or before December 31, 2000, shall remain outstanding following the Retirement Date and shall vest on the same schedule as if the Executive had remained employed with the Company through December 31, 2000. All restricted stock under awards to the Executive that would vest after December 31, 2000, shall be forfeited as of the Retirement Date. For purposes of clarification, Schedule B attached hereto sets forth the restricted stock that has been awarded to the Executive as of the date immediately prior to the Retirement Date and sets forth whether such restricted stock awards will survive the Retirement Date. Section 2.4. Put Right. The Executive shall have a one- time right, exercisable within 30 trading days after the Retirement Date, to sell to the Company, and, in the event the Executive exercises such right, the Company shall be obligated to purchase from the Executive for cash, up to 33% of the shares of Class A Common Stock and Class B Common Stock of the Company owned by the Executive on the date of exercise of such right (the "Put"). The per share purchase price of the shares subject to the Put shall be the average closing price of the Class A Common Stock or Class B Common Stock, as the case may be, for the 30 trading days preceding the date of exercise as reported on NASDAQ (National Market System). Payments by the Company pursuant to the Put will be made within five business days of proper notice of exercise of the Put by the Executive, subject to proper delivery in proper form by the Executive of the relevant shares of Common Stock Section 2.5. Split-Dollar Life. The Company shall continue to pay the premiums on and shall maintain in effect the two split-dollar life insurance policies currently in effect with respect to the Executive (Policy No. 2,161,371 and Policy No. 3123424) through December 31, 2001. As of December 31, 2001, such insurance policies shall be transferred to the Executive, and thereafter the Executive shall be responsible for all premiums under such policies, and the Company shall waive its right to receive reimbursement for premiums paid on such policies. Section 2.6 Company Benefits. For a period of three years following the Retirement Date, the Executive shall be entitled to participate in the benefit plans of the Company set forth on Schedule A attached hereto. With respect to the Company's Profit Sharing Plan and Profit Sharing Restoration Plan, the Executive shall be entitled to all accrued amounts to which the Executive is eligible under such plans and agreement. In addition, following the Retirement Date, the Executive shall receive cash payments from the Company in the amounts that would have been contributed to the Profit Sharing Plan and the Profit Sharing Restoration Plan for the Executive (and on the same schedule) as if he remained employed by the Company through April 7, 2002. If the Company is unable to include the Executive and his spouse in the Executive Medical Plan or the Food Lion Group Benefit Plan, it shall secure similar benefits for the Executive and his spouse for such three-year period. Following such three- year period, the Executive shall receive COBRA continuation of health care. As soon as practicable after the Retirement Date, the Company shall transfer title to the vehicle currently used by the Executive to the Executive. Thereafter, the Executive shall be responsible for all maintenance, insurance and other expenses relating to such vehicle, and the Company shall have no further obligations with respect to such vehicle. Section 2.7 Withholding of Taxes. The Company may withhold from any benefits or compensation payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law or governmental regulation or ruling. Section 2.8 Miscellaneous. Except as specifically provided herein or as otherwise may be required by law, the Executive shall not be entitled to receive any other payments, benefits or severance amounts from the Company following the Retirement Date. ARTICLE III: CONFIDENTIAL INFORMATION The Executive acknowledges that during his service and employment with the Company as its Chairman, Chief Executive Officer and President that he has been privy and made party to confidential information, including but not limited to knowledge or data relating to the Company and its businesses and investments, information regarding vendors, employees, strategic and business plans, and analysis of competitors ("Confidential Information") and Trade Secrets (as defined below). Following the Retirement Date, the Executive shall hold in a fiduciary capacity for the benefit of the Company all Trade Secrets and Confidential Information, which shall have been obtained by the Executive during the Executive's employment by the Company and which is not generally available public knowledge (other than by acts by the Executive in violation of this Agreement). For three years following the Retirement Date, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case the Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Trade Secrets or Confidential Information to anyone other than the Company and those designated by the Company. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which the Executive has control over, shall not be removed from the Company's premises and, if so removed, shall be returned to the Company by the Retirement Date. The Executive acknowledges that he has assigned to the Company all rights to Trade Secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. For purposes of this Agreement, Trade Secrets shall mean all information, without regard to form, including, but not limited to, technical or non-technical data, formulae, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, business projects, product plans, distribution lists or lists of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. ARTICLE IV: NON-COMPETITION; NON-SOLICITATION; NON-DISPARAGEMENT Section 4.1 Acknowledgements. The Executive acknowledges (i) that during his service and employment as Chairman, Chief Executive Officer and President of the Company, he required special expertise and talent in conducting his duties and that the Executive had substantial contacts with customers, suppliers, advertisers and vendors of the Company and its affiliates; (ii) that the Executive was placed in a position of trust and responsibility and had access to a substantial amount of Confidential Information and Trade Secrets and that the Company placed him in such position and gave him access to such information in reliance upon his agreement not to compete with the Company during the time periods set forth below, including, but not limited to, the review and preparation of strategic plans and business strategies to expand the Company's business operations; (iii) that due to the Executive's management and supervising duties, the Executive is a repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (iv) that due to the Executive's special experience and talent, the breach of this Article 4 cannot be reasonably or adequately compensated solely by damages in an action at law; (v) that the Executive is capable of competing with the Company and its subsidiaries; (vi) that the Executive is capable of obtaining gainful employment that does not violate the restrictions contained in this Agreement; and (vii) that a material inducement for the Company in executing this Agreement and making the payments hereunder was the Executive's willingness to be bound by the terms of this Article 4. Section 4.2 Non-Competition. In light of the acknowledgements set forth above and in consideration of the payments made to the Executive hereunder, for three years following the Retirement Date, the Executive shall not, directly or indirectly, own, manage, operate, control, be employed by, or perform services for any business, howsoever organized and in whatsoever form, that engages in any retail or wholesale grocery or supermarket business and which is located anywhere within the continental United States. Section 4.3. Non-Solicitation. To protect the goodwill of the Company and the Company's legitimate business interests and in consideration of the payments made to the Executive hereunder, for three years after the Retirement Date, the Executive shall not, directly or indirectly, solicit the customers, suppliers or employees of the Company or its affiliates to terminate their relationship with the Company or its affiliates (or to modify such relationship in a manner that is adverse to the interests of the Company or its affiliates), or to violate any valid contracts they may have with the Company or its subsidiaries; provided, however, that nothing in this Section 4.3 shall prohibit the Executive from responding to an unsolicited request from any third party for an employment reference with respect to any person who was an employee of the Company during the period of the Executive's employment with the Company. Section 4.4. Non-Disparagement. Following the Retirement Date, the Executive shall not disparage the Company or any of the Company's subsidiaries, affiliates, and their respective officers, directors, employees, agents, successors and assigns, and the Company shall not disparage the Executive or any of his representatives or agents, or any of their respective heirs and assigns. A proceeding brought by any party to enforce its rights shall not be deemed to be a breach of this Section 4.4. Section 4.5. Miscellaneous. The Executive acknowledges that the restrictions, prohibitions and other provisions of this Article 4 are reasonable, fair and equitable in scope, term and duration, are necessary to protect the legitimate business interests of the Company and its affiliates and are a material inducement to the Company to enter into this Agreement and make the payments hereunder. It is the intention of the parties hereto that the restrictions contained in this Article 4 be enforceable to the fullest extent permitted by applicable law. Therefore, if, at any time, the provisions of this Article 4 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Article 4 shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter and the Executive agrees that this Article 4 as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. ARTICLE V: MISCELLANEOUS Section 5.1 Remedy. Should the Executive engage in or perform, either directly or indirectly, any of the acts prohibited by Articles 3 and 4, it is agreed that the Company shall be entitled to immediately withhold any payments or benefits to be made to the Executive under Article 2 of this Agreement and all outstanding stock options held by the Executive shall immediately be canceled and cease to be exercisable (and to the extent such payments and benefits have already been made, the Executive shall immediately repay such amounts to the Company upon such breach, including, but not limited to, any gain realized upon the lapse of restricted stock or exercise of stock options, as provided in Sections 2.2 and 2.3 hereof) and the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining the Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy shall not be deemed to limit or prevent the exercise by the Company of any or all further rights and remedies which may be available to the Company hereunder or at law or in equity. Section 5.2 Notices. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered, sent by facsimile or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to such address or sent to such facsimile number as each party may furnish to the other in writing from time to time. Section 5.3 Applicable Law, Jurisdiction and Venue. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the State of North Carolina. In any such litigation, each party hereto waives personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified mail directed to such party at his or its address for purposes of notice under Section 5.1 hereof. Section 5.4 No Waiver. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall (i) be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time or (ii) preclude insistence upon strict compliance in the future. Section 5.5 Severability. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Section 5.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. Section 5.7 Headings. The paragraph headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. Section 5.8 Gender and Plurals. Wherever the context so requires, the masculine gender includes the feminine or neuter, and the singular number includes the plural and conversely. Section 5.9 Affiliate. As used in this Agreement, unless otherwise indicated, "affiliate" shall mean any person or entity which directly or indirectly through any one or more intermediaries owns or controls, is owned or controlled by, or is under common ownership or control with the Company. Section 5.10 Assignment. This Agreement is binding on the Executive and the Company and their successors and assigns; provided, however, that the rights and obligations of the Company under this Agreement may be assigned to a successor entity which assumes (either by operation of law or otherwise) the Company's obligations hereunder. Any such assignment by the Company will not release the Company unless and until all obligations to the Executive hereunder are fully discharged. No rights or obligations of the Executive hereunder may be assigned by the Executive to any other person or entity, except by will or the laws of descent and distribution. In the event of the Executive's death prior to receipt by the Executive of all amounts payable by the Company hereunder, such amounts shall be payable to the Executive's designated beneficiaries on the same schedule as provided for in this Agreement. Section 5.11 Entire Agreement. Except as otherwise specifically provided herein, this Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the Executive's resignation of employment with the Company, and amends and supersedes all prior employment or severance agreements between the Executive and the Company or any of its predecessors, including, but not limited to, the Employment Agreement. The Executive acknowledges and agrees that the consideration provided for herein is adequate consideration for the Executive waiving his rights under the Employment Agreement. Except as otherwise provided herein, each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement, or promise relating to the Executive's resignation of employment with the Company, which is not contained in this Agreement, shall be valid or binding. Any modification of this Agreement will be effective only if it is in writing and signed by the party to be charged.. Section 5.12 Arbitration. Except as otherwise necessary to secure the remedy specified in Section 5.1 of this Employment Agreement, any dispute arising between the Company and the Executive with respect to the performance or interpretation of this Retirement Agreement shall be submitted to arbitration in Salisbury, North Carolina, for resolution in accordance with the commercial arbitration rules of the American Arbitration Association, modified to provide that the decision by the arbitrators shall be binding on the parties, shall be furnished in writing, separately and specifically stating the findings of fact and conclusions of law on which the decision is based, and shall be rendered within 90 days following impanelment of the arbitrators. The cost of arbitration shall initially be borne by the party requesting arbitration. Following a decision by the arbitrators, the costs of arbitration shall be divided as directed by the arbitrators. ARTICLE VI: EXECUTIVE ACKNOWLEDGEMENTS The Executive acknowledges that: (a) He has read and understands the terms of this Agreement and has voluntarily agreed to their terms without coercion or undue persuasion by the Company or any officer, director or other agent thereof; (b) He has been encouraged by the Company to seeks, and has sought, competent legal counsel in his review and consideration of this Agreement and its terms; and (c) This Agreement does not purport to waive, and does not waive, any rights the Executive may have which arise after the date on which this Agreement is finally executed. [The next page is the signature page] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FOOD LION, INC. By: \s\ William G. Ferguson William G. Ferguson, Chairman Senior Management Compensation Committee \s\ Tom E. Smith Tom E. Smith, Individually SCHEDULE A Food Lion Group Benefit Plan (including life insurance coverage but excluding disability coverage) Executive Medical Plan Financial planning services up to $1,500 per year, reduced in 1999 for the value of any services already received SCHEDULE B STOCK OPTIONS Grant No. Grant No. of Amount and Exercise Survives Date Options Date of Price Retirement Granted Vesting Date 4241 11/6/91 75,000 60,000 vested $12.4166 Yes 7,500 on 11/6/99 Yes 7,500 on 11/6/00 Yes 4242 5/3/96 246,607 82,202 on 5/3/99 $7.3750 Yes 82,202 on 5/3/00 Yes 82,203 on 5/3/01 No 4243 5/1/97 342,598 114,199 on 5/1/00 $6.6875 Yes 114,199 on 5/1/01 No 114,200 on 5/1/02 No 41704 5/7/98 225,662 75,220 on 5/7/01 $10.2200 No 75,221 on 5/7/02 No 75,221 on 5/7/03 NO RESTRICTED STOCK Grant No. Grant No. of Amount and Survives Date Options Date of Retirement Granted Vesting Date 41175 5/3/96 47,031 11,758 vested Yes 11,758 on 5/3/99 Yes 11,758 on 5/3/00 Yes 11,757 on 5/3/01 No 41332 5/1/97 68,227 17,057 on 5/1/99 Yes 17,057 on 5/1/00 Yes 17,057 on 5/1/01 No 17,056 on 5/1/02 No 41705 5/7/98 45,596 11,399 on 5/7/00 Yes 11,399 on 5/7/01 No 11,399 on 5/7/02 No 11,399 on 5/7/03 No -----END PRIVACY-ENHANCED MESSAGE-----