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 14, 1997
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 18,1997.
Class A Common Stock 236,082,726
Class B Common Stock 232,727,364
Page 1 of 30
The Exhibit index is located on page 16.
FOOD LION, INC.
INDEX TO FORM 10-Q
June 14, 1997
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Income for the
12 and 24 weeks ended June 14, 1997 and
June 15, 1996 3-4
Consolidated Balance sheets as of June 14,
1997, December 28, 1996 and June 15, 1996 5
Consolidated Statements of Cash Flows for
the 12 and 24 weeks ended June 14, 1997
and June 15, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13-14
Holders
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FOOD LION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 12 Weeks ended June 14, 1997 and June 15, 1996
(Dollars in thousands except per share data)
June 14, 1997 June 15, 1996 June 14, 1997 June 15, 1996
% %
Net sales $2,324,719 $2,084,414 100.00 100.00
Cost of goods sold 1,817,872 1,640,768 78.20 78.72
Gross profit 506,847 443,646 21.80 21.28
Selling and administrative expenses 345,413 306,410 14.86 14.70
Depreciation and amortization 52,150 37,951 2.24 1.82
Asset impairment reserve - - 0.00 0.00
Operating income 109,284 99,285 4.70 4.76
Interest expense 27,761 19,639 1.19 0.94
Income before income taxes 81,523 79,646 3.51 3.82
Provision for income taxes 31,794 31,062 1.37 1.49
Net income $ 49,729 $ 48,584 2.14 2.33
Earnings per share $ 0.11 $ 0.10
Dividends per share $ 0.03 $ 0.03
Weighted average number
of shares outstanding:
Class A 236,087,308 235,689,846
Class B 232,760,697 234,617,072
Total 468,848,005 470,306,918
-3-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FOOD LION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 24 Weeks ended June 14, 1997 and June 15, 1996
(Dollars in thousands except per share data)
June 14, 1997 June 15, 1996 June 14, 1997 June 15, 1996
% %
Net sales $4,601,466 $4,108,867 100.00 100.00
Cost of goods sold 3,597,757 3,253,598 78.19 79.18
Gross profit 1,003,709 855,269 21.81 20.82
Selling and administrative expenses 692,254 585,398 15.04 14.26
Depreciation and amortization 100,847 74,970 2.19 1.82
Asset impairment reserve - 9,640 0.00 0.23
Operating income 210,608 185,261 4.58 4.51
Interest expense 54,446 38,643 1.18 0.94
Income before income taxes 156,162 146,618 3.40 3.57
Provision for income taxes 60,903 57,181 1.33 1.39
Net income $ 95,259 $ 89,437 2.07 2.18
Earnings per share $ 0.20 $ 0.19
Dividends per share $ 0.07 $ 0.06
Weighted average number
of shares outstanding:
Class A 236,141,377 236,446,163
Class B 232,831,531 235,276,093
Total 468,972,908 471,722,256
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FOOD LION, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 14, 1997 December 28, 1996 June 15, 1996
Assets
Current assets:
Cash and cash equivalents $ 26,638 $ 102,371 $ 75,690
Receivables 142,006 151,163 123,494
Inventories 974,953 1,065,743 871,203
Prepaid expenses and other 71,166 33,660 52,685
Deferred tax asset 75,807 75,807 50,018
Total current assets 1,290,570 1,428,744 1,173,090
Property, at cost, less accumulated
depreciation 1,835,458 1,772,503 1,529,074
Deferred tax asset 8,619 8,619 -
Intangible assets 274,117 278,726 9,864
Total assets $3,408,764 $3,488,592 $2,712,028
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable $ - $ 250,010 $ -
Accounts payable, trade 477,972 470,994 404,444
Accrued expenses 368,024 397,431 322,831
Capital lease obligations - current 20,872 21,970 16,667
Long term debt - current 905 973 -
Other liabilities - current 6,992 7,279 3,457
Income taxes payable - 5,578 ____ -
Total current liabilities 874,765 1,154,235 747,399
Long-term debt 633,905 495,111 315,300
Capital lease obligations 479,338 469,035 398,033
Deferred income taxes - - 44,120
Other liabilities 143,202 154,273 79,525
Total liabilities 2,131,210 2,272,654 1,584,377
Shareholders' Equity:
Class A non-voting common stock, $.50 par value 118,033 118,083 117,805
Class B voting common stock, $.50 par value 116,364 116,451 116,776
Additional capital 24 1,708 -
Retained earnings 1,043,133 979,696 893,070
Total shareholders' equity 1,277,554 1,215,938 1,127,651
Total liabilities and shareholders' equity $3,408,764 $3,488,592 $2,712,028
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FOOD LION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 24 Weeks ended June 14, 1997 and June 15, 1996
(Dollars in thousands)
24 Weeks
June 14,1997 June 15,1996
Cash flows from operating activities
Net income $95,259 $89,437
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 100,847 74,970
Loss (gain) on disposals of property 1,057 (463)
Asset impairment reserve - 9,640
Changes in operating assets and liabilities:
Receivables 9,157 4,501
Inventories 90,790 9,818
Prepaid expenses and other (37,506) (29,341)
Accounts payable and accrued expenses (22,429) 47,135
Income taxes payable (5,578) -
Other liabilities (11,358) 7,464
Total adjustments 124,980 123,724
Net cash provided by operating activities 220,239 213,161
Cash flows from investing activities
Capital expenditures (145,846) (102,936)
Proceeds from disposal of property 5,121 7,939
Net cash used in investing activities (140,725) (94,997)
Cash flows from financing activities
Net payments under short-term borrowings (250,010) -
Principal payments on long-term debt (161,274) (40,000)
Proceeds from issuance of long-term debt 300,000
Principal payments under capital lease obligations (10,320) (8,213)
Dividends paid (31,390) (26,238)
Repurchase of common stock (2,960) (38,599)
Proceeds from issuance of common stock 707 541
Net cash used in financing activities (155,247) (112,509)
Net (decrease)increase in cash and cash
equivalents (75,733) 5,655
Cash and cash equivalents at beginning
of period 102,371 70,035
Cash and cash equivalents at end of period $ 26,638 $75,690
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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 December 28, 1996 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:
Cash paid during the period for:
June 14, 1997 June 15, 1996
Interest (net of amounts
capitalized)* $ 50,302 $38,905
Income taxes 101,676 87,826
*Interest capitalized 835 623
Capital lease obligations for stores of $31,594 and $46,179
were incurred in the 24 week period of 1997 and 1996,
respectively. Capital lease retirements of $12,069 and $10,943
were recorded in the 24 week period of 1997 and 1996,
respectively.
The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to
be cash equivalents.
3) The Financial Accounting Standards Board has issued Statement No.128
"Earnings Per Share," effective for financial statements
issued for periods ending after December 15, 1997. FAS No. 128 will be
implemented in the Company's 10K for the year ended January 3, 1998.
The Company does not expect that FAS No. 128 will have a material impact
on the earnings per share computation.
-7-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS (12 and 24 weeks ended June 14, 1997 compared to 12 and
24 weeks ended June 15, 1996)
The Company's sales for the second quarter and year-to-date 1997 were $2.3
billion and $4.6 billion, respectively, resulting in increases of 11.5% and
12.0% over the corresponding period in 1996. These increases are primarily the
result of additional sales from the Company's Kash n'Karry Food Stores, Inc.
("Kash n' Karry") subsidiary, which Food Lion acquired in December 1996. The
second quarter and year to date same store sales declines of 0.2% and 0.1%,
respectively, were influenced by the following:
The Company is cycling many of the initiatives started in late 1995 and
early 1996, which increased sales during 1996. Food Lion will not experience
the same increase in sales from these initatives in 1997. These initiatives
included the conversion to 24-hour store operations, expansion of the MVP
program(Food Lion's customer loyalty card program), new deli/bakery
operations, and acceptance of debit and credit card transactions in all
stores.
The grocery industry in general has experienced slow growth in the last
several months.
Competitive initiatives by other supermarkets in Food Lion's major markets
have increased with the introduction of customer loyalty cards and heavy
advertising and promotional activity.
The Company's Southwest market is generating positive cash flow but is
not achieving the Company's standards for financial performance. The Company
continues to monitor sales and profits in the Southwest market and to evaluate
the performance of all corporate assets, including those in the Southwest.
The Company anticipates that it will open 62 new stores, close or relocate
approximately 41 stores, and renovate approximately 100 stores in 1997. At June
14, 1997, the Company had opened 19 new stores, closed 31 stores (of which eight
were relocations), and completed renovations of 33 existing stores.
Gross profits of 21.80% of sales for the second quarter and 21.81% year to date
increased 0.52% of sales and 0.99% of sales,respectively. The increase in gross
profit is primarily due to continued category management initiatives
particularly in the grocery and perishable departments and an increase in
private label sales. Gross profit increased by 0.24% for the quarter and 0.18%
year to date due to higher margins provided from the fresh and sevice
departments offered in the
Kash n' Karry stores.
-8-
For the second quarter of 1997, selling and administrative expenses were $345.4
million or 14.86% of sales as compared to 14.70% of sales in second quarter of
1996. Year to date, selling and administrative expenses were $692.3 million or
15.04% of sales as compared to 14.26% of sales for the same period last year.
Kash n' Karry operations increased the Company's selling and administrative
expenses by 0.7% and 0.8% of sales for the quarter and year to date,
respectively. Kash n' Karry stores incur a higher level of selling and
administrative expenses than Food Lion stores due to their larger square footage
store format and emphasis on specialty service departments.
Selling and administrative expenses for the Food Lion stores were 14.16% of
sales for the second quarter of 1997, representing an improvement over expense
levels experienced in the previous four quarters, as a result of continued cost
containment, despite a soft sales environment.
Because of the consolidation of Kash n' Karry stores, the Company anticipates
that the selling, general and administrative ("SGA")ratio will continue to
exceed historical levels for some time. As the Company implements cost saving
strategies within the Kash n' Karry operation and consolidates the
administrative functions of the two entities, the Company should experience a
downward trend in the SGA ratio.
Depreciation and amortization was $52.2 million or 2.24% of sales compared to
1.82% of sales in the second quarter of 1996. Year to date depreciation and
amortization was $100.8 million or 2.19% of sales compared to 1.82% of sales
year to date 1996. The quarter and year to date increases of 0.42% and 0.37% of
sales, respectively, are primarily due to leasehold improvements and equipment
purchases for new stores and renovations since the second quarter last year.
Amortization of the goodwill from the Kash n' Karry acquisition also increased
amortization expense in 1997.
During the first quarter of 1996 Food Lion adopted Financial Accounting
Standards Board Statement no. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS no. 121). The
implementation of FAS no. 121 created a non-cash charge against first quarter
1996 pre-tax net income of $9.6 million to
reflect the carrying value of the Company's assets, using a discounted cash flow
valuation method. As of second quarter this year, no adjustment under FAS No.
121 has been required.
Interest expense of $27.8 million for the second quarter of 1997 and $54.4
million year to date increased $8.1 million and $15.8 million, respectively,
compared to the same periods of 1996. As a percent of sales, the second quarter
increase of 0.25% of sales and the year to date increase of 0.24% of sales is
due to borrowings incurred to fund the Kash n' Karry transaction, and an
increase in interest expense on store capital leases resulting from new store
openings and renovations.
-9-
During the second quarter of 1997, the Company replaced short-term borrowings
with $300 million in debt securities - $150 million at an interest rate of 7.55%
due in 2007 and $150 million at an interest rate of 8.05% due in 2027.
Net income for the quarter was $49.7 million or 2.14% of sales as compared to
2.33% of sales in the second quarter of 1996. Earnings in the second quarter
were $.11 per share as compared to $.10 per share in the second quarter last
year.
Liquidity and Capital Resources
Cash provided by operating activities totaled $220.2 million for the 24 weeks
ended June 14, 1997 compared with $213.2 million for the same period last year.
The increase was primarily due to lower inventory levels, which were partially
offset by a decrease in trade payables.
Capital expenditures totaled $145.8 million for the 24 weeks ended June 14, 1997
compared with $102.9 million for the same period in 1996. During the second
quarter of 1997, the Company opened ten new stores, including the relocation of
five existing stores, and completed the renovation of 20 existing stores. Food
Lion plans to open a total of 62 new stores and to renovate approximately 100
stores in 1997. The Company anticipates that the majority of new stores will be
opened under conventional leasing arrangements.
Significant cash capital expenditures currently estimated for the remainder of
1997 are $167 million to be applied to store renovations and expansions, new
store construction, distribution equipment, information technology and other
capital expenditures.
In addition, the Company anticipates spending $150 million in capital
expenditures over the next two to three years for renovations in Kash n' Karry
stores.
Capital expenditures for 1997 will be financed through funds generated from
operations, existing bank and credit lines, and other debt, if necessary.
On April 21, 1997, the Company issued $150 million in debt securities at an
interest rate of 7.55% due in 2007 and $150 million in debt securities at an
interest rate of 8.05% due in 2027. Interest on the notes is payable
semiannually in arrears on April 15 and October 15 of each year, commencing on
October 15, 1997. Proceeds from the issuance were used to refinance amounts
outstanding under the Company's revolving credit facility, as noted below.
The Company maintains the following bank and credit lines:
$250 million commercial paper program under which no borrowings were
outstanding during the entire second quarter of 1997 or 1996.
-10-
A revolving credit facility with a syndicate of commercial banks providing
$700 million in committed lines of credit, of which $350 million will expire in
December, 1997 with the remaining $350 million to expire in December, 2001.
There were no borrowings outstanding at the end of the second quarter of 1997 or
1996. During the second quarter 1997, the Company had average borrowings of
$104.2 million at a daily weighted average interest rate of 5.51% with a maximum
amount outstanding of $300 million. Borrowings against this facility were used
to fund the Kash n'Karry acquisition initially until long-term financing (see
above discussion) was finalized in April 1997.
Additional short-term committed lines of credit totaling $35 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 June 14, 1997 or June 15, 1996.
During the second quarter of 1997, the Company had average borrowings of $10.9
million at a daily weighted average interest rate of 5.70% with a maximum amount
outstanding of $35 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 (see following
table):
Informal Credit Arrangements:
(dollars in millions) 1997 1996
Outstanding borrowings at end of second quarter $ 0 $0
Average borrowings $13.4 $5.3
Maximum amount outstanding $55.0 $25.0
Daily weighted average interest rate 5.72% 5.45%
During the second quarter of 1997, Food Lion expended $2.1 million for the
purchase of the Company's Class A and Class B shares, as part of the Company's
stock repurchase plan. The Company purchased 125,000 shares of Class A stock
during the quarter at an average price of $6.81 per share and 175,000 shares of
Class B stock at an average price of $7.06 per share. Additional purchases of
Class A and Class B Common Stock may be made in the open market under the
current program which began in May of 1997, as deemed in the best interest of
shareholders. The Board of Directors has approved the repurchase of up to $100
million worth of Class A and/or Class B common stock under the current program,
which expires in May of 1998.
The Company established a pre-tax charge against 1993 earnings of $170.5 million
(approximately $104 million after tax) to cover management's estimate of the
costs associated with the closing of 88 unprofitable store locations. As of the
end of second quarter 1997, the Company has charged $88.0 million against the
reserve, primarily as
-11-
a result of the payment of remaining rent obligations on leased stores and the
disposition of property. The Company believes the remaining reserve is adequate
to cover the costs associated with the disposition of the remaining properties.
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 using 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 on Forms 10-Q, 10-K and 8-K.
Important assumptions and other 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, 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, and uncertainties detailed from time to time in the Company's filings
with the Securities and Exchange Commission.
-12-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has had no significant developments related
to legal matters since the Item 1 disclosure included in the
Company's Form 10Q filed May 2,1997 for the quarter ended March 22,
1997.
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
(a). The Company held its annual Meeting of Shareholders on May 1,
1997.
(b). Not applicable
(c). Matters voted upon at the meeting:
Election of Directors
Broker
For Withheld Non-Votes
Pierre-Olivier Beckers 199,580,788 4,010,144 29,311,432
Dr. J. Kelly Collamore 199,606,559 3,984,373 29,311,432
JC Coppieters `T Wallant 199,587,707 4,003,225 29,311,432
William G. Ferguson 199,554,946 4,035,986 29,311,432
Dr. Bernard W. Franklin 199,527,196 4,063,736 29,311,432
Joseph C. Hall, Jr. 198,009,860 5,581,072 29,311,432
Margaret H. Kluttz 199,524,909 4,066,023 29,311,432
Tom E. Smith 199,485,176 4,105,756 29,311,432
Philippe Stroobant 199,616,370 3,974,562 29,311,432
Gue De Vaucleroy 199,582,055 4,008,877 29,311,432
-13-
Appointment of Independent Accountants
Broker
For Against Abstain Non-Votes
Coopers & Lybrand, L.L.P. 203,201,592 156,381 232,959 29,311,432
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10(a) License Agreement
11 Computation of Earnings per Share
27 Financial Data Schedule
(b). The Company filed a report on Form 8-K pursuant to Item 5 on
April 7,1997 in regard to "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
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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 July 25,1997 BY: Laura Kendall
Laura Kendall
Vice President of Finance
Chief Financial Officer
Principal Financial Officer
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EXHIBIT INDEX
SEQ. PAGE
EXHIBIT # DESCRIPTION No.
10(a) License Agreement 17-27
11 Computation of Earnings per Share 28
27 Financial Data Schedule 29-30
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