10-Q 1 0001.txt 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 June 17, 2000 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 DELHAIZE AMERICA, 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 July 20, 2000. Class A Common Stock 79,965,968 Class B Common Stock 75,290,542 155,256,510 Page 1 of 56 DELHAIZE AMERICA, INC. INDEX TO FORM 10-Q June 17, 2000 Part I.FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Income for the 12 and 24 weeks ended June 17, 2000 and June 19, 1999 3-4 Consolidated Balance Sheets as of June 17, 2000, January 1, 2000 and June 19, 1999 5 Consolidated Statements of Cash Flows for 24 weeks ended June 17, 2000 and June 19, 1999 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14-15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements DELHAIZE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 12 Weeks ended June 17, 2000 and June 19, 1999 (Dollars in thousands except per share data) June 17, 2000 June 19, 1999 June 17, 2000 June 19, 1999 % % Net sales $2,647,124 $2,509,240 100.00 100.00 Cost of goods sold 2,054,739 1,933,085 77.62 77.04 Selling and administrative expenses 468,563 440,528 17.70 17.56 Operating income 123,822 135,627 4.68 5.40 Interest expense 28,344 25,384 1.07 1.01 Income before income taxes 95,478 110,243 3.61 4.39 Provision for income taxes 36,285 41,892 1.37 1.67 Net income $ 59,193 $ 68,351 2.24 2.72 Basic earnings per share $ 0.38 $ 0.43 Diluted earnings per share $ 0.38 $ 0.43 Dividends per share $ 0.14 $ 0.13 Weighted average number of shares outstanding: Class A 79,950,702 81,704,721 Class B 75,290,542 76,420,385 Total 155,241,244 158,125,106 Number of shares outstanding for the twelve weeks ended June 19, 1999 are restated to reflect a one-for-three reverse stock split on September 9, 1999.
-3- PART I. FINANCIAL INFORMATION Item 1. Financial Statements DELHAIZE AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 24 Weeks ended June 17, 2000 and June 19, 1999 (Dollars in thousands except per share data) June 17, 2000 June 19, 1999 June 17, 2000 June 19, 1999 % % Net sales $5,126,358 $4,916,286 100.00 100.00 Cost of goods sold 3,944,697 3,789,947 76.95 77.09 Selling and administrative expenses 925,222 871,829 18.05 17.74 Operating income 256,439 254,510 5.00 5.17 Interest expense 55,374 49,737 1.08 1.01 Income before income taxes 201,065 204,773 3.92 4.16 Provision for income taxes 76,408 77,814 1.49 1.58 Net income $ 124,657 $ 126,959 2.43 2.58 Basic earnings per share $ 0.80 $ 0.80 Diluted earnings per share $ 0.80 $ 0.80 Dividends per share $ 0.29 $ 0.25 Weighted average number of shares outstanding: Class A 79,941,049 82,170,112 Class B 75,290,542 76,681,920 Total 155,231,591 158,852,032 Number of shares outstanding for the 24 weeks ended June 19, 1999 are restated to reflect a one-for-three reverse stock split on September 9, 1999.
-4- DELHAIZE AMERICA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) June 17, 2000 January 1, 2000 June 19, 1999 Assets Current assets: Cash and cash equivalents $ 100,573 $ 195,502 $ 89,822 Receivables 222,586 235,457 167,358 Inventories 1,178,395 1,157,695 1,104,720 Prepaid expenses 57,812 28,407 27,215 Deferred tax assets 55,611 55,611 65,397 Total current assets 1,614,977 1,672,672 1,454,512 Property, at cost, less accumulated depreciation 2,107,368 2,039,314 1,968,728 Deferred tax assets - - 4,707 Intangible assets, less accumulated amortization 250,360 254,276 267,193 Other assets 20,775 7,150 3,346 Total assets $3,993,480 $3,973,412 $3,698,486 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $ 235,000 $ 302,000 $ 62,000 Accounts payable 590,038 569,592 559,399 Accrued expenses 327,880 369,230 353,137 Capital lease obligations - current 25,137 23,877 22,531 Long term debt - current 1,987 2,834 42,292 Other liabilities - current 13,100 12,660 11,272 Total current liabilities 1,193,142 1,280,193 1,050,631 Long-term debt 426,654 426,930 428,641 Capital lease obligations 505,322 478,942 492,327 Deferred income taxes 7,421 7,421 - Other liabilities 101,124 101,060 109,576 Total liabilities 2,233,663 2,294,546 2,081,175 Shareholders' equity: Class A non-voting common stock, $.50 par value 39,983 39,965 121,813 Class B voting common stock, $.50 par value 37,645 37,645 114,039 Additional capital 156,097 155,280 - Retained earnings 1,526,092 1,445,976 1,381,459 Total shareholders' equity 1,759,817 1,678,866 1,617,311 Total liabilities and shareholders' equity $3,993,480 $3,973,412 $3,698,486
-5- DELHAIZE AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the 24 Weeks ended June 17, 2000 and June 19, 1999 (Dollars in thousands) 24 Weeks Ended June 17, 2000 June 19, 1999 Cash flows from operating activities Net income $ 124,657 $126,959 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 130,315 117,176 Loss(gain) on disposals of property and capital lease terminations 584 (1,571) Changes in operating assets and liabilities: Receivables 12,871 31,743 Inventories (20,700) (1,085) Prepaid expenses (9,163) (6,663) Other assets (878) 149 Accounts payable and accrued expenses (20,904) 7,416 Other liabilities 504 (3,190) Total adjustments 92,629 143,975 Net cash provided by operating activities 217,286 270,934 Cash flows from investing activities Capital expenditures (156,343) (185,851) Proceeds from disposal of property 1,292 1,279 Direct costs associated with acquisition (3,239) - Other investment activity (9,508) - Net cash used in investing activities (167,798) (184,572) Cash flows from financing activities Net(payments)proceeds under short-term borrowings (67,000) 1,000 Principal payments on long-term debt (1,122) (1,348) Principal payments under capital lease obligations (12,347) (11,214) Direct financing costs (20,242) - Dividends paid (44,541) (39,884) Repurchase of common stock - (69,546) Proceeds from issuance of common stock 835 860 Net cash used in financing activities (144,417) (120,132) Net decrease in cash and cash equivalents (94,929) (33,770) Cash and cash equivalents at beginning of period 195,502 123,592 Cash and cash equivalents at end of period $100,573 $ 89,822
-6- 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 Delhaize America, 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 1, 2000 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: June 17, 2000 June 19, 1999 Cash payments for income taxes $83,114 $86,923 Cash payments for interest, net of amounts capitalized 55,734 51,332 Non-cash investing and financing activities: Capitalized lease obligations incurred for store properties 41,107 28,878 Capitalized lease obligations terminated for store properties 1,120 17,406 The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. -7- 3) Inventories Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first-out (LIFO) method comprised approximately 82% and 85% of inventories as of June 17, 2000 and June 19, 1999, 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 $146.8 million and $141.5 million greater as of June 17, 2000 and June 19, 1999, respectively. Application of the LIFO method resulted in increases in the cost of goods sold of $3.9 million and $2.4 million for the 24 weeks ended June 17, 2000 and June 19, 1999, respectively. 4) Reclassification Certain financial statement items have been reclassified to conform to the current year's format. 5) 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 (155,241,244 and 158,125,106 for the second quarter of 2000 and 1999, respectively; 155,231,591 and 158,852,032 year to date for 2000 and 1999, respectively). 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 126,000 and 319,000 for outstanding stock options year to date for 2000 and 1999, respectively. For 1999, basic earnings per share and diluted earnings per share have been restated to reflect a one-for-three reverse stock split on September 9, 1999. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS (12 and 24 weeks ended June 17, 2000 compared to 12 and 24 weeks ended June 19, 1999) The Company recorded net income for the second quarter and year to date for 2000 of $59.2 million and $124.7 million, respectively, resulting in decreases of 13.4% and 1.8% over the corresponding periods of 1999. Net sales for the second quarter and year to date of 2000 were $2.6 billion and $5.1 billion, respectively, resulting in increases of 5.5% and 4.3% over the corresponding periods of 1999. Same store sales increased 1.1% for the second quarter and decreased 0.3% year to date. During the second quarter, the Company introduced new promotional campaigns at its Food Lion and Kash n'Karry banners to improve sales trends in response to a highly competitive sales environment in the first six months of 2000. Gross profit of 22.38% of sales for the second quarter this year was below the second quarter of last year of 22.96% of sales. Gross margins were adversely impacted in the second quarter by the cost of markdowns and changes in the mix of products sold as a result of promotional campaigns in a highly competitive sales environment. The Company's internal testing for the second quarter indicated minimal inflation; however, the Company has provided a $2.0 million LIFO provision in the second quarter of 2000 primarily due to an increase in paper products and cigarette costs. The current LIFO provision is adequate to cover this level of inflation. Year to date gross profit of 23.05% of sales compared favorably to the corresponding period of last year of 22.91% of sales. This improved gross profit was primarily due to continued category management initiatives of margin blending and category mix, particularly in the perishable (dairy and frozen) and grocery departments, partially offset by promotional markdowns. Selling and administrative expenses for the second quarter were $468.6 million (including $66.2 million in depreciation and amortization) or 17.70% of sales as compared to $440.5 million (including $59.7 million in depreciation and amortization) or 17.56% of sales in the corresponding period of the prior year. The increase in selling and administrative expenses was due primarily to increases in store salaries, store rent and depreciation. The Company has experienced increasing labor costs due to the low unemployment rates in all its operating markets, which in turn has created higher turnover as well as wage increases. Higher labor costs were partially offset by adjustments to benefit and insurance reserves to reflect -9- current estimates. The increase in store rent was due to 76 new store openings and 149 expansions of existing stores since second quarter of last year. Depreciation and amortization of $66.2 million increased over the second quarter of last year of $59.7 million due to leasehold improvements and equipment purchases for new stores and renovations. Selling and administrative expenses for the second quarter of 1999 included a one-time charge of $3.3 million (pre-tax) related to executive post-employment benefits. Interest expense of $28.3 million for the second quarter of 2000 and $55.4 million year to date was higher as compared to $25.4 million and $49.7 million for the respective periods of 1999 due to an increase in short-term borrowings. Net income for the quarter was $59.2 million or 2.24% of sales as compared to $68.4 million or 2.72% of sales in the second quarter of the prior year. Basic and diluted earnings per share were $0.38 for the second quarter of 2000 compared to $0.43 last year. Store Closing Costs (Dollars in millions) Reduction of Asset Lease Accrued Values Liabilities Expenses Total Balance at March 25, 2000 $8.2 $104.3 $1.1 $113.6 Additions 0.2 3.1 .9 4.2 Reductions -0.3 -2.4 -.6 -3.3 Balance at June 17, 2000 $8.1 $105.0 $1.4 $114.5 The Company recorded $3.9 million in store closing costs (included in Selling and Administrative Expenses on the Company's Consolidated Statement of Income) during the second quarter of 2000. These costs are included in the "Additions" line in the table above. Reductions relate primarily to on-going rent payments made on lease obligations. During the second quarter of 2000, the Company closed four stores and relocated three of these stores in the normal course of business. The revenues and operating results of these stores were not significant to the Company's total revenues and operating results. During the second quarter of 2000, the Company completed disposition efforts related to one closed store. At the end of the first quarter of 2000 the Company had $114.5 million in store closing costs related to 159 stores (156 leased and 3 owned) and one distribution center. Disposition efforts on the properties related to these facilities (leases, equipment, and buildings) will continue until all related properties are disposed. -10- Liquidity and Capital Resources Cash provided by operating activities totaled $217.3 million for the 24 weeks ended June 17, 2000, compared with $270.9 million for the same period last year. The decrease was primarily due to an increase in inventory levels, net of related accounts payable, and a decrease in accrued expenses mainly as a result of increased payouts for 1999 benefit plans. Capital expenditures totaled $156.3 million for the 24 weeks ended June 17, 2000, compared with $185.9 million for the same period in 1999. Year to date the Company opened 29 new stores and completed the renovation of 56 existing stores. In addition, during the 24 weeks of 2000, the Company had merger costs of $3.2 million related to the acquisition of Hannaford Bros. Co. and an investment of $9.5 million in a Thailand chain. With its 2000 growth plan, the Company anticipates a net increase in store square footage of approximately 8.0%. This plan is subject to change and review as conditions warrant. Capital expenditures currently estimated for 2000 are $360 million. Capital expenditures for 2000 will be financed through funds generated from operations and existing bank credit facilities. Cash flows used in financing activities for the 24 weeks ended June 17, 2000 increased to $144.4 million from $120.1 million for the same period of last year. The increase in cash used was primarily the result of payments on short-term borrowings and bridge financing costs incurred for the Company's announced Hannaford Bros. Co. acquisition. The Company maintains the following bank and credit lines: A revolving credit facility with a syndicate of commercial banks providing $500.0 million in committed lines of credit, which expires in November 2000. As of June 17, 2000, the Company had $180.0 million in outstanding borrowings. There were no outstanding borrowings as of the end of the second quarter of 1999. During the second quarter of 2000, the Company had average borrowings of $114.8 million at a daily weighted average interest rate of 7.62%. Additional short-term committed lines of credit totaling $20.0 million were available when needed through May 29, 2000. The Company was not required to maintain compensating balances related to these lines of credit, and borrowings could occur -11- periodically. These lines were replaced with additional uncommitted lines during the second quarter. The Company had no borrowings outstanding at June 17, 2000 and $20.0 million outstanding at the end of second quarter of 1999. During the second quarter while this line was available, the Company had average borrowings of $20.0 million at a daily weighted average interest rate of 6.58% 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 second quarter were as follows: Informal Credit Arrangements (Dollars in millions) 2000 1999 Outstanding borrowings at the end of the second quarter $55.0 $42.0 Average borrowings $66.3 $26.8 Maximum amount outstanding $125.0 $105.0 Daily weighted average interest rate 7.45% 5.09% The Company completed its acquisition of all the outstanding shares of Hannaford Bros. Co. in a cash and stock transaction valued at approximately $3.6 billion, including the assumption of debt, on July 31, 2000. Hannaford will operate as a subsidiary of Delhaize America, Inc. The acquisition will result in a combined entity that will include more than 1,400 stores on the Eastern seaboard and generate sales in excess of $14 billion a year. The Company estimates the total amount of cash required for the merger with Hannaford to be approximately $2.7 billion. The cash consideration required to complete the merger will be funded through (i) a 364-day capital markets bridge facility for up to $2.5 billion and (ii) a $500 million five-year syndicated revolving credit facility. The Company plans to commence a debt offering for long term financing to replace the bridge facility within one year from completion of the merger. The Company has entered into various agreements to hedge against a potential increase in interest rates on planned bond issues related to the announced acquisition of Hannaford Bros. Co. The notional amount of the agreements totals $1.75 billion. At June 17, 2000, the unrealized loss related to these agreements was $98.7 million as compared to the unrealized gain totaling $7.2 million at January 1, 2000. The -12- differential to be paid or received will be recognized as an adjustment to interest expense over the life of the underlying debt. The Company is subject to risk of nonperformance by the counterparties to the agreement. The Company does not anticipate nonperformance by the counterparties, who are major U.S. financial institutions. The Company finances its daily working capital requirements, when necessary, through the use of its various committed and uncommitted lines of credit. These financial instruments are sensitive to interest rate changes. Outstanding borrowings under such agreements are discussed above. Other This report contains certain "forward-looking statements" within the protection of the statutory safe-harbors of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 and interest costs on borrowed funds, changes in state or federal legislation or regulation, changes in the availability and cost of labor, adverse determinations with respect to litigation or other claims, inability to develop new stores or complete remodels as rapidly as planned, and stability of product costs -- supply or quality control problems with the Company's vendors detailed from time- to-time in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. -13- Item 3. Quantitative and Qualitative Disclosures About Market Risk This information is set forth in Item 2 to this Form 10-Q and is hereby incorporated by reference. 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 10Q filed May 9, 2000 for the 12 weeks ended March 25, 2000. Item 2. Change in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a). The Company held its Annual Meeting of Shareholders on May 4, 2000. (b). Not applicable (c). Matters voted upon at the meeting Election of Directors For Withheld Broker Non-Votes Pierre-Olivier Beckers 62,034,416 3,048,545 10,207,581 Dr. J. Kelly Collamore 63,016,361 2,066,600 10,207,581 JC Coppieters`T Wallant 63,011,645 2,071,316 10,207,581 Pierre Dumont 62,971,571 2,111,390 10,207,581 William G. Ferguson 62,975,011 2,107,950 10,207,581 Dr. Bernard W. Franklin 63,014,506 2,068,455 10,207,581 Joseph C. Hall, Jr. 62,954,046 2,128,915 10,207,581 Margaret H. Kluttz 62,969,022 2,113,939 10,207,581 Bill McCanless 62,154,831 2,928,130 10,207,581 Dominique Raquez 62,066,357 3,016,604 10,207,581 -14- Appointment of For Against Abstain Broker Independent Accountants Non-votes PricewaterhouseCoopers 64,683,909 312,254 86,798 10,207,581 LLP For Against Abstain Broker Non-votes Amendments to the bylaws of the Company 61,215,211 3,421,843 445,907 10,207,581 For Against Abstain Broker Non-votes Delhaize America, Inc. 2000 Stock Incentive Plan 51,479,101 3,775,822 582,955 19,542,664 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a). Exhibits 27 Financial Data Schedule (b). The Company did not file a report on Form 8-K during the period ended June 17, 2000. -15- 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. DELHAIZE AMERICA, INC. Registrant DATE: August 1, 2000 BY:Laura Kendall Laura Kendall Chief Financial Officer Principal Accounting Officer -16- Exhibit Index Exhibit Description Page No. 3 Bylaws of Delhaize America 18-31 10a Shareholders' Agreement 32-39 10b Stock Incentive Plan 40-54 27 Financial Data Schedule 55-56 -17-