-----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, CLWs0qhT+UaTOwkSzATcwbrSzsrAzEvE3IQL0s+MJIldOS83oAqjJ8y/ivb52PsK ngzf8wi6S2IvjO47rK+H8Q== 0000037912-99-000023.txt : 19990818 0000037912-99-000023.hdr.sgml : 19990818 ACCESSION NUMBER: 0000037912-99-000023 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990619 FILED AS OF DATE: 19990817 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/A SEC ACT: SEC FILE NUMBER: 000-06080 FILM NUMBER: 99694623 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/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 19, 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 July 23, 1999. Class A Common Stock 242,890,915 Class B Common Stock 227,189,964 Page 1 of 18 FOOD LION, INC. Form 10Q/A Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Income for the 12 and 24 weeks ended June 19, 1999 and June 20, 1998 3-4 Consolidated Balance Sheets as of June 19, 1999, January 2, 1999 and June 20, 1998 5 Consolidated Statements of Cash Flows for 24 weeks ended June 19, 1999 and June 20, 1998 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 12 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands except per share data) June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998 % % Net sales $2,509,240 $2,353,260 100.00 100.00 Cost of goods sold 1,933,085 1,826,657 77.04 77.62 Selling and administrative expenses 440,528 406,621 17.56 17.28 Operating income 135,627 119,982 5.40 5.10 Interest expense 25,384 23,154 1.01 0.99 Income before income taxes 110,243 96,828 4.39 4.11 Provision for income taxes 41,892 36,795 1.67 1.56 Net income $ 68,351 $ 60,033 2.72 2.55 Basic earnings per share $ 0.14 $ 0.13 Diluted earnings per share $ 0.14 $ 0.13 Dividends per share $ 0.04 $ 0.04 Weighted average number of shares outstanding: Class A 245,114,162 244,777,891 Class B 229,261,156 232,727,364 Total 474,375,318 477,505,255
-3- PART I. FINANCIAL INFORMATION Item 1. Financial Statements FOOD LION, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the 24 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands except per share data) June 19, 1999 June 20, 1998 June 19, 1999 June 20, 1998 % % Net sales $4,916,286 $4,658,733 100.00 100.00 Cost of goods sold 3,789,947 3,626,772 77.09 77.85 Selling and administrative expenses 871,829 795,334 17.74 17.07 Operating income 254,510 236,627 5.17 5.08 Interest expense 49,737 50,768 1.01 1.09 Income before income taxes 204,773 185,859 4.16 3.99 Provision for income taxes 77,814 70,592 1.58 1.52 Net income $ 126,959 $ 115,267 2.58 2.47 Basic earnings per share $ 0.27 $ 0.24 Diluted earnings per share $ 0.27 $ 0.24 Dividends per share $ 0.08 $ 0.07 Weighted average number of shares outstanding: Class A 246,510,337 240,556,329 Class B 230,045,760 232,727,364 Total 476,556,097 473,283,693
-4- FOOD LION, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) June 19, 1999 January 2, 1999 June 19, 1998 Assets Current assets: Cash and cash equivalents $ 89,822 $ 123,592 $ 94,697 Receivables 167,358 199,101 157,905 Inventories 1,104,720 1,103,635 1,000,916 Prepaid expenses 27,215 20,552 48,562 Deferred tax asset 65,397 65,397 63,123 Total current assets 1,454,512 1,512,277 1,365,203 Property, at cost, less accumulated depreciation 1,968,728 1,897,080 1,832,946 Deferred tax asset 4,707 4,707 51,980 Intangible assets 267,193 258,402 267,046 Other assets 3,346 3,495 4,069 Total assets $3,698,486 $3,675,961 $3,521,244 Liabilities and Shareholders' Equity Current Liabilities: Short-term borrowings $ 62,000 $ 61,000 $ - Accounts payable, trade 559,399 545,015 557,580 Accrued expenses 353,137 360,105 321,621 Capital lease obligations - current 22,531 21,940 21,229 Long term debt - current 42,292 42,518 2,646 Other liabilities - current 11,272 9,839 9,911 Total current liabilities 1,050,631 1,040,417 912,987 Long-term debt 428,641 429,763 470,797 Capital lease obligations 492,327 492,660 491,178 Other liabilities 109,576 114,199 120,686 Total liabilities 2,081,175 2,077,039 1,995,648 Shareholders' Equity: Class A non-voting common stock, $.50 par value 121,813 123,946 125,299 Class B voting common stock, $.50 par value 114,039 115,415 116,364 Additional capital - 60,332 105,999 Retained earnings 1,381,459 1,299,229 1,177,934 Total shareholders' equity 1,617,311 1,598,922 1,525,596 Total liabilities and shareholders' equity $3,698,486 $3,675,961 $3,521,244
-5- FOOD LION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the 24 Weeks ended June 19, 1999 and June 20, 1998 (Dollars in thousands) 24 Weeks June 19, 1999 June 20,1998 Cash flows from operating activities Net income $126,959 $115,267 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 117,176 106,430 Gain on disposals of property and capital lease terminations (1,571) (1,841) Changes in operating assets and liabilities: Receivables 31,743 8,885 Inventories (1,085) (18,172) Prepaid expenses (6,663) (26,048) Other assets 149 1,651 Accounts payable and accrued expenses 7,416 30,121 Other liabilities (3,190) (4,039) Total adjustments 143,975 96,987 Net cash provided by operating activities 270,934 212,254 Cash flows from investing activities Capital expenditures (185,851) (141,878) Proceeds from disposal of property 1,279 66,895 Net cash used in investing activities (184,572) ( 74,983) Cash flows from financing activities Net proceeds (payments) under short-term borrowings 1,000 (80,000) Principal payments on long-term debt (1,348) (4,992) Principal payments under capital lease obligations (11,214) (17,621) Dividends paid (39,884) (35,248) Repurchase of common stock (69,546) - Proceeds from issuance of common stock 860 1,947 Net cash used in financing activities (120,132) (135,914) Net (decrease) increase in cash and cash equivalents (33,770) 1,357 Cash and cash equivalents at beginning of period 123,592 93,340 Cash and cash equivalents at end of period $ 89,822 $ 94,697 -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 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: June 19, 1999 June 20, 1998 Cash payments for income taxes $ 86,923 $93,273 Cash payments for interest, net of amounts capitalized 51,332 52,952 Non-cash investing and financing activities: Capitalized lease obligations incurred for store properties 28,878 31,975 Capitalized lease obligations terminated for store properties 17,406 12,302 Conversion of long-term debt to stock 0 110,445 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 85% and 84% of inventories as of June 19, 1999 and June 20, 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 $141.5 million and $119.9 million greater as of June 19, 1999 and June 20, 1998, respectively. Application of the LIFO method resulted in increases in the cost of goods sold of $2.4 million and $5.5 million for the 24 weeks ended June 19, 1999 and June 20, 1998, 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 (474,375,318 and 477,505,255 for the second quarter of 1999 and 1998, respectively; 476,556,097 and 473,283,693 year to date for 1999 and 1998, 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 956,000 and 1,267,000 for outstanding stock options year to date for 1999 and 1998, respectively. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS (12 and 24 weeks ended June 19, 1999 compared to 12 and 24 weeks ended June 20, 1998) The Company recorded earnings for the second quarter and year to date for 1999 of $68.4 million and $127.0 million, respectively, resulting in increases of 13.9% and 10.1% over the corresponding periods of 1998. The second quarter of 1999 includes an after-tax charge of $2 million related to executive post-employment benefits (see discussion below). Excluding this charge, earnings would have been $70.4 million for the second quarter and $129.0 million year to date, representing increases of 17.2% and 11.9% over the respective periods of 1998. Sales for the second quarter and year to date of 1999 were $2.5 billion and $4.9 billion, respectively, resulting in increases of 6.6% and 5.5% over the corresponding periods of 1998. The Company's second 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, 1999 second quarter and year to date sales increased 7.5% and 7.0% over the corresponding periods of last year. Same store sales increased 2.4% for the second quarter. 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 second quarter and year to date of 1999 was to reduce reported sales by approximately $20.4 million and $70.4 million, respectively. 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. -9- Second Quarter of 1999 1999 Dollars % 1999 Comparable % Comparable Dollars to As to As Qtr. 2- Reported Qtr. 2- Reported 1998 1998 (Dollars and (New (Original (New (Original shares in Method) Method) Method) Method) thousands) Net sales $ 2,509,240 $ 2,529,658 100.00% 100.00% Cost of goods sold 1,933,085 1,953,503 77.04 77.22 Selling and administrative 440,528 440,528 17.56 17.42 expenses Operating income 135,627 135,627 5.40 5.36 Interest expense 25,384 25,384 1.01 1.00 Income before 110,243 110,243 4.39 4.36 income taxes Provision for 41,892 41,892 1.67 1.66 income taxes Net income $68,351 $68,351 2.72% 2.70% Basic and diluted earnings per share $0.14 $0.14 Weighted average number of shares 474,375 474,375 outstanding The Company's 1999 business plan includes opening 94 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 approximately 8.5% in 1999. As of June 19, 1999, the Company had opened 53 new stores, closed 13 stores (of which 12 were relocations), and completed renovations of 52 existing stores. Gross profits of 22.96% for the second quarter and 22.91% year to date (or 22.78% and 22.59%, respectively, adjusted to the original method of reporting sales tax) compared favorably against prior year gross profits of 22.38% of sales in the second quarter and 22.15% of sales year to date. The increase in gross profit is due to continued category management initiatives particularly in the perishable and non-grocery categories. In addition, the Company benefited from continued efficient warehouse operations which led to lower operating costs. The second quarter LIFO charge was $1 million. The Company's internal testing for the second quarter indicated minimal inflation; however, given the difficulty in predicting inflationary trends, the Company has provided a $2.4 million LIFO provision through the second quarter of 1999. -10- For the second quarter of 1999, selling and administrative expenses were $440.5 million or 17.56% of sales (17.42% adjusted for the original method of reporting sales tax) as compared to $406.6 million or 17.28% of sales in the corresponding period of the prior year. Excluding the one-time charge of $3.3 million (pre tax) related to the executive post-employment benefits (see discussion below), selling and administrative expenses would have been 17.43% of sales for the second quarter (17.30% adjusted for the original method of reporting sales tax). The Company posted an improvement in selling and administrative expenses on a comparable basis despite continued increases in labor related costs due to the low unemployment rate in the Southeast market, and an increase in occupancy costs resulting from the Company's new store opening and renovation program. This improvement was accomplished through strong sales posted during the quarter and good cost control across all remaining expense categories. During the second quarter, the Company recorded a $3.3 million pre- tax charge ($2 million after-tax) related to executive post-employment benefits. These benefits relate to the resignation of the Company's former Senior Vice President of Merchandising and finalization of amounts due upon retirement of the Company's former President and Chief Executive Officer ("CEO"). These costs are included in selling and administrative expenses. Interest expense of $25.4 million for the second quarter of 1999 and $49.7 million year to date compares to $23.2 million and $50.8 million for the respective periods of 1998 due to higher interest expense on store capital leases. Net income for the quarter was $68.4 million or 2.72% of sales as compared to $60.0 million or 2.55% of sales in the second quarter of the prior year. Basic and diluted earnings per share were $0.14 for the second quarter of 1999 compared to $0.13 last year. Excluding the one-time after-tax charge related to post-employment benefits of $2.0 million (see discussion above), net income for the second quarter of 1999 would have been $70.4 million or 2.80% of sales, and basic and diluted earnings per share would have been $0.15. Store Closing Costs (Dollars in millions) Reduction of Asset Lease Accrued Values Liabilities Expenses Total Balance at March 27, 1999 $15.4 $110.5 $1.2 $127.1 Additions .6 3.8 1.6 6.0 Reductions 0.0 -3.6 -2.7 -6.3 Balance at June 19, 1999 $16.0 $110.7 $.1 $126.8 -11- 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 second quarter of 1999. These costs are included in the "Additions" line in the table above. Significant additions also include $2.1 million related to 12 acquired stores that will not re-open as Food Lion locations. The costs associated with closing these stores were charged against Goodwill. Reductions include fees totaling $1.9 million related to the termination of three store leases. The remaining $4.4 million relates to on-going rent payments made on lease obligations and payment of expenses arising from contractual obligations. During the second quarter of 1999, the Company closed 8 stores in the normal course of business, all 8 stores were relocated. 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 1999, the Company completed disposition efforts related to 4 closed stores. At the end of the second quarter of 1999 the Company had $126.8 million in store closing costs related to 142 stores (137 leased and 5 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. Liquidity and Capital Resources Cash provided by operating activities totaled $270.9 million for the 24 weeks ended June 19, 1999, compared with $212.3 million for the same period last year. The increase was primarily due to an increase in operating income and improved receivable management. Capital expenditures totaled $186 million for the 24 weeks ended June 19, 1999, compared with $142 million for the same period in 1998. The Company opened 53 new stores, closed 13 stores (including 12 relocations), and completed the renovation of 52 existing stores through the end of the second quarter of 1999. Food Lion plans to open a total of 94 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. Capital expenditures currently estimated for 1999 are $390 million. Capital expenditures for 1999 will be financed through funds generated from operations and existing bank and credit lines. -12- The Company maintains the following bank and credit lines: $250.0 million commercial paper program under which no borrowings were outstanding during the first and second 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 the end of the second quarter of 1999 or 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. As of June 19, 1999, the outstanding borrowings from this line totaled $20 million. There were no outstanding borrowings as of June 20, 1998. During the second quarter of 1999, the Company had average borrowings of $8.04 million at a daily weighted average interest rate of 5.01% 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) 1999 1998 Outstanding borrowings at the end of the second quarter $42.0 $0.0 Average borrowings $26.8 $15.8 Maximum amount outstanding $105.0 $72.0 Daily weighted average interest rate 5.09% 5.62% During the second quarter of 1999, the Company repurchased $69.5 million of Company stock, representing approximately 4.4 million Class A shares and approximately 2.8 million Class B shares. In July 1999, the Board of Directors approved $100 million as the amount available for share repurchase going forward. 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. Year 2000 In 1996, the Company began evaluating both its information -13- 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. Installation of replacement systems impacted by Year 2000 issues is progressing with completion expected in fall, 1999. The Company 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, 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 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 -14- is related to the implementation of certain replacement systems. At the end of the second quarter of fiscal 1999, the Company had incurred approximately $11 million of the total cost of the Year 2000 project of which $3.1 million had been expensed as incurred and $7.9 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, 22 employees during Phase Two, and 19 employees during Phase Three 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 continues to communicate 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 substantial percentage of these critical suppliers have indicated they are Year 2000 compliant while the remaining suppliers 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 -15- 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 -16- 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. -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: August 17, 1999 BY:\s\ Laura Kendall Laura Kendall Vice President of Finance Chief Financial Officer Principal Accounting Officer -18- -----END PRIVACY-ENHANCED MESSAGE-----