ITEM 1. BUSINESS
(a) General Development of Business
Giant Food Inc. (sometimes herein called "Giant" or the "Company") was incorporated in Delaware in 1935. The Company, together with its subsidiaries (Giant of Maryland, Inc.; Giant of Salisbury, Inc.; Cole Engineering, Inc.; Warex-Jessup, Inc.; Giant Construction Company, Inc.; LECO, Inc.; Bursil, Inc.; GFS Realty, Inc.; GF McLean Shopping Center, Inc.; Giant Automatic Money Systems, Inc.; Super G, Inc.; Montrose Crossing, Inc.; Friendship Macomb SC, Inc.; Bayside Traffic Services of Maryland, Inc; Giant of Talbot Co., Inc.; Giant of Cherry Hill, Inc.; Giant of Friendship, Inc.; and Shaw Community Supermarket, Inc. [85% owned]) and one affiliate company (Maryland Concession and Vending Company), operate a chain of 179 stores selling, at retail, food, drugs, and general merchandise in Washington, D.C., Maryland, Virginia, Delaware, New Jersey, and Pennsylvania. Of the Company's 179 stores, 112 are in the Washington, D.C. Metropolitan Area, including surrounding counties of Maryland and Virginia, 43 are in or near Baltimore, Maryland, and others are in Fredericksburg, Charlottesville and Warrenton, Virginia; Easton, Salisbury, Frederick, Prince Frederick, Eldersburg and Westminster, Maryland; Delaware, New Jersey and Pennsylvania.
(b) Financial Information About Industry Segments
There is no financial information reported on industry segments and lines of business apart from Giant's principal business of operating supermarkets to sell, at retail, food, drugs, and general merchandise. Inasmuch as Giant did not engage in any line of business which during either of its last three fiscal years accounted for 10% or more of total sales and revenues, or 10% or more of income before taxes and extraordinary items computed without deduction of loss resulting from operations of any line of business, or a loss which equaled or exceeded 10% of such income, no segment reporting is required. During each of the last three fiscal years, Giant's retail sales provided in excess of 90% of its total sales and earnings. Refer to Management Discussion and Analysis of New Accounting Standards for information regarding future disclosures about industry segments.
(c) Narrative Description of Business
The majority of the Company's stores are located in shopping centers, with the average food and food/pharmacy combination unit generating an annual sales volume of approximately $23,600,000. The Company also operates freestanding drug stores in Bethesda, and Salisbury, Maryland and Arlington, Virginia. During the next fiscal year, the Company plans to open two food-drug stores and begin construction on four food- drug stores that will open in the following year. Additionally, five supermarkets will be expanded and fifteen supermarkets will be remodeled during the upcoming fiscal year.
Giant supermarkets are all self-service and offer a full line of nationally advertised groceries, meat, produce, dairy products, seafood, tobacco, flowers, prepared foods, and household and non-food items. Giant also sells beer and wine where permitted. In addition, Giant sells groceries, frozen foods, bakery products, and dairy products under its own private labels. Unbranded items such as meats and produce are also sold in Giant's supermarkets. For each of the fiscal years ended in February 1998, 1997, and 1996, respectively, the Company's sales were divided, as follows: meat, delicatessen, dairy, and seafood, 22%; grocery and non-food, 68%, and fresh produce, 10%.
Giant operates a full line service delicatessen in 172 stores. Most of the bakery items such as bread, rolls, cakes, pies, and pastries, marketed under the names of "Super G" and "Giant" are made in a 250,000 square-foot Company bakery locate in Silver Spring, Maryland. The Company operates three distribution centers of approximately 1.25 million combined square feet in Landover, Maryland, one mile from the District of Columbia line. The main center also houses the Company's executive offices, dairy processing plant, flower warehouse, ice cube production plant, and a salvage building. The Company owns an executive office building of about 180,000 square feet together with a 750-car parking garage. Giant also owns a 760,000 square-foot dry grocery warehouse located in Jessup, Maryland (including a 20,408 square-foot soft drink bottling plant within that warehouse). Giant also leases a 138,000 square- foot frozen food distribution center and a 60,000 square-foot ice cream manufacturing facility at the Jessup location.
(i) Giant produces for sale in its supermarkets bakery goods and dairy products, ice cream, soft drinks and ice cubes. These items are manufactured by its Bakery, Dairy, Ice Cream Plant, Soft Drink Bottling Plant and Ice Plant. Giant also provides services such as check-cashing, issuance of money orders, photographic film developing, rental of home-care appliances, some catering, and cooperates in such community-related projects as the sponsoring of "It's Academic," "Apples for the Students" and other projects and activities related to community improvement.
Additionally, the Company warehouses and distributes to its own stores flowers and gifts, snacks and magazines, and pharmaceuticals. The Company also has an in-house advertising agency, a trucking brokerage operation, a vending-machine business, an import-export division and also owns or is the controlling general partner of twenty-one shopping centers and five freestanding stores. Revenue from the Company's construction division from outside construction is not material. Transfer sales from the above activities and from its manufacturing and processing operations in support of its retail operations were eliminated in the consolidation of the Company's financial statements.
(ii) Giant has made no public announcement of any new product or industry segment which is material or would require the investment of a material amount of its assets.
(iii) Raw materials for Giant's manufacturing and
processing operations are readily available.
(iv) Giant owns approximately 38 trademarks and service marks registered by it in the U.S. Patent and Trademark Office. Those which were issued before November 16, 1989 have a term of twenty years and those registered after November 16, 1989 have a term of ten years. Each of Giant's registrations may be renewed for successive terms of ten years so long as each mark is in use. Giant does not own any patents which are of material importance to its operations. Giant uses its trademarks to identify and promote its more than 1,500 private label products. Giant uses its service marks to identify and distinguish its high quality supermarket and pharmacy services from those of its competitors. These registrations afford Giant the legal right to use the marks nationwide.
(v) Giant's sales volume is not materially affected by seasonality.
(vi) The Company generates sufficient cash from operations to meet its working capital requirements. The Company does not anticipate any changes in its working capital requirements during the next fiscal year.
(vii) Giant's business is not dependent upon a single or a few customers. Giant does not sell to any single customer or affiliated group of customers goods or services in an amount which equals 10% or more of its consolidated sales.
(viii) Giant's business is such that backlog ordering is not done.
(ix) None of Giant's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
(x) The retail food business is highly competitive, and in the area in which Giant operates, some of the country's leading chains are represented and compete vigorously with the Company, both in price and in service. On the basis of figures published in the April 27, 1998, edition of Fortune magazine, the Company is ranked twelfth in gross revenues among retail grocery chains in the United States. Competition from the other chains, independent grocery store operators and restaurants and competition which exists with respect to particular products or groups of products may adversely affect the Company's profit margins in ensuing years.
(xi) Giant did not spend any material amount on Company-sponsored research and development activities. In addition, Giant did not spend during any of the last five fiscal years any material amount on customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques.
(xii) Giant's compliance with federal, state, and local
laws which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had and is not expected to have any material effect upon its capital expenditures, its earnings, or its competitive position.
(xiii) At the end of Fiscal Year 1998, Giant had approximately 28,000 full-time and part-time associates. Approximately 25,200 or 90% are represented under collective bargaining agreements.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The amount of foreign sales and export sales done by Giant is not material and is therefore not reported.
(e) Recent Developments
On May 19, 1998, The 1224 Corporation ("1224") and Koninklijke Ahold N.V., a corporation organized under the laws of the Netherlands ("Ahold"), entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") which provides that Ahold will purchase from 1224 all of its Class AC Shares at a price of $43.00 per share, net to the seller in cash, and that Ahold will make a tender offer for all the issued and outstanding Class A Shares at a price per share equal to the per share price to be paid to 1224 for the Class AC Shares (the "Tender Offer"). If Ahold or any of its affiliates acquires or enters into a binding agreement to acquire all of the Class AL Shares before the expiration date of the Tender Offer, the offer price will be increased to $43.50 per share. The Certificate of Incorporation of 1224 provides that the Class AC Shares owned by it can only be sold as part of a transaction pursuant to which the holders of Class A Shares are afforded the opportunity to participate in such sale on equal terms with 1224. The Stock Purchase Agreement provides that Ahold may purchase the Class AC Shares from 1224 only if it purchases the Class A Shares tendered pursuant to the Tender Offer. Ahold's obligation to purchase the Class AC Shares that are tendered is subject to a number of conditions, including the tender pursuant to the Tender Offer of at least 65% of the Class A Shares outstanding on a fully diluted basis.
In February, 1996, the Board of Directors of the Company appointed a Strategic Planning Committee to consider the effect on the Company and the holders of the Class A Shares of any proposed sale of the Class AC Shares (the "Special Committee"). The Special Committee consists of three directors who were elected by 1224 but who are not officers or directors of 1224 or officers of the Company. The Special Committee has unanimously determined that the Tender Offer is fair to, and in the best interests of, the Company and the holders of the Class A Shares and unanimously recommended to the Board of Directors of the Company that the Board recommend that the holders of the Class A Shares accept the Tender Offer and tender their Class A Shares pursuant to the Tender Offer. As of the date hereof, the full Board of Directors has not taken a position with respect to the Tender offer. The five directors of the Company elected by 1224 have advised the Company that they intend to vote to recommend that the holders of the Class A Shares accept the Tender Offer and tender their Class A Shares pursuant to the Tender Offer.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates 179 stores of which 140 are food-drug combination units, 36 are food stores and three are freestanding drug stores. There are 112 stores located in the Washington, D.C. Metropolitan Area; 43 stores located in or near Baltimore, Maryland; and other stores located in Fredericksburg, Charlottesville, and Warrenton in the state of Virginia; Frederick, Prince Frederick, Easton, Salisbury, Eldersburg, and Westminster in the state of Maryland; as well as stores located in Delaware, New Jersey, and Pennsylvania.
Ten of the Company's supermarkets are between fifteen to twenty thousand square feet; twenty-five are between twenty to thirty thousand square feet; fourteen are between thirty to forty thousand square feet; fifty-five are between forty to fifty thousand square feet; forty- four are between fifty and sixty thousand square feet, and thirty-one are over sixty thousand square feet.
The Company owns and operates three distribution centers of approximately 1.25 million combined square feet in Landover, Maryland. The main center also houses the Company's executive offices (including an executive office building of approximately 180,000 square feet), its dairy processing plant, a flower warehouse, and an ice cube production plant. A dry grocery warehouse, containing approximately 760,000 square feet, is located in Jessup, Maryland. Also located at the Jessup complex is a 138,000 square-foot frozen food distribution center and a 60,000 square- foot ice cream manufacturing facility. The Landover complex and the Jessup complex each contain approximately 85 acres. The Company's bakery is located in Silver Spring, Maryland, in a Company-owned building containing 250,000 square feet.
The Company, through its wholly-owned subsidiary, GFS Realty, Inc., also owns or is the controlling general partner of twenty-one shopping centers and five freestanding combination food/drug stores. The shopping centers are located at:
8320 Old Keene Mill Road, Springfield, Virginia 6223 Baltimore National Pike, Baltimore, Maryland 7137 Columbia Pike, Annandale, Virginia 1228 Elden Street, Herndon, Virginia 46 Bureau Drive, Gaithersburg, Maryland 7546 Annapolis Road, Lanham, Maryland 12445 Hedges Run Road, Lakeridge, Virginia 3501 Plank Road, Fredericksburg, Virginia 15791 Columbia Pike, Burtonsville, Maryland 20044 Goshen Road, Gaithersburg, Maryland 7501 Huntsman Blvd., Springfield, Virginia 1454 Chain Bridge Road, McLean, Virginia 12051 Rockville Pike, Rockville, Maryland 3336 Wisconsin Avenue, N.W., Washington, D.C. 5700 South-East Crain Highway, Upper Marlboro, Maryland 20961 Southbank Street, Sterling, Virginia 10100 Dumfries Road, Manassas, Virginia 382 Egg Harbor Road, Turnersville, New Jersey 20944 Frederick Road, Germantown, Maryland 1925 East Joppa Road, Baltimore, Maryland 200 W. Swedesford Road, Devon, Pennsylvania (under construction)
The freestanding combination food/drug stores are located at: 3757 Old Court Road, Pikesville, Maryland 1734 York Road, Lutherville, Maryland 400 East Evesham Road, Cherry Hill, New Jersey 542 Berlin-Cross Keys Road, Winslow Township, New Jersey 110 Stemmers Run Road, Essex, Maryland
Also, through GFS Realty, Inc., the Company is a limited partner of one shopping center being managed by an outside general partner. This shopping center is located at:
6050 Daybreak Circle, Clarksville, Maryland
In addition, through long-term leases, GFS Realty, Inc., operates and manages ten shopping centers and one freestanding food/drug store. These are located at:
8750 Arliss Street, Silver Spring, Maryland 948 Bay Ridge Road, Annapolis, Maryland 5730 Edsall Road, Alexandria, Virginia 13600 Laurel Bowie Road, Laurel, Maryland 9580 Livingston Road, Ft. Washington, Maryland 8819 Centreville Road, Manassas, Virginia 1131 Merritt Boulevard, Dundalk, Maryland 17821 Georgia Avenue, Olney, Maryland 7200 Cradlerock Way, Columbia, Maryland 2401 Wooton Parkway, Rockville, Maryland
The freestanding combination food/drug store is located at:
3130 Solomons Island Road, Edgewater, Maryland
In each shopping center, the Company is the largest tenant occupying approximately 25% to 90% of the space.
The table below sets forth certain information with respect to changes in the number of the Company's supermarkets (including combination food/pharmacy stores and freestanding drug stores) during the past five years:
Number at Number at Fiscal Year Beginning of Year Opened Closed End of Year
February 26, 1994 158 4 2 160 February 25, 1995 160 4 0 164 February 24, 1996 164 7 2 169 February 22, 1997 169 8 3 174 February 28, 1998 174 11 6 179
With the exception of the bakery, the twenty-one shopping centers and the five freestanding combination food/drug stores noted above, the distribution centers at Landover and the dry grocery warehouse at Jessup, all the properties occupied by the Company are held under leases which provide for minimum rentals and, in some cases, additional rentals based on percentages of sales.
At February 28, 1998, the Company had entered into leases covering stores, warehouses, and equipment on which the minimum annual rentals for the succeeding years are as follows:
Minimum Annual Rentals (In Thousands)
Year Capital Leases Operating Leases
1999 22,675 36,966 2000 22,500 35,968 2001 22,394 34,531 2002 22,223 33,726 2003 21,738 33,233 Later Years 284,366 527,295
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings that have arisen in the ordinary course of business. Currently, there are claims alleging acts of employment discrimination. Management, after consulting with legal counsel, is of the opinion that the outcome of such matters will not have a material impact on the consolidated financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Principal markets on which Giant's Class A Common Stock is traded: American, Philadelphia and Pacific Stock Exchanges.
The table below presents the high and low market prices for Giant's Class A Common shares.
Common Stock Price Range
Fiscal 1998 Fiscal 1997
Quarter Ended High Low Quarter Ended High Low
May 17 $33.75 $31.00 May 18 $33.50 $30.38 Aug 9 33.94 32.19 Aug. 10 36.13 33.13 Nov 1 33.94 28.38 Nov. 2 35.50 32.38 Feb 28 36.63 30.13 Feb. 22 36.13 31.88
The last sale price of Giant's Class A Common (Non-Voting) shares on the American Stock Exchange on May 1, 1998 (the latest most practicable date) was $37.375.
(b) Holders
The approximate number of holders of record for Giant's Class A Non-Voting Stock as of May 1, 1998: 23,403 (includes street name shareholders).
The number of holders of record for Giant's Class AL Voting Stock as of May 1, 1998: 1.
The number of holders of record for Giant's Class AC Voting Stock as of May 1, 1998: 1.
(c) Dividends
The table below presents dividend information for Giant's Common shares.
Dividends Declared Per Share of Common Stock Fiscal 1998 Fiscal 1997
April $.195 April $.19
July .195 July .19
October .195 October .19
January .195 January .19
$.78 $.76
The Promissory Note Purchase Agreement with The Prudential Insurance Company of America (see Note 4 to the Consolidated Financial Statements, page 32) includes certain restrictive covenants which, among other things, prohibit the Company from paying dividends after February 22, 1986, aggregating more than 50 percent of its cumulative "consolidated net earnings" (as defined in the Agreement), less the aggregate of dividends paid and less the net amount expended to repurchase or redeem any of its capital stock after February 22, 1986. At February 28, 1998, the specified levels were $90,553,000 in excess of such aggregate amounts of dividends and distributions. The Company anticipates the continuation of its current policies of paying dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended (1), (2), (3), (4)
1998 1997 1996 1995 1994
Sales $4,230,640 $3,880,959 $3,860,579 $3,695,627 $3,567,468
Net Income 71,190 85,504 102,153 94,161 95,231(*)
Earnings per share Basic $1.19 $1.43 $1.72 $1.59 $1.60(*) Diluted $1.18 $1.42 $1.71 $1.58 $1.59
Total assets $1,521,882 $1,503,525 $1,447,139 $1,416,710 $1,357,813
Long-term debt, net of current portion: Notes and mortgages 27,134 39,039 45,959 57,805 86,068
Obligations under capital leases 156,041 144,953 142,863 140,946 141,062
Total long-term debt 183,175 183,992 188,822 198,751 227,130
Cash dividends declared per Common share $0.78 $0.76 $0.74 $0.72 $0.70
(1) Year ends last Saturday in February. (2) Thousands of dollars except per-share figures. (3) Fiscal 1997 results include an adverse impact from a five- week labor dispute. See Management's Discussion and Analysis of Financial Condition and Results of Operation. (4) Fiscal 1998 was a 53 week year. (*) Reflects impact of change in accounting for income taxes. Change equaled $3.9 million of income, equal to 7 cents per share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company operates a chain of retail supermarkets under the name "Giant" in the Washington, D.C. and Baltimore metropolitan areas and in other areas of Maryland and Virginia and under the name "Super G" in Delaware, Pennsylvania, and New Jersey. The Company produces bakery goods, dairy products, ice cream, soft drinks, and ice cubes for sale in its supermarkets. The Company also has extensive warehousing and distribution facilities to support its operations.
The Company opened eleven food-drug combination stores during the 1998 fiscal year, including four additional Super G stores in Pennsylvania. Two of the new stores replaced older units in the Washington, DC area, resulting in an increase of an average of 21,600 square feet in the specific market area. The Company also closed a 21,750 square foot food store in Washington, D.C., a 24,000 square foot food store in Oxon Hill, Maryland, a 20,511 square foot food store in Columbia, Maryland and a 24,000 square foot food store in Baltimore, Maryland. The net effect of these changes was to increase the Company's total retail footage by 493,000 square feet to 8.1 million, an increase of 6.5% over the prior year. At the end of the fiscal year, the Company operated 179 stores of which 140 are food-drug combination units, 36 are food stores, and three are freestanding drug stores.
RESULTS OF OPERATIONS
The Company's earnings for fiscal 1998 were $71.2 million or $1.19 per share (basic), as compared with earnings of $85.5 million or $1.43 per share (basic)in the 1997 fiscal year. Earnings for fiscal 1996 were $102.2 million or $1.72 per share (basic). Earnings were 1.68% of sales in the 1998 fiscal year, 2.20% of sales in the prior year and 2.65% in fiscal 1996. Earnings patterns were markedly different in the first three quarters of fiscal 1998 as compared to the fourth quarter. For the first three quarters, earnings were $34.8 million or $.59 per share (basic), as compared to total earnings of $67.8 million or $1.14 per share (basic) for the corresponding periods in fiscal 1997. For the fourth quarter, earnings including a non-recurring pre-tax gain of $24 million were $36.4 million or $0.60 per share (basic), as compared to total earnings of $17.7 million and per share (basic) earnings of $0.29 in the corresponding period in fiscal 1997.
Sales for the 1998 fiscal year were $4.23 billion compared to sales of $3.88 billion in the prior year. The current year contained 53 weeks compared to 52 weeks in the prior year. Same store sales, adjusted for same number of weeks, for the 1998 fiscal year were up $129 million or 3.34% as compared to fiscal 1997, reflecting a significant increase during the fourth quarter both in total sales and in same store sales as compared to the fourth quarter of fiscal 1997. Sales results for the first three quarters of fiscal 1998 totaled $2.81 billion, which represented an increase of $140.6 million, or 5.3%, over the same period
in fiscal 1997. Same store sales during the first three quarters increased 1.75%. Significant factors in this growth in sales were promotional activities that the Company undertook during the fiscal year to increase customers and number of items sold. The number of items sold increased by 7.1% during this period.
The Company's fourth quarter sales for the 1998 fiscal year totaled $1,423 million, which represented an increase of $209 million, or 17.2% over the same period in fiscal 1997. Same store and same number of weeks sales during the fourth quarter of 1998 increased 6.9% as compared to fiscal 1997. These increases in the fourth quarter sales were attributable to the prior year having reduced sales because of a five- week strike by the Company's truck drivers.
Sales for the 1997 fiscal year were $3.88 billion, representing an increase of $20.4 million or .5%, over sales of $3.86 billion for the 1996 fiscal year. Same store sales for the 1997 fiscal year decreased 2.4% over fiscal 1996. This decrease was principally the result of the five week strike in the fourth quarter of fiscal year 1997.
The cost of sales for fiscal 1998 was 71.95% as compared to 70.46% for fiscal 1997, and 70.14% for fiscal year 1996. The increase in cost of sales as a percentage of sales in fiscal 1998 was attributable to both the greater promotional activity during the fiscal year and the cost incurred in the fourth quarter for preparation of a potential work stoppage at the Company's distribution centers in November 1997. The cost of sales for the fourth quarter of fiscal 1998 was 72.06% compared to 72.26% in the fourth quarter of fiscal 1997. The slight decrease in cost of sales in the fourth quarter was caused by the prior year containing the effect of the five week strike and the current year containing increased costs attributable to the contracting of outside sources to supply the stores in the case of a potential break in service at the expiration of the warehouse workers' contract.
The Company uses the LIFO method for its nonperishable inventory. During the last three years, the Company has experienced low to moderate inflation as it relates to these inventories. This year's LIFO charge of $3.2 million compares with charges of $4.3 million and $4.7 million for the two prior fiscal years. As a percentage of sales, the LIFO charges were .08% in 1998, .11% in 1997, and .12% in 1996.
For many years, the Company has sought to improve its operating results by engaging in various activities which are used in support of its retail operations. The Company maintains manufacturing and processing activities in bakery, dairy, ice cream, beverage and ice cube operations. Other areas maintained in support of the retail stores are wholesaling activities including produce, pharmaceutical, snacks, magazine and vending operations. The Company has also developed support activities in the area of real estate operations through its GFS Realty subsidiary, which currently owns or manages thirty-eight properties which include shopping centers and free-standing stores. Transfer sales from manufacturing, processing and wholesaling activities were eliminated in the consolidated financial statements.
Selling, general, and administrative expenses decreased to 25.05% of sales in fiscal 1998 compared to 25.75% in fiscal 1997 and 25.33% in fiscal 1996. This year's decrease was principally caused by a non- recurring gain of $23.7 million as a reduction of overall employee benefit costs. Management is instituting various cost containment programs to achieve a lower selling, general and administrative expense, as a percent of sales, in the future. During the current year expenses relating to development and implementation of these programs were incurred. The current year contains an increase in general and administrative expenses including occupancy costs related to new stores. The effect of the increases in occupancy costs will be reduced as the planned new stores reach projected sales levels.
There was an increase in fiscal year 1998 net interest expense, $9.8 million compared to $6.8 million in the prior year. This was principally the result of lower interest income due to lower invested cash balances throughout the year.
Income before income taxes was $117.2 million for fiscal 1998, representing 2.77% of sales, compared to $140.5 million, representing 3.62% of sales in the prior year. The decrease of 16.6% in income before taxes resulted from the increased promotional activity relating to building sales and recapturing lost market share caused by the five week strike that ended in January 1997. Income before income taxes for the 1996 fiscal year was $167.8 million, 4.35% of sales. The decrease in income from fiscal 1996 to fiscal 1997 of $27.4 million, or 16.3% resulted largely from the effect of the work stoppage and the positive effect of the weather on fiscal 1996.
The provision for income taxes yielded an effective tax rate of 39.2% for the current year compared to 39.1% in the prior years.
COMPETITIVE ENVIRONMENT
Competition in the Washington, D.C. and Baltimore metropolitan areas, where the majority of the Company's stores are located, has increased considerably over the past several years as additional supermarket chains and alternative format competitors have entered the market. Further, the stores in Pennsylvania, New Jersey, and Delaware are faced with intense competition from supermarket chains which are more established in these markets. The operation in these states has not yet become profitable. The Company is committed to maintaining its current market share throughout its area of operations by offering aggressive promotions. Management believes that such promotions, which also include the programs instituted following the drivers' strike in the fourth quarter of Fiscal Year 1997, will put continuing pressure on margins and earnings which will have to be addressed by cost control measures.
LABOR CONTRACTS
The Company employs approximately 28,000 full and part-time associates of which approximately 25,200 are represented under collective bargaining agreements. During the current year the Company completed the renewal of two major labor contacts that were set to expire during this year. The contract with the approximately 900 bakery workers at the manufacturing plant and the in-store bakeries was renewed through August 2000. The contract with the approximately 1,150 warehouse associates was also renewed through May 2001. The contract terms are similar to the contract with the truck drivers and sustains the Company's options to use alternative methods of supplying the Company's stores when it is advantageous to the Company. Both the bakery and warehouse contracts were renewed without any labor disruption.
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS, INVESTMENTS AND WORKING CAPITAL
Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Short-term investments consist primarily of United States government and agency securities purchased with an original maturity of more than three months. As of February 28, 1998, the Company's cash, cash equivalents and short-term investments totaled $149 million, compared with $178 million and $246 million at the close of each of the two prior years. The lower cash is partially attributable to reduced earnings and higher financing activities, principally the repayment of debt and acquisition of treasury stock.
Net cash provided by operations amounted to $177 million for the current fiscal year, $122 million for the preceding fiscal year and $199 million for the 1996 fiscal year. (See Consolidated Statements of Cash Flows for further details.)
Cash outlays for property, plant and equipment were $137 million for the current year, and $146 million and $128 million for the prior two years. These expenditures were related to the additional new stores and maintaining the existing store base.
Working capital at the fiscal year end was $173 million compared with $199 million and $209 million at the close of the two prior years. The working capital ratio is 1.50 to 1, compared with 1.55 to 1 and 1.62 to 1 at the end of the two prior years, respectively. Including the LIFO reserve, working capital would be $267 million currently, a 1.76 to 1 ratio, compared with $289 million, a 1.80 to 1 ratio and $295 million, a 1.87 to 1 ratio at the end of the two prior years, respectively.
CAPITAL EXPENDITURES
The Company plans to open two stores in the coming year, one of which will be in Pennsylvania. The Pennsylvania store will be in a shopping center developed by GFS Realty, the Company's real estate subsidiary. Although store development is unpredictable, the Company believes that this is an estimate of anticipated growth. The Company also plans on beginning construction on four food-drug stores that will open in the following year. Additionally, five supermarkets will be expanded and fifteen supermarkets will be remodeled during the upcoming year. Capital expenditures for the coming year will be approximately $130 million. This capital expenditure program is subject to continuing change and review. In the normal course of operations, the Company replaces stores and closes unprofitable stores. The Company plans to close two smaller stores over the coming year. The impact of future store closings is not expected to be material. The Company believes that the liquid assets on hand plus its cash flow from operations will be sufficient to support ongoing business levels, including the planned capital expenditure program, debt service, and dividends.
CAPITALIZATION
Notes and mortgages decreased $16.8 million due to scheduled principal payments and the voluntary retirement of debt. The retirement resulted in a net interest benefit to the Company. Scheduled principal amortization during the upcoming 1999 fiscal year is expected to exceed the amount of any new financing during that year.
At the close of the 1998 fiscal year, shareholders' equity as a percentage of capitalization (long-term debt plus shareholders' equity) was 83% compared with 83% and 81% for the prior two fiscal years. Shareholders' equity at the year end was $903 million, compared with $874 million a year earlier. Long-term debt consists of $27 million of notes and mortgages at an average interest cost of 10.2%, and $156 million of obligations under capital leases. At the close of the prior year, the comparable balances were $39 million and $145 million, respectively.
DIVIDENDS
For the current year, cash dividends of $46.5 million were paid at the rate of 78 cents per share. For the prior two years dividend payments were $45.1 million and $43.6 million, at the rate of 76 cents and 74 cents per share. Fiscal year 1998 marks the 39th consecutive year of dividend payments, beginning in 1959 when the Company went public.
INFLATION AND CHANGING PRICES
Inflation continues to moderately increase costs to the Company including the cost of merchandise, labor, utilities and the cost of acquiring property, plant and equipment. The Company uses the LIFO method of accounting for 83% of its inventories. Under this method, the cost of merchandise sold approximates current cost and thus reduces the distortion, if any, in reported income due to increasing costs. The historical costs of property, plant and equipment recorded by the Company were incurred over a period of many years. The cost of replacement of property, plant and equipment is generally greater than the cost on the books of the Company as a result of inflation that has occurred over the years since property, plant and equipment were placed in service.
NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new standard requires public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement is effective for fiscal years beginning after December 15, 1997 and will not impact the Company's consolidated financial position, results of operations or cash flows, and any effects, while not yet determined by the Company, will be limited to the presentation of its disclosures.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information. Costs of making the Company's systems Year 2000 compliant are estimated to be approximately $6 million. The costs associated with this effort are expensed as incurred and the balance of the costs are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company or its vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995-SAFE HARBOR CAUTIONARY STATEMENT
Various statements in this section, which sets forth management's discussion and analysis of the Company's financial condition and results of operations, statements in other portions of this document relating to financial projections, plans and objectives of management for future operations, future economic performance, or the assumptions underlying or relating to such statements, statements in other portions of this document preceded by, followed by or that include the words "believes," "anticipates," or similar expressions, and other statements except for historical information provided in this report, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, cost containment programs, market share, and projected sales. From time to time, the Company may also make other written or oral disclosures containing forward-looking statements.
The Company's actual results for future periods may differ materially from those in the forward-looking statements. The actual results may be affected by, among other things, the competitive environment in the Company's market area. In addition, all of the Company's forward-looking statements are subject to inherent uncertainties and risk, including among others: business and economic conditions generally in the Company's operating regions; changes in inflation; changes in consumer spending; pricing pressures and other competitive factors; supplier relationships and costs; results of the Company's programs to reduce costs; ability to recruit and develop employees; relations with union bargaining units; changes in governmental legislation or regulation; and adverse results from ligation or claims. Consequently, these factors, other factors mentioned in this document and in other public filings, press releases and oral statements of the Company, and other unidentified factors, may cause actual events and results to vary significantly from those included in or contemplated or implied by the Company's forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market capitalization as of January 28, 1997, was less than $2.5 billion. Accordingly, no disclosure is required under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Giant Food Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders' equity present fairly, in all material respects, the financial position of Giant Food Inc. and its subsidiaries at February 28, 1998, February 22, 1997 and February 24, 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/S/
PRICE WATERHOUSE LLP
Washington, D.C. March 30, 1998
CONSOLIDATED STATEMENTS OF INCOME
Fifty-three weeks ended February 28,1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
Dollar amounts in thousands except per share data
1998 1997 1996
SALES $4,230,640 $3,880,959 $3,860,579
COSTS AND EXPENSES Cost of sales 3,043,985 2,734,530 2,707,682 Selling, general and administrative (including a non-recurring gain of $23,674 for 1998 employee benefit costs) 1,059,674 999,195 977,835
Interest expense, net 9,829 6,779 7,235 4,113,488 3,740,504 3,692,752
INCOME BEFORE INCOME TAXES 117,152 140,455 167,827
PROVISION FOR INCOME TAXES 45,962 54,951 65,674
NET INCOME $ 71,190 $ 85,504 $ 102,153
EARNINGS PER SHARE BASIC $1.19 $1.43 $1.72 DILUTED $1.18 $1.42 $1.71
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
February 28, 1998, February 22, 1997 and February 24, 1996 Dollar amounts in thousands
ASSETS 1998 1997 1996 CURRENT ASSETS Cash and cash equivalents $ 28,857 $ 40,981 $ 111,133 Short-term investments 120,278 137,096 134,677 Receivables 63,560 53,452 47,771 Income taxes receivable 8,723 8,501 Inventories 274,137 291,644 225,801 Deferred income taxes 23,068 22,579 24,003 Other current assets 3,450 3,623 2,886
Total current assets 522,073 557,876 546,271
PROPERTY, PLANT AND EQUIPMENT Land 90,113 85,109 79,639 Buildings and improvements 383,795 347,921 319,982 Leasehold improvements 210,280 196,243 170,794 Fixtures and equipment 882,051 840,566 802,173
1,566,239 1,469,839 1,372,588 Less accumulated depreciation 725,190 688,238 643,693
841,049 781,601 728,895 Equipment deposits and construction in progress 23,699 33,886 32,496
864,748 815,487 761,391
PROPERTY UNDER CAPITAL LEASES, net of accumulated amortization (1998, $77,770; 1997, $71,192; 1996, $65,018) 116,711 106,565 105,839
REAL ESTATE HELD FOR FUTURE DEVELOPMENT 5,495 11,875 16,902
OTHER ASSETS 12,855 11,722 16,736
$1,521,882 $1,503,525 $1,447,139
The accompanying notes are an integral part of the consolidated financial statements.
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 1996
CURRENT LIABILITIES Current portion of long-term debt Notes and mortgages $ 1,905 $ 6,821 $ 6,846 Obligations under capital leases 6,621 5,839 5,310 Accounts payable 259,020 248,368 219,253 Accrued expenses Compensation related 66,563 82,741 84,277 Other 2,874 3,955 1,486 Dividends payable 11,710 11,393 11,009 Income taxes payable 9,061
Total current liabilities 348,693 359,117 337,242
LONG-TERM DEBT Notes and mortgages 27,134 39,039 45,959 Obligations under capital leases 156,041 144,953 142,863 183,175 183,992 188,822
OTHER LIABILITIES Deferred income taxes 22,294 12,675 12,543 Accrued insurance claims 34,334 38,482 47,964 Other 30,773 35,606 37,811 87,401 86,763 98,318
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY Common stock, $1 par, all classes 60,257 60,257 60,257 Capital in excess of par value 2,299 2,147 388 Retained earnings 843,402 819,060 779,000 Accumulated other comprehensive income (243) (449) (108)
905,715 881,015 839,537 Less Class "A" stock held in treasury, at cost (1998, 100,627 shares; 1997, 285,464 shares; 1996, 702,782 shares) 3,102 7,362 16,780 902,613 873,653 822,757 $1,521,882 $1,503,525 $1,447,139
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
Dollar amounts in thousands except share amounts
Accumulated Total Capital in Treasury stock Other Share- excess of (Class "A") Comprehensive Retained holders' par value Shares Cost Income earnings equity
Balance, 2-25-95 $ 1,002,464 $23,937 $(1,648) $720,784 $755,456
Comprehensive income Net income 102,153 Unrealized security holding gains(losses) 1,540 Total comprehensive income 103,693 Stock options exercised (494) (280,768) (6,705) 6,211 Tax benefit under stock option plans 724 724 Awards under stock bonus plan 158 (18,914) (452) 610 Dividends ($.74 per share) (43,937) (43,937) Balance, 2-24-96 388 702,782 16,780 (108) 779,000 822,757
Comprehensive income Net income 85,504 Unrealized security holding gains(losses) (341) Total comprehensive income 85,163 Stock options exercised (227) (503,875) (12,494) 12,267 Treasury stock acquired upon exercise of stock options 105,100 3,554 (3,554) Tax benefit under stock option plans 1,850 1,850 Awards under stock bonus plans 136 (18,543) (478) 614 Dividends ($.76 per share) (45,444) (45,444) Balance, 2-22-97 2,147 285,464 7,362 (449) 819,060 873,653
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
Dollar amounts in thousands except share amounts
Accumulated Total Capital in Treasury stock Other Share- excess of (Class "A") Comprehensive Retained holders' par value Shares Cost Income earnings equity
Comprehensive income Net income 71,190 Unrealized security holding gains(losses) 206 Total comprehensive income 71,396 Stock options exercised (1,164) (362,634) (10,136) 8,972 Purchase of treasury stock 195,989 6,423 (6,423) Tax benefit under stock option plans 1,253 1,253 Awards under stock bonus plan 63 (18,192) (547) 610 Dividends ($.78 per share) (46,848) (46,848) Balance, 2-28-98 $2,299 100,627 $ 3,102 $(243) $843,402 $902,613
Common stock, all classes Shares Par value Balance, February 25, 1995 60,256,620 $60,257 Balance, February 24, 1996 60,256,620 60,257 Balance, February 22, 1997 60,256,620 60,257 Balance, February 28, 1998 60,256,620 60,257
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996 Dollar amounts in thousands 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 71,190 $ 85,504 $102,153 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 94,040 96,743 93,932 Amortization of property under capital leases 6,578 6,174 5,875 Stock awarded as compensation 610 614 610 Other adjustments, net 2,040 535 1,613 Net increase (decrease) in cash from changes in operating assets and liabilities, detailed below 2,145 (67,835) (5,528)
Net cash provided by operating activities 176,603 121,735 198,655
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short-term investments (153,001)(172,820) (73,782) Proceeds from sales of short-term investments 148,160 138,697 19,826 Proceeds from maturity of short-term investments 21,865 31,141 14,595 Capital expenditures (136,921)(145,812)(128,107) Proceeds from dispositions of other assets - 13,998 - Additions to other assets (3,173) (9,518) (7,598)
Net cash used in investing activities (123,070)(144,314)(175,066)
CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on notes and mortgages (16,821) (6,945) (28,263) Reduction of obligations under capital leases (4,854) (4,281) (3,858) Issuance of common stock 8,972 8,713 6,211 Purchases of treasury stock (6,423) - - Dividends paid (46,531) (45,060) (43,591)
Net cash used in financing activities (65,657) (47,573) (69,501)
Net decrease in cash and cash equivalents (12,124) (70,152) (45,912) Cash and cash equivalents at beginning of year 40,981 111,133 157,045
Cash and cash equivalents at end of year $ 28,857 $ 40,981 $111,133
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
Dollar amounts in thousands
CASH FLOWS FROM CHANGES IN OPERATING ASSETS AND LIABILITIES 1998 1997 1996 (Increase) decrease in assets Receivables $(10,108) $ (5,681) $ (3,904) Inventories 17,507 (65,843) 12,177 Income taxes receivable 1,031 (8,501) - Deferred income taxes (489) 1,645 (2,474) Other current assets 173 (737) (742) Increase (decrease) in liabilities Accounts payable 10,652 29,115 (6,576) Accrued expenses (17,259) 933 454 Income taxes payable - (7,211) (7,023) Deferred income taxes 9,619 132 (9,325) Accrued insurance claims (4,148) (9,482) 12,493 Other liabilities (4,833) (2,205) (608) Net cash provided by (used in) changes in operating assets and liabilities $ 2,145 $(67,835) $ (5,528)
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
Dollar amounts in thousands except per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Giant Food Inc. (the "Company") operates a chain of 179 retail supermarkets and drug stores selling food, pharmacy and general merchandise. The majority of the Company's stores are located in the Washington, D.C. and Baltimore, Maryland metropolitan areas as well as Pennsylvania, New Jersey and Delaware. A majority of the Company's workforce is subject to labor agreements requiring periodic negotiation.
The Company uses a 52-53 week fiscal year ending on the last Saturday in the month of February. Fiscal 1998 was a 53-week period while fiscal 1997 and fiscal 1996 were 52-week periods.
Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash equivalents: For financial reporting purposes, cash equivalents consist of all highly liquid investments purchased with original maturities of three months or less. At February 28, 1998, such cash equivalents consist principally of corporate commercial paper.
Short-term investments: The Company classifies all of its short-term investments as available-for-sale securities. Such short-term investments consist primarily of United States government and federal agency securities, corporate commercial paper and corporate bonds which are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income in shareholders' equity. Realized gains and losses on short-term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company's intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available-for-sale and are classified as current assets.
Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) method is used for determining the cost of grocery, drug, cosmetic and non-food inventories, while the first-in, first-out (FIFO) method is used for determining the cost of other inventories, primarily perishable items. Approximately 83% of the Company's inventories are valued using the LIFO method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment: Property, plant and equipment are stated at cost. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated useful lives of the assets which results in average depreciation rates of 3%, 4% and 8% for buildings and improvements, leasehold improvements and furniture and equipment, respectively. Accelerated methods and lives are used for income tax reporting purposes.
Property under capital leases: Property under capital leases, which consists principally of real property used in the Company's operations, is recorded at the lower of the present value of the minimum lease payments or the fair market value of the leased property at the inception of the lease. Amortization of the leased property is computed using the straight-line method over the term of the lease.
Real estate held for future development: Real estate held for future development is stated at cost.
Long-lived assets: The recoverability of long-lived assets is assessed annually or whenever adverse events and changes in circumstances indicate that previously anticipated undiscounted cash flows warrant reassessment.
Accrued insurance claims: The Company maintains insurance coverage with respect to general liability, automobile and workers' compensation risks under contractual arrangements, subject to specified limitations. The costs associated with such risks are subject to adjustment based upon the Company's ultimate claim experience.
Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities.
Pre-opening costs: Costs associated with the opening of new stores are expensed as incurred.
Buying and promotional allowances: Allowances and credits received from vendors in connection with the Company's buying and merchandising activities are recognized as earned.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation: The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has provided pro forma disclosures which reflect the fair value based method of accounting for stock options granted in 1998, 1997 and 1996 as required by the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (Note 7).
Use of estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
Earnings per share: On February 28, 1998, the Company adopted SFAS No. 128, "Earnings per Share" and restated all prior-period earnings per share data. Basic earnings per share excludes the dilutive effect of outstanding stock options and is computed by dividing net income by the weighted average common shares outstanding of 60,056,932, 59,778,489, and 59,360,234 in fiscal years 1998, 1997, and 1996. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options were exercised. It is computed by increasing the denominator of the basic calculation by potential dilutive common shares, determined using the treasury stock method, of 60,411,000, 60,427,000, and 59,735,438 in fiscal years 1998, 1997, and 1996.
Comprehensive income: On February 28, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Total comprehensive income is reported in the consolidated statements of changes in stockholders' equity and includes net income and unrealized security holding gains and losses, net of taxes.
Business segments: Substantially all of the Company's assets, sales and operating income are employed in or derived from a combination of retail food and drug business in the United States. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. This Statement is effective for fiscal years beginning after December 15, 1997 and will not impact the Company's consolidated financial position, results of operations or cash flows, and any effects, while not yet determined by the Company, will be limited to the presentation of its disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments: The carrying amount of the Company's cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of the short maturity of those instruments. The Company derives the fair value of its short-term investments based on quoted market prices. The Company estimates the fair value of its notes and mortgages by discounting the required future cash flows under such notes and mortgages using borrowing rates at which similar types of borrowing arrangements could be currently obtained by the Company.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following: Unrealized Holding As of February 28, 1998: Cost (Losses) Gains Fair Value Government obligations $ 30,719 $ (456) $ 30,263 Corporate obligations 88,094 56 88,150 Other 1,860 - 1,860 $120,673 $ (400) $120,273
As of February 22, 1997: Government obligations $136,590 $ (742) $135,848 Corporate obligations - - - Other 1,248 - 1,248 $137,838 $ (742) $137,096
As of February 24, 1996: Government obligations $133,941 $ (177) $133,764 Corporate obligations - - - Other 913 - 913 $134,854 $ (177) $134,677
Maturities of short-term investments at February 28, 1998 were as follows: Cost Fair Value Due within one year $ 93,198 $ 93,516 Due after one year through five years 27,475 26,757 $120,673 $120,273
3. INVENTORIES
If the FIFO method had been used, inventories would have been $93,233, $90,008, and $85,713 higher at the end of 1998, 1997 and 1996, respectively. Net income would have been higher by $1,964 ($.03 per share-basic) in 1998, $2,616 ($.04 per share-basic) in 1997, and $2,889 ($.05 per share-basic) in 1996. The replacement cost of inventories valued at LIFO approximates FIFO cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. NON-RECURRING GAIN
The Company realized a $23,674 non-recurring gain during the fourth quarter of fiscal 1998. This non-recurring gain was realized as a reduction of overall employee benefit costs, and accordingly, has been presented as a reduction in selling, general and administrative expenses in the accompanying financial statements. Management cannot predict the likelihood that such reductions will occur in the future.
5. NOTES AND MORTGAGES
Notes and mortgages outstanding at February 28, 1998, February 22, 1997 and February 24, 1996 were as follows: 1998 1997 1996 Notes payable to insurance company $ 17,400 $ 33,560 $ 39,720 Mortgage notes payable 11,639 12,300 13,085 29,039 45,860 52,805 Less current portion 1,905 6,821 6,846
$ 27,134 $ 39,039 $ 45,959
The insurance company notes are subject to covenants, the more significant of which restrict the payment of dividends, the creation of long-term debt and the purchase of Company common stock. At February 28, 1998, approximately $90,553 of consolidated retained earnings were free of dividend and stock purchase restrictions. The average interest rate on the insurance company notes is 9.80%.
Mortgage notes are collateralized by real estate which cost $15,562. The average interest rate on such notes is 11.35%.
Net interest expense was as follows: 1998 1997 1996 Notes and mortgages $ 4,356 $ 5,045 $ 6,237 Lease obligations 17,094 16,597 16,140 Capitalized interest ( 1,677) ( 1,731) ( 1,138)
19,773 19,911 21,239 Less interest income ( 9,944) (13,132) (14,004)
$ 9,829 $ 6,779 $ 7,235
Annual maturities of notes and mortgages for the next five years are as follows: 1999, $1,905; 2000, $2,000; 2001, $2,108; 2002, $2,230; and 2003, $20,796.
The estimated fair value of notes and mortgages is approximately $31,234, $49,200 and $66,000 at February 28, 1998, February 22, 1997, and February 24, 1996, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. INCOME TAXES
The provision (benefit) for income taxes consists of: 1998 1997 1996 Current Federal $30,578 $44,446 $64,536 State 6,389 8,728 12,937 36,967 53,174 77,473 Deferred Federal 7,438 1,466 (9,822) State 1,557 311 (1,977)
8,995 1,777 (11,799)
$45,962 $54,951 $65,674
Deferred income tax assets (liabilities) are comprised of the following:
February 28, February 22, February 24, 1998 1997 1996 Current deferred income tax assets: Employee benefits $ 13,376 $ 13,233 $ 13,930 Promotional allowances 4,796 4,461 4,734 Capitalization of inventory 588 4,356 3,235 Other 4,309 529 2,104 23,069 22,579 24,003
Noncurrent deferred income tax assets: Capital leases 18,113 17,414 16,658 Accrued insurance claims 19,014 18,429 21,274 Pension payments 8,151 6,904 5,843 Capitalization of overhead 4,181 4,276 3,812 Promotional allowances 2,925 6,350 8,396 Other 831 1,159 485 53,215 54,532 56,468 Total deferred tax assets 76,284 77,111 80,471
Noncurrent deferred income tax liabilities: Depreciation (70,319) (62,016) (63,820) Acquisition of shopping center for stock (5,191) (5,191) (5,191) Total deferred tax liabilities (75,510) (67,207) (69,011)
Net deferred tax asset $ 774 $ 9,904 $ 11,460
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. INCOME TAXES (continued)
The following table reconciles the statutory federal income tax rate to the Company's effective income tax rate. 1998 1997 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 4.4 4.4 4.2 Other (0.2) (0.3) (0.1)
Effective income tax rate 39.2% 39.1% 39.1%
7. COMMITMENTS AND CONTINGENCIES
Leases: The Company leases certain of its warehouse facilities and a substantial number of its retail store properties under noncancelable lease agreements for periods ranging from 20 to 30 years. These leases generally contain optional renewal provisions for one or more periods of five years each. Substantially all leases covering retail store properties provide for additional rentals based on sales. Most leases also require the payment of taxes, insurance and maintenance costs. Data processing and certain other equipment leases are for terms of two to five years.
Future minimum lease payments under capital leases and noncancelable operating leases as of February 28, 1998 are as follows:
Capital Operating leases leases 1999 $ 22,675 $ 36,966 2000 22,500 35,968 2001 22,394 34,531 2002 22,223 33,726 2003 21,738 33,233 Later years 284,366 527,295
Total minimum lease payments 395,896 $701,719 Less executory costs 158
Net minimum lease payments 395,738 Less imputed interest 233,076
Present value of net minimum lease payments 162,662 Less current portion 6,621
Long-term obligations under capital leases $156,041
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMMITMENTS AND CONTINGENCIES (continued)
Minimum lease payments for capital leases have not been reduced by minimum sublease rentals of $5,080 receivable in the future under noncancelable subleases.
Net rental expense associated with leases consists of the following: 1998 1997 1996 Operating leases Minimum $41,418 $32,829 $22,369 Contingent 8,586 7,900 9,142 Contingent rentals under capital leases 2,977 3,105 3,416 Gross rental expense 52,981 43,834 34,927 Sublease income (2,649) (2,458) (2,303)
Net rental expense $50,332 $41,376 $32,624
The Company also leases certain retail space to others under noncancelable operating lease agreements. Rental income from owned properties was $13,883 in 1998, $11,450 in 1997, and $10,395 in 1996. Total future minimum rentals from owned properties as of February 28, 1998 were approximately $83,438.
Contingencies: From time to time, the Company is involved in legal proceedings that have arisen in the ordinary course of business. Currently, there are claims alleging acts of employment discrimination. Management, after consulting with legal counsel, is of the opinion that the outcome of such matters will not have a material impact on the consolidated financial position of the Company.
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS
Shares authorized: Common stock, $1 par value, authorized and outstanding at year end is as follows: Outstanding Class Authorized 1998 1997 1996 "A" non-voting 75,000,000 59,905,993 59,721,156 59,303,838 "AC" voting 125,000 125,000 125,000 125,000 "AL" voting 125,000 125,000 125,000 125,000
75,250,000 60,155,993 59,971,156 59,553,838
Class "A" common stock has all of the rights and privileges pertaining to other classes of common stock except the right to vote. No dividends may be declared on any class of common stock without declaring at least an equal dividend on Class "A" stock. However, dividends may be declared on Class "A" stock without declaring dividends on any other class of common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS (continued)
The Company's Board of Directors has authorized the future repurchase of up to 2,325,000 Class "A" common shares. The Company has purchased and accumulated treasury stock in order to accommodate a portion of the needs for registered common stock which may arise in connection with the exercise of stock options and the award of shares under the stock bonus plan.
Stock options: The Company has established incentive compensation plans under which it is authorized to grant non-qualified stock options to approximately 1,650 employees. Options to purchase the Company's Class "A" common stock are exercisable at a price equal to the market value of the stock at the date of grant and become exercisable over one to five years following the grant. All options expire ten years after date of grant.
The Company had historically granted stock appreciation rights (SARs) in tandem with options. During the year ended February 24, 1990, the Company began to grant non-qualified options without tandem SARs. No options have been granted with tandem SARs since July 1989.
Upon exercise of a SAR the holder is entitled to receive cash (or equivalent value in stock) equal to the amount by which the market value of the Company's Class "A" common stock on the exercise date exceeds the exercise price of the related stock options. As SARs are exercised the corresponding options are canceled and as options are exercised the corresponding SARs are canceled.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS (continued)
Option and SAR activity is as follows: Number of Shares Average Option Options SARs Price
February 25, 1995 Outstanding 3,124,035 419,025 $23.56
1996 Activity Granted 732,350 - 27.75 Options exercised (281,299) (49,004) 22.14 SARs exercised (179,057) (179,057) 16.69 Canceled (72,436) (5,216) 24.50
February 24, 1996 Outstanding 3,323,593 185,748 24.94
1997 Activity Granted 573,400 - 33.40 Options exercised (503,875) (9,679) 24.42 SARs exercised (78,124) (78,124) 18.84 Canceled (139,171) (2,951) 26.08
February 22, 1997 Outstanding 3,175,823 94,994 26.71
1998 Activity Granted 754,400 - 33.04 Options exercised (362,634) (8,294) 24.63 SARs exercised (46,565) (46,565) 19.65 Canceled (133,480) (900) 31.32
February 28, 1998 Outstanding 3,387,544 39,235 28.25
Exercisable 1,650,524 39,235 $26.54 Available for future grants 559,420 NONE -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS (continued)
The following table summarizes information about options outstanding at February 28, 1998 for the plans:
Options Outstanding Options Exercisable Weighted - Average Remaining Weighted Number Contractual Number Average Range of Outstanding Life Exercise Exercisable Exercise Exercise Prices At 2/28/98 (in years) Price At 2/28/98 Price $17.35 - 19.81 22,445 3.6 18.86 22,445 18.86 20.00 - 24.94 1,028,539 5.0 22.70 730,039 22.71 25.00 - 29.94 908,040 4.7 27.22 665,800 27.28 30.44 - 35.63 1,428,520 8.7 33.06 232,240 32.85 3,387,544 1,650,524
The weighted-average fair value of options granted during 1998 and 1997 was $8.13 and $8.03, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes model. The following weighted-average assumptions are included in the Company's fair value calculations:
1998 1997 Expected life (years) 6 6 Risk-free interest rate 6.0% 6.2% Volatility 20.0% 20.9% Dividend yield 2.5% 2.8%
Under the above models, the total value of stock options granted during 1998, 1997 and 1996 was approximately $5,528, $4,608 and $5,175, respectively, which would be amortized over the five year option vesting period. Had the Company determined compensation costs for these plans in accordance with SFAS No. 123, the Company's pro forma net income would have decreased by $1,461, $938 and $421 in 1998, 1997 and 1996, respectively. Pro forma basic earnings per share would be $1.16 in 1998, $1.41 in 1997 and $1.71 in 1996. Pro forma diluted earnings per share would be $1.15 in 1998, $1.40 in 1997 and $1.70 in 1996. The SFAS No. 123 method of accounting does not apply to options granted prior to 1996, and accordingly, the resulting pro forma compensation cost is not representative of that to be expected in the future.
Stock awards: The Company has also established an executive stock bonus plan under which certain officers and managerial employees may be awarded shares of Class "A" common stock. Charges to income arising from stock awards (including applicable withholding taxes) were $1,000 in 1998, $1,000 in 1997 and $1,000 in 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. EMPLOYEE BENEFIT PLANS
Pension and savings plans: The Company maintains a qualified defined benefit pension plan which covers substantially all non-union employees. Plan benefits are based on the participants' years of service and average annual earnings. The Company's policy is to fund the amount expensed for accounting purposes subject to it being deductible for income tax purposes. The assets of the qualified defined benefit pension plan at February 28, 1998 are comprised of approximately 70% equities and approximately 30% fixed income investments and cash equivalents.
Supplementary defined benefit pension plans covering certain officers are also maintained. These plans are unfunded and non-qualified. The pension liability associated with the plans is accrued using the same actuarial methods and assumptions as those used for the Company's qualified plan.
The net periodic pension cost for these plans includes the following components:
1998 1997 1996 Service cost Qualified plan $ 5,166 $ 4,908 $ 4,158 Supplemental plans 214 166 151 Interest cost Qualified plan 9,155 8,224 8,339 Supplemental plans 498 336 337 Actual return on assets (21,453) (15,576) (21,228) Net amortization and deferral Qualified plan 9,440 4,617 12,412 Supplemental plans 268 212 189 Net pension cost $ 3,288 $ 2,887 $ 4,358
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. EMPLOYEE BENEFIT PLANS (continued)
The funded status and amounts recognized in the consolidated balance sheets as of February 28, 1998, February 22, 1997 and February 24, 1996 are as follows: Qualified plan 1998 1997 1996 Actuarial present value of benefit obligations Vested benefit obligation $ 96,623 $ 81,576 $ 80,908
Accumulated benefit obligation $107,529 $ 91,333 $ 90,570
Projected benefit obligation $135,784 $116,301 $113,415
Plan assets at fair value (135,060) (117,980) (105,956) Projected benefit obligation (less than) in excess of plan assets 724 (1,679) 7,459 Unrecognized net gain (loss) 12,774 11,153 (1,167) Unrecognized prior service cost (2,222) (1,759) (1,927) Unrecognized transition asset 4,848 6,100 7,351 Pension liability recognized in the consolidated balance sheets $ 16,124 $13,815 $11,716
Supplemental plans 1998 1997 1996 Actuarial present value of benefit obligations Vested benefit obligation $ 5,684 $ 3,066 $ 2,805
Accumulated benefit obligation $ 5,684 $ 3,066 $ 2,805
Projected benefit obligation $ 7,514 $ 4,784 $ 4,420
Plan assets at fair value - - -
Projected benefit obligation in excess of plan assets 7,514 4,784 4,420 Unrecognized net gain (2,552) 673 681 Unrecognized prior service cost (1,129) (1,225) (1,354) Unrecognized transition obligation (409) (512) (614) Additional Liability 1,130 Pension liability recognized in the consolidated balance sheets $ 4,554 $ 3,720 $ 3,133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. EMPLOYEE BENEFIT PLANS (continued) Actuarial assumptions used were as follows: 1998 1997 1996
Discount rate 7.0% 7.5% 7.5% Rate of increase in compensation levels 3.5% 4.0% 4.0% Expected rate of return on plan assets 9.0% 9.5% 9.5%
Payments are made to union-sponsored, multi-employer pension plans in accordance with negotiated labor contracts. Charges to income arising from contributions required under the labor contracts aggregated $19,220, $18,731 and $19,051 in 1998, 1997 and 1996, respectively.
The Company sponsors a tax deferred savings plan whereby eligible employees may elect annually to contribute up to 20% of their compensation, subject to statutory limitations. A non-qualified supplemental tax deferred savings plan is also maintained for certain employees. The Company matches a portion of employee contributions. Charges to income representing the Company's contributions to the plans were $4,849, $4,516, and $4,259 in 1998, 1997 and 1996, respectively.
Other Benefits:
The Company does not provide any significant post-retirement or post- employment benefits to administrative employees, and post-retirement and post-employment benefits for union employees are covered by union- sponsored, multi-employer plans.
10. CASH FLOWS
Net cash flows from operating activities include cash payments for interest and income taxes as follows:
1998 1997 1996
Interest $20,324 $21,887 $22,758 Income taxes 35,936 72,586 84,495
Non-cash investing and financing activities include capital leases of $16,724, $6,900 and $6,212 in 1998, 1997 and 1996, respectively.
SUPPLEMENTARY FINANCIAL INFORMATION
(a) Selected Quarterly Financial Data (unaudited)
Thousands of Dollars, Except Per Share
Gross Net Earnings Per Share Fiscal Year Sales Profit Income Basic Diluted 1st 12 weeks $ 928,936 $ 265,205 $ 14,912 $ .25 $ .25 2nd 12 weeks 934,782 255,546 7,640 .13 .13 3rd 12 weeks 943,931 268,351 12,228 .21 .20 Last 17 weeks 1,422,991 397,553 36,410 .60 .60 Total $ 4,230,640 $ 1,186,655 $ 71,190 $ 1.19 $ 1.18
1st 12 weeks $ 895,627 $ 271,144 $ 25,783 $ .43 $ .43 2nd 12 weeks 874,424 269,807 23,172 .39 .39 3rd 12 weeks 896,977 268,743 18,860 .32 .31 Last 16 weeks 1,213,931 336,735 17,689 .29 .29 $ 3,880,959 $ 1,146,429 $ 85,504 $ 1.43 $ 1.42
1st 12 weeks $ 869,235 $ 257,626 $ 22,106 $ .37 $ .37 2nd 12 weeks 856,515 254,057 17,765 .30 .30 3rd 12 weeks 870,666 258,836 17,420 .30 .29 Last 16 weeks 1,264,163 382,378 44,862 .75 .75 $ 3,860,579 $ 1,152,897 $ 102,153 $ 1.72 $ 1.71
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Title of All Positions Year First Name Age Held with the Company Elected Director
Pete L. Manos 61 Chairman of the Board, 1995 President, and Chief Executive Officer
Alvin Dobbin* 66 Executive Vice President, 1996 Chief Operating Officer, and Director
Constance M. Unseld 50 Director 1993
Peter F. O'Malley 59 Director 1993
David J. Sainsbury 57 Director 1994
Harry G. Beckner 69 Director 1994
Rosemary P. Thorne 46 Director 1996
Raymond A. Mason 61 Director 1996
David Bremner** 40 Director 1997
The present term of each of the above Directors will expire at the Annual Meeting of Voting Shareholders currently scheduled for September 10, 1998.
Millard F. West, Jr. and Morton H. Wilner retired as active directors on September 6, 1990, on which date they were elected Directors Emeritus. Messrs. West and Wilner served as Board members 26 and 24 years, respectively.
*Although Mr. Dobbin retired from his corporate positions effective February 28, 1998, he remains a Director of the Company.
**Mr. Bremner replaced Michael W. Broomfield as a Director of the Company.
(b) Identification of Executive Officers
Year First Elected Name and Position Age Officer Present Office Pete L. Manos 61 1977 1992 (President) Chairman of the Board, 1995 (Chief Executive Officer) President, & Chief Executive 1996 (Chairman of the Board) Officer
Alvin Dobbin* 66 1970 1996 (Executive Vice President) Executive Vice President- 1996 (Chief Operating Officer) and Chief Operating Officer
Michael W. Broomfield** 55 1998 1998 Chief Operating Officer
David W. Rutstein 53 1978 1981 (Sr. V.P.- General Counsel) Senior Vice President- 1996 (Chief Admin. Officer) General Counsel, Chief 1996 (Secretary) Administrative Officer, and Secretary
Mark H. Berey 46 1997 1997 (Sr. V.P. - Finance) Senior Vice President- 1997 (Treasurer) Finance, Treasurer, 1997 (Chief Financial Officer) Chief Financial Officer
M. Davis Herriman 59 1985 1996 (Sr. V.P. - Grocery, Bakery Senior Vice President- and Pharmacy Operations Grocery, Bakery and 1998 (Chief Merchandising Pharmacy Operations and Officer) Chief Merchandising Officer
Roger D. Olson 53 1978 1988 Senior Vice President- Labor Relations and Personnel
Robert W. Schoening 51 1985 1988 Senior Vice President- Information Systems
Samuel E. Thurston 54 1977 1988 Senior Vice President- Distribution
John P. Mason 45 1996 1998 Senior Vice President- Perishable Operations
* Mr. Dobbin retired from these positions effective February 28, 1998. Mr. Broomfield was elected to the position of Chief Operating Officer effective March 9, 1998.
** Mr. Broomfield was elected to the position of Chief Operating Officer effective March 9, 1998.
The present term of each of the above Executive Officers will expire at the first meeting of the Board of Directors subsequent to the Annual Meeting of Voting Shareholders currently scheduled for September 10, 1998.
(c) Identification of Certain Significant Employees Not applicable.
(d) Family Relationships Not applicable.
(e) Business Experience
Each of the above-named executive officers of the Company has been employed by the Company for a period of time in excess of five years except for Messrs. Broomfield, Berey, and Green. Mr. Broomfield served as Managing Director of Saveacentre (a subsidiary of J Sainsbury) from 1992-1996 when he was assigned by J Sainsbury to work in the President's office at Giant where he stayed until he assumed his position as Chief Operating Officer of Giant on March 9, 1998. Mr. Berey served as President and Chief Executive Officer of Sutton Place Gourmet since June of 1989, and in 1995 became that company's Chairman of the Board. Mr. Berey stepped down from that position in July of 1996 and took personal time off before assuming his position with Giant in August 1997. Mr. Green served as the Vice President of Construction, Engineering, and Purchasing of Pathmark Stores since 1992. Messrs. Broomfield, Berey, and Green each have more than five years experience in the food-retail industry. The positions of each of the officers with the Company are set forth above in subsection (b), and the duties of each have been encompassed within the framework of their respective titles since first becoming an officer of the Company.
The principal occupation, employment, and business
experience during the past five years of each of the Directors and Directors Emeritus of the Company is set forth below:
Pete L. Manos - see subsection (b) above.
Alvin Dobbin - see subsection (b) above.
Constance M. Unseld is the founder and operator of the Unselds' School, a state accredited, independent school in Baltimore, Maryland. She also serves as a member of the Board of Regents of the University of Maryland system.
Peter F. O'Malley is the founder and current counsel to the law firm of O'Malley, Miles, Nylen & Gilmore of Prince George's County, Maryland. He currently serves on the Boards of Directors of Potomac Electric Power Company, Potomac Capital Investments and Legg Mason, Inc. The firm of O'Malley, Miles, Nylen & Gilmore is one of a number of firms which provides legal services to the Company.
David J. Sainsbury is Chairman of J Sainsbury plc where he has worked since 1963. Mr. Sainsbury is a great-grandson of the founder of J Sainsbury plc.
Harry G. Beckner was formerly President of Jewel Food Stores of Chicago, Illinois and Chief Operating Officer of the H.E. Butt (H.E.B.) grocery company of San Antonio, Texas. He serves on the Boards of Directors of H.E.B. and Shaw's Supermarkets Inc.
Rosemary P. Thorne serves as Group Finance Director of J Sainsbury plc. Miss Thorne is a non-executive director of the Board of the Department for Education and Employment. She is also a member of the Financial Reporting Review Panel, a board member of the Prince's Youth Business Trust and an active member of the prestigious Hundred Group.
Raymond A. Mason is the Chairman, President and Chief Executive Officer of Legg Mason, Inc. He has served as chairman of the Securities Industry Association, The National Association of Security Dealers and chairman of the Regional Firms Committee of the New York Stock Exchange.
David Bremner is Deputy Group Chief Executive for J Sainsbury plc. He is also Chairman of Homebase (Sainsbury's chain of home improvement and garden centers) and Chairman of Shaw's Supermarkets Inc.
Millard F. West, Jr., a Director Emeritus of the Company, is a former Vice-President of the firm of Prudential Securities, Inc. (Members New York Stock Exchange) and is a former Director of Dewey Electronics Corporation.
Morton H. Wilner, a Director Emeritus of the Company, is General Counsel Emeritus of the Armed Forces Benefit Association and Vice Chairman of A.F.B.A. Industrial Bank. He is also a Trustee
Emeritus, for life, of the University of Pennsylvania.
(f) Involvement in Certain Legal Proceedings
No Director, Director Emeritus or Executive Officer was involved in any event during the past five years which would be responsive to this question.
(g) Promoters and Control Persons
Not applicable.
(h) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission ("SEC") and the American Stock Exchange initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company within prescribed time periods. Officers, directors, and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended February 28, 1998, except for the report described below, all Section 16(a) filing requirements applicable to officers, directors, and greater than ten-percent beneficial owners were met on a timely basis.
George W. Hannis, Jr. inadvertently failed to file a Form 4 with respect to his exercise of stock options upon his retirement from the Company. The error was corrected by the filing of SEC Form 5 in April 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables and narrative text discuss the compensation paid in Fiscal Year 1998 and the two prior fiscal years to the Company's Chief Executive Officer and the Company's four other most highly- compensated executive officers.
Summary Compensation Table
Annual Compensation (1)
Other Name and Annual Principal Fiscal Compen- Position Year Salary Bonus sation(1)
Pete L. Manos 1998 $579,519 $150,000 $5,772 Chairman of the 1997 $520,673 $260,000 $6,002 Board, President 1996 $327,028 $260,000 $6,134 and CEO
Alvin Dobbin 1998 $336,985 $ 93,600 $5,772 Exec. V.P. 1997 $290,141 $160,000 $6,002 & COO 1996 $254,431 $150,378 $6,134
David W. Rutstein 1998 $291,571 $ 96,825 $5,772 Sr. V.P. 1997 $264,654 $160,000 $6,002 Gen. Counsel, CAO 1996 $252,720 $149,363 $6,134 & Secretary
M. Davis Herriman 1998 $252,739 $ 82,200 $5,772 Sr. V.P. Grocery, 1997 $217,657 $120,000 $6,002 Bakery & Pharmacy 1996 $189,375 $118,807 $6,134 Operations and Chief Merchandising Officer
Robert W. Schoening 1998 $264,291 $ 57,728 $5,772 Sr. V.P. 1997 $187,488 $ 98,681 $6,002 Information 1996 $179,006 $ 98,681 $6,134 Systems
(1) Aggregate value of perquisites does not exceed the lesser of $50,000 or 10% of the total amount of annual salary and bonus. Includes cash payments for income taxes to each named officer on the value of the restricted shares and the tax payment itself pursuant to the Non- Qualified Executive Stock Bonus Plan II.
Long Term Compensation
Options/ All Other Name and Restricted SAR Compensa- Principal Fiscal Stock Awards(#) LTIP tion Position Year Awards(3) (4) Payouts (5)(6)
Pete L. Manos 1998 $9,027 32,500 0 $31,065 Chairman of the 1997 $9,388 0* 0 $36,320 Board, President 1996 $9,596 102,500 0 $24,318 and CEO
Alvin Dobbin 1998 $9,027 17,500 0 $18,397 Exec. V.P. & 1997 $9,388 14,500 0 $25,415 COO 1996 $9,596 9,500 0 $23,085
David W. Rutstein 1998 $9,027 17,500 0 $16,725 Sr. V.P. 1997 $9,388 9,500 0 $20,273 Gen. Counsel, CAO 1996 $9,596 9,500 0 $18,855 & Secretary
M. Davis Herriman 1998 $9,027 9,500 0 $17,473 Sr. V.P. Grocery, 1997 $9,388 12,500 0 $16,041 Bakery & Pharmacy 1996 $9,596 7,500 0 $14,170 Operations and Chief Merchandising Officer
Robert W. Schoening 1998 $9,027 17,500 0 $15,168 Sr. V.P. 1997 $9,388 9,500 0 $15,130 Information 1996 $9,596 9,500 0 $14,390 Systems
(3) Under this plan, the aggregate stock holdings of this group were 17,340.60 shares and the share value was $36.312 as of February 28, 1998. Dividends are paid on the stock held under this plan.
Under this plan, the Company makes an annual contribution not exceeding the greater of (i) $1,000,000 or (ii) six-tenths of one percent (0.60%) of the pre-tax earnings of the Company. The Company's cash contributions are used to purchase shares of Class A non-voting common stock.
Distributions of those shares will be made to those participants who meet any of the following conditions: (1) ten years' participation in the Plan; (2) retirement after attainment of age 62; (3) abolition of the participant's job; (4) total and complete disability or (5) death.
(4) All options granted to participants pursuant to these stock option plans are issued at 100% of fair market value on the date issued and may be exercised, on a graduated basis, after the later of one year from the date of grant or two years' continued employment. All options terminate 10 years from their date of issuance.
*Incorrectly reported as 2,500 in the 1997 10K.
The Company receives no cash consideration for granting options. In order to acquire shares, the optionee must pay the full purchase price of the shares being exercised, plus appropriate withholding taxes. Optionees are not permitted to receive cash for any excess of market value over option price.
(5) Includes Company matching contributions under Company's Qualified Tax-Deferred Savings Plan ("Qualified Plan") and the Company's Non-Qualified Excess Benefits Savings Plan ("Non-Qualified Plan").
Participants in the Qualified Plan and Non-Qualified Plan are permitted to contribute portions of their compensation, subject to legal limitations for the Qualified Plan and without legal limitations for the Non-Qualified Plan, for which the Company contributes an amount in cash equal to the participant's initial 3% pre-tax contribution. In addition, the Company provides supplemental contributions (in the form of Giant Food Inc. Class A common stock for the Qualified Plan) and the Non-Qualified Plan to match participants' contributions (partially or totally) in excess of 3% of salary up to 6% of salary. Such Company contributions are limited to .4% of its pre-tax earnings.
In Fiscal Year 1998 the Company made matching contributions under the Qualified Plan as follows: Mr. Manos $6,000, Mr. Dobbin $6,000, Mr. Rutstein $6,000, Mr. Herriman $6,000, and Mr. Schoening $6,000. In Fiscal Year 1998 the Company made matching contributions under the Non- Qualified Plan as follows: Mr. Manos $25,065.65, Mr. Dobbin $12,396.93, Mr. Rutstein $10,724.81, Mr. Herriman $7,797.68, and Mr. Schoening $7,469.67.
(6) Includes premium payments under the Company's Split Dollar Insurance Program in which participants are provided with permanent life insurance owned by the Company. The Company pays for premiums and will recover amounts equal to its investment in the insurance policies at the deaths of the participants.
During Fiscal Year 1998 the Company made insurance premium payments as follows: Mr. Herriman $3,675 and Mr. Schoening $1,698.
OPTION GRANTS IN LAST FISCAL YEAR (1)
Individual Grants
Number of Securities Underlying % of Total Options/ Options Exercise SARs Granted to of Base Granted Employees Price Expiration Name (2) in FY 98 ($/Sh) Date
Pete L. Manos 2,500 $32.88 03/03/07 30,000 $33.56 06/09/07 32,500 4.31%
Alvin Dobbin 2,500 $32.88 03/03/07 15,000 $33.56 06/09/07 17,500 2.32%
David W. Rutstein 2,500 $32.88 03/03/07 15,000 $33.56 06/09/07 17,500 2.32%
M. Davis Herriman 2,500 $32.88 03/03/07 7,000 $33.56 06/09/07 9,500 1.26%
Robert W. Schoening 2,500 $32.88 03/03/07 15,000 $33.56 06/09/07 17,500 2.32%
(1) No SARs were awarded in the 1998 Fiscal Year.
(2) Options granted under the 1989 Non-Qualified Stock Option Plan have a term of up to ten years as determined by the Stock Option Plan Committee ("Committee"). Options become exercisable after the later of one year from date of grant or the completion of two years of continued employment. After such date, optioned shares are exercisable only to the extent of one-fifth of the total number of optioned shares per year. After the fourth year, option grants are exercisable in full. The Committee may prescribe longer time periods and additional requirements with respect to the exercise of an option and may terminate unexercised options based on the performance of the employee. The Company is required to withhold income taxes from income realized by an employee on the exercise of an option. The Company will (i) reduce the amount of stock issued to reflect the necessary withholding, (ii) withhold the appropriate tax from other compensation due to the optionee, or (iii) condition transfer of any stock to the employee on the payment to the Company of the required taxes.
Potential Realizable Value of Assumed Rates of Stock Price Appreciation for Option Term (10 Years)
0% 5% 10% Gain (3) Gain (4) (5) Gain (4) (5)
Name
Pete L. Manos $0 $ 51,695 $ 131,006 0 633,171 1,604,580 $0 $ 684,866 $1,735,586
Alvin Dobbin $0 $ 51,695 $ 131,006 0 316,586 802,290 $0 $ 368,281 $ 933,296
David W. Rutstein $0 $ 51,695 $ 131,006 0 316,586 802,290 $0 $ 368,281 $ 933,296
M. Davis Herriman $0 $ 51,695 $ 131,006 0 147,740 374,402 $0 $ 199,435 $ 505,408
Robert W. Schoening $0 $ 51,695 $ 131,006 0 316,586 802,290 $0 $ 368,281 $ 933,296
(3) As shown in this column, no gain to the named officers or all optionees is possible without appreciation in the price of the Company's stock, which will benefit all shareholders.
(4) The price of Class A common stock at the end of the ten-year term of the option grant at a 5% annual appreciation would be $53.56 and $54.67, and at a 10% annual appreciation would be $85.28 and $87.05. These appreciation rates are the result of calculations required by the Securities and Exchange Commission's rules, and therefore are not intended to forecast future appreciation, if any, in the stock price of the Company.
(5) The gain is calculated from the exercise price of the options listed above, $32.88 and $33.56 based on the grant date of the options. Option grants are at 100% of market value on the date of grant.
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option SAR/Values (1)
Shares SARs Value Acquired on Exerc'd Realized Name Exercise(#) (#) ($)
Pete L. Manos 0 0 0
Alvin Dobbin 0 0 0
David W. Rutstein 0 0 0
M. Davis Herriman 0 0 0
Robert W. Schoening 0 0 0
Value of Value of Number of Number of Unexerc'd Unexerc'd Unexerc'd Unexerc'd In-the-Money In-the-Money Options/SARs Options/SARs Options/SARs Options/SARs at FY-End at FY-End at FY-End($) at FY-End($) Name Exercisable Unexercisable Exercisable Unexercisable
Pete L. Manos 82,500 107,500 $ 670,276 $ 529,699
Alvin Dobbin 30,000 40,500 $ 315,157 $ 176,578
David W. Rutstein 29,000 36,500 $ 312,785 $ 195,709
M.Davis Herriman 26,000 28,500 $ 273,355 $ 153,981
Robert Schoening 26,500 36,500 $ 278,878 $ 195,709
(1) Value is before taxes. The dollar values are computed by determining the difference between the fair market value of the underlying common stock and the exercise price at fiscal year end.
PENSION TABLE
Pension Plan:
The Company maintains a tax-qualified defined benefit pension plan for approximately 2,500 salaried employees. The following table provides an example of benefits at the normal retirement age of 65 payable as a life annuity: Estimated Annual Benefits
Pension from Retirement Plan Highest Five for Following Number of Years Year Average of Credited Service* Earnings 10 20 30
$ 40,000 $ 3,844 $ 8,087 $ 12,731 70,000 7,894 16,487 25,781 100,000 11,944 24,887 38,831 150,000 18,694 38,887 60,581 200,000 25,444 52,887 82,331 250,000 32,194 66,887 104,081 300,000 38,944 80,887 125,801 350,000 45,694 94,887 147,581 400,000 52,444 108,887 169,331 500,000 65,944 136,887 212,831 600,000 79,444 164,887 256,331 700,000 92,944 192,887 299,831 800,000 106,444 220,887 343,331
A participant's annual pension payable to him/her as of his/her normal retirement date will be equal to:
(i) .85% of "final average earnings" plus .50% of that portion of final average earnings in excess of "covered compensation" times number of years of credited service not to exceed 15, plus
(ii) 1.05% of final average earnings plus .50% of that portion of final average earnings in excess of "covered compensation" times number of years of credited service over 15, not to exceed 15, plus
(iii) .50% of final average earnings times years of credited service over 30.
For purposes of determining plan benefits, earnings are the gross cash compensation provided to a participant, including overtime and bonuses.
Early retirement benefits are payable under the Pension Plan.
Generally, the payment of benefits will be in the form of a straight- life annuity for participants who are not married and a joint and survivor annuity for those who are married.
*The amounts shown include benefits payable from the Supplemental Retirement Arrangements.
The number of years of credited service of the executive officers listed in the remuneration table under the Retirement Plan, determined as of February 28, 1998 are: Mr. Manos, 27 years; Mr. Dobbin, 27 years; Mr. Rutstein, 20 years; Mr. Herriman 27 years; and Mr. Schoening 21 years.
Supplemental Retirement Arrangements:
An unfunded non-qualified pension plan, the Excess Benefit Savings Plan, provides a make-up benefit for those executives who are impacted by the compensation limitations of Section 401(a)(17) of the Internal Revenue Code and by the maximum benefit limitations of Section 415 of the Internal Revenue Code. A provision of this plan also provides that certain officers are entitled to a make-up benefit equal to 60% of their earnings averaged over the five years prior to retirement, less amounts payable from the Retirement Plan (including non-qualified pension plan benefits described above), the Profit Sharing and Thrift Plans, and from social security.
Mr. Dobbin is the only person who qualified for the 60% provision. However, it was not applicable because his benefits payable from the pension plan, the Profit Sharing and Thrift Plan, and social security exceeded 60% of his average earnings over the five years prior to his retirement.
Compensation of Directors
During Fiscal Year 1998, Directors and Directors Emeritus who were not employees received an annual fee of $35,000 and $10,000 respectively, and a fee of $250 for committee meetings attended.
Employment Contracts and Termination of Employment and Change in Control Arrangements
Officers of the corporation have contracts that provide benefits in the event of job loss after change in control, or severance. Subject to the satisfaction of several requirements; (1) an officer who loses his/her job within two years of a change in control will receive for a period of 24 months, or (2) an officer who is terminated will receive severance for a period of one month per year of service to the Company, (but not more than 24 months nor less than 3 months and only until retirement age or said retirement benefits are paid):
A. Base salary continued at the rate in effect on the date prior to termination;
B. Bonus continuation based on the average bonus percentage paid during the three prior years under the Company's executive bonus plan; and
C. Medical and life insurance coverage comparable to that provided to other officers who remain in the employ of the Company.
If any of the events had occurred on February 28, 1998, the following individuals would have been entitled to receive the following amounts:
Change in Control Severance
Pete L. Manos 1,651,650 1,651,650 Alvin Dobbin* 0 0 David W. Rutstein 875,800 729,833 M. Davis Herriman 773,800 773,800 Robert W. Schoening 570,164 498,893
*Mr. Dobbin is not entitled to any payments under the Change in Control and Severance Agreement because the plan prohibits payments to anyone over the age 65. The Company provided an informal arrangement for Mr. Dobbin pursuant to which Mr. Dobbin will continue to be paid his base pay and car allowance in effect on February 28, 1998, through December 31, 1998. These payments will total $290,000.
Compensation Committee Interlocks and Insider Participation
Mrs. Unseld and Messrs. Beckner and O'Malley comprise the Company's Officers' Executive Compensation Committee. Mr. O'Malley is of counsel to the law firm of O'Malley & Miles which represents the Company with respect to certain legal matters.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners (as of May 1, 1998)
The following table sets forth information with respect to the ownership of the voting securities of the Company as of May 1, 1998. Nature Number of Title of Shares Beneficial Percent Name and Address Class of Stock Owned Ownership of Class
The 1224 Corporation(1) Common AC 125,000 Direct 100.0% 6300 Sheriff Road Landover, Maryland 20785
J Sainsbury (USA) Holdings Inc. Common AL 125,000 Direct 100.0% P.O. Box 3566 Portland, Maine 04104
(b) Security Ownership of Management (as of May 1, 1998)
The following table sets forth the number of each class of equity securities of the Company beneficially owned by each (i) director, (ii) named executive officers and (iii) Directors and Executive Officers of the Company as a group as of May 1, 1998. Nature Number of Title of Shares Beneficial Percent Name and Title Class of Stock Owned Ownership of Class David J. Sainsbury Common Stock A 0(2) Direct and 0% Director (Non-Voting) Indirect
Harry Beckner Common Stock A 1,000 Direct .0017% Director (Non-Voting)
Pete L. Manos Common Stock A 157,208(3) Direct and .2605% Chairman of the Board, Indirect President, CEO, and Director
Alvin Dobbin Common Stock A 147,932(4) Direct and .2451% Exec. Vice Pres., (Non-Voting) Indirect Chief Operating Officer, Director
Constance M. Unseld Common Stock A 1,000 Direct .0017% Director (Non-Voting)
Nature Number of Title of Shares Beneficial Percent Name and Title Class of Stock Owned Ownership of Class Peter F. O'Malley Common Stock A 2,000 Indirect .0033% Director (Non-Voting)
Rosemary P. Thorne Common Stock A 0 Direct 0% Director (Non-Voting)
Raymond A. Mason Common Stock A 1,000 Direct .0017% Director (Non-Voting)
David Bremner Common Stock A 0 Direct 0% Director (Non-Voting)
Millard F. West, Jr. Common Stock A 23,800(5) Indirect .0394% Director Emeritus (Non-Voting)
Morton H. Wilner Common Stock A 10,000 Indirect .0166% Director Emeritus (Non-Voting)
David W. Rutstein Common Stock A 129,382(6) Direct and .2144% Sr. Vice President-(Non-Voting) Indirect General Counsel, Chief Administrative Officer, Secretary
M. Davis Herriman Common Stock A 68,950(7) Direct and .1143% Sr. Vice President-(Non-Voting) Indirect Grocery, Bakery and Pharmacy and Chief Merchandising Officer
Robert W. Schoening Common Stock A 55,600(8) Direct and .0921% Sr. Vice President-(Non-Voting) Indirect Information Systems
All Directors and Common Stock A 1,396,528(9) Direct and 2.3141% Officers as a (Non-Voting) Indirect Group (29 persons)
Common Stock AC 125,000(10) 100.000% (Voting)
Common Stock AL 125,000(10) 100.000% (Voting)
NOTES:
(1) Pursuant to the Will of Israel Cohen, the Class AC Voting Common Stock was transferred to The 1224 Corporation, a Delaware Corporation. The 1224 Corporation issued all of its non-voting stock to the Israel Cohen Estate and all of its 500 outstanding voting shares to four officers of the company, (Pete L. Manos, Alvin Dobbin, David W. Rutstein and Roger D. Olson) and to Mr.
Cohen's sister, Lillian Cohen Solomon (100 shares each). The holders of The 1224 Corporation voting stock have the exclusive right to exercise all the voting rights in the Class AC Voting Common Stock.
(2) Mr. Sainsbury disclaims beneficial ownership of the Common Stock of the Company beneficially owned by J Sainsbury (USA) Holdings Inc. Mr. Sainsbury is a director of J Sainsbury plc, the ultimate parent company of J Sainsbury (USA) Holdings Inc. In addition to the 125,000 Class AL voting shares listed above, J Sainsbury (USA) Holdings Inc. owns 11,779,931 Class A non-voting shares.
(3) Includes 118,500 shares acquirable under stock option plans within sixty days. Mr. Manos disclaims beneficial ownership of the Class AC shares held by The 1224 Corporation except for 100 shares.
(4) Includes 43,500 shares acquirable under stock option plans within sixty days. Mr. Dobbin disclaims beneficial ownership of the Class AC shares held by the 1224 Corporation except for 100 shares.
(5) Includes 13,000 shares owned by wife for which Mr. West disclaims beneficial ownership.
(6) Includes 41,500 shares acquirable under stock option plans within sixty days. Mr. Rutstein disclaims beneficial ownership of the Class AC shares held by the 1224 Corporation except for 100 shares.
(7) Includes 34,900 shares acquirable under stock option plans within sixty days.
(8) Includes 33,600 shares acquirable under stock option plans within sixty days.
(9) Includes shares acquirable under stock option plans within sixty days.
(10) As noted in Item 12(a) above.
(c) Changes in Control
Not applicable. ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others
Not applicable.
(b) Certain Business Relationships
During the Company's most recent fiscal year, the law firm of O'Malley & Miles, to which Mr. O'Malley is of counsel, provided certain legal services to the Company.
Mr. Mason is the Chairman, President, and CEO of Legg Mason, Inc. which performs certain financial services for the Company. Services provided in Fiscal Year 1998 were provided on a competitive market basis and were not financially material to the Company
(c) Indebtedness of Management
Not applicable.
(d) Transactions with Promoters
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page in Form 10-K
(a) The following documents are filed as part of this report:
(1) Financial Statements and supplementary data:
Report of Independent Accountants 21 Consolidated Statements of Income for the years ended February 28, 1998, February 22, 1997, and February 24, 1996 22 Consolidated Balance Sheets at February 28, 1998, February 22, 1997, and February 24, 1996 23-24 Consolidated Statements of Changes in Shareholders' Equity for the years ended February 28, 1998, February 22, 1997, and February 24, 1996 25-26 Consolidated Statements of Cash Flows for the years ended February 28, 1998, February 22, 1997, and February 24, 1996 27-28 Notes to Consolidated Financial Statements 29-42
Supplementary Financial Information (unaudited) 43
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
The Index to Exhibits is on page 65.
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Registrant during the Fourth Quarter of the Fiscal Year ending February 28, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GIANT FOOD INC.
BY: /s/ Pete L. Manos Pete L. Manos, Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
GIANT FOOD INC.
May 19, 1998 By: /s/ Pete L. Manos Pete L. Manos President and Principal Executive Officer
May 19, 1998 By: /s/ Pete L. Manos Pete L. Manos, Director
May 19, 1998 By: /s/ Alvin Dobbin Alvin Dobbin, Director
May 19, 1998 By: /s/ David J. Sainsbury David J. Sainsbury, Director
May 19, 1998 By: /s/ Harry Beckner Harry Beckner, Director
May 19, 1998 By: /s/ Constance M. Unseld Constance M. Unseld, Director
May 19, 1998 By: /s/ Peter F. O'Malley Peter F. O'Malley, Director
May 19, 1998 By: /s/ Raymond A. Mason Raymond A. Mason, Director
May 19, 1998 By: /s/ Rosemary P. Thorne Rosemary P. Thorne, Director
May 19, 1998 By: /s/ David Bremner David Bremner, Director
INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
3.(i) Articles of Incorporated by reference Incorporation to the Company's Form 10-K filed with the SEC in May, 1997 for the Fiscal Year Ended February 22, 1997
3.(ii) By-Laws Incorporated by reference to the Company's Form 10-K filed with the SEC in May, 1997 for the Fiscal Year Ended February 22, 1997
10.1 1989 Non-Qualified Incorporated by reference Stock Option Plan to the Company's Form 10-K filed with the SEC in May, 1993 for the Fiscal Year Ended February 27, 1993
10.2 Non-Qualified Executive Incorporated by reference Stock Bonus Plan to the Company's Form 10-K filed with the SEC in May, 1993 for the Fiscal Year Ended February 27, 1993
10.3 Split Dollar Insurance Incorporated by reference Program to the Company's Form 10-K filed with the SEC in May, 1993 for the Fiscal Year Ended February 27, 1993
10.4 Supplemental Retirement Incorporated by reference Plan to the Company's Form 10-K filed with the SEC in May, 1993 for the Fiscal Year Ended February 27, 1993
10.5 Excess Benefit Plan Incorporated by reference to the Company's Form 10-K filed with the SEC in May, 1993 for the Fiscal Year Ended February 27, 1993
INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
10.6 Giant Food Inc. 9.60% Incorporated by reference Promissory Notes Due to the Company's Form 10-K October 15, 2001 Note filed with the SEC in Agreement with The May, 1997 for the Fiscal Prudential Insurance Year Ended February 22, 1997 Company of America dated October 28, 1986 ("1986 Note Agreement")
10.7 Giant Food Inc. 9.83% Incorporated by reference Promissory Notes Due to the Company's Form 10-K August 4, 2012 Note filed with the SEC in Agreement with The May, 1997 for the Fiscal Prudential Insurance Year Ended February 22, 1997 Company of America dated August 4, 1987 ("1987 Note Agreement")
10.8 Letter Agreement dated Incorporated by reference July 15, 1988 to the Company's Form 10-K referencing the Note filed with the SEC in Agreement dated October May, 1997 for the Fiscal 28, 1986 and the Note Year Ended February 22, 1997 Agreement dated August 4, 1987 respectively, each between Giant Food Inc. and The Prudential Insurance Company of America
10.9 Letter dated August 5, Incorporated by reference 1991 referencing the to the Company's Form 10-K Note Agreement between filed with the SEC in Giant Food Inc. and The May, 1997 for the Fiscal Prudential Insurance Year Ended February 22, 1997 Company of America dated October 28, 1986, as amended
INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
10.10 Amendment, Assumption Incorporated by reference and Guarantee Agreement to the Company's Form 10-K dated as of February 28, filed with the SEC in 1992 by and among Giant May, 1997 for the Fiscal Food Inc., Giant of Year Ended February 28, 1997 Landover, Inc., Giant of Maryland, Inc. and The Prudential Insurance Company of America
10.11 Amendment, Assumption Incorporated by reference and Guarantee Agreement to the Company's Form 10-K dated as of February 27, filed with the SEC in 1993 by and among Giant May, 1997 for the Fiscal Food Inc., Giant of Year Ended February 28, 1997 Landover, Inc. and The Prudential Insurance Company of America
10.12 Change in Control and Severance Agreement 68
11 Computation of Earnings Per Common Share 77
21 Subsidiaries 78
23 Consent of Independent Accountants 79
27 Financial Data Schedule
CHANGE IN CONTROL AND SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL AND SEVERANCE AGREEMENT ("Agreement") is made and entered into as of the _____ day of _______________, 1997, by and between GIANT FOOD, INC., a Delaware corporation (the "Company"), and __________ ("You" or "Your" or "Yourself").
R E C I T A L S
You are a principal officer of the Company and an integral part of its management;
The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have Your continued dedication, notwithstanding the possibility, threat, or occurrence of a Change in control of the Company; and
You have been given the opportunity to review this Agreement; to evaluate the benefits that this Agreement provides to You and the burdens and restrictions that this Agreement will impose upon You; and to seek the advice of independent professional advisers.
WE HEREBY AGREE AS FOLLOWS:
Section 1. Definitions.
Section 1(a). "Cause" shall mean any act or omission to act, or any series of acts or omissions to act, or any course of conduct by You that, in the opinion of a majority of the Company's Board acting in good faith, constitutes reckless, unethical, or criminal misconduct, willful misfeasance, gross negligence or any other material breach of Your duties to the Company.
Section 1(b). A "Change in Control" shall mean:
(i) any merger or consolidation of the Company with any entity not controlled by the 1224 Group;
(ii) any transfer, sale or exchange of ownership of the Class AC Stock to any entity not controlled by the 1224 Group;
(iii) any transfer by The 1224 Corporation of its voting power over the Class AC Stock (i.e., a voting trust) to any entity not controlled by the 1224 Group; or
(iv) any redemption of the Class AC Stock or any other action that eliminates the special voting power of the Class AC Stock.
Section 1(c). The "Change in Control Period" is the period commencing on the date of a Change in Control (as defined in Section 1(b)) and ending on the earlier to occur of (i) 24 months after a Change in Control, or (ii) the first day of the month following Your retirement at the Normal Retirement Age.
Section 1(d). "Confidential Information" shall be deemed to include, but shall not be limited to, any and all ideas, creations, inventions, improvements, know-how, customer lists, business plans, business and marketing strategies, developments or products of the Company, or other secrets of the Company that are not generally known in the supermarket or drug store industries and which in any manner become known to You as a consequence of or through Your employment; Company handbooks, guidebooks, manuals, and internal controls; policies, procedures, and guidelines, whether or not published by the Company; contracts and agreements between the Company and third parties; and such other information that has not entered the public domain as the Company may designate as confidential by a written designation to that effect.
Section 1(e). "Good Reason" shall mean any action taken by the Company, including any change in Your titles, authority, duties or responsibilities from those in effect during the immediately preceding 180- day period which results in a permanent and material diminution in an officer's position, authority, duties or responsibilities within the Company; unless either (i) such action is taken by the Company for cause, or (ii) such action results from a termination or outsourcing by the Company of a department or function.
Section 1(f). The "Normal Retirement Age" is Your 65th birthday, and the "Normal Retirement Date" is the date You turn age 65.
Section 1(g). "Severance Policy" means those severance benefits and limitations discussed under Section 3 of the Agreement.
Section 1(h). "Termination" means discontinuation of Services provided by You to the Company.
Section 1(i). "1224 Group" means any persons who were shareholders of The 1224 Corporation within the prior 24 months.
Section 2. Change in Control.
Section 2(a). Change in Control Benefit. If You satisfy the requirements of Section 2(b)(i), (ii), or (iii) prior to attaining Normal Retirement Age, then for 24 months, or until Your benefits are terminated under any other provision of this Agreement, You will receive:
(i) Your base salary at the rate in effect on the date prior to termination;
(ii) bonus continuation based on the average bonus percentage paid during the three prior years under the Company's executive bonus plan; and (iii) medical and life insurance coverage comparable to that provided to other officers who remain in the employ of the Company.
Section 2(b). Entitlement to Receive Change in Control Benefits. You will be entitled to receive the Change in Control benefits only if either:
(i) You terminate your employment within 24 months after a Change in Control for good reason; or
(ii) The Company terminates Your employment within 24 months after a Change in Control, for any reason other than for cause or Your physical or mental incapacity; or
(iii) The Company terminates Your employment during the six-month period immediately preceding a Change in Control, for any reason other than for cause or Your physical or mental incapacity, and such termination (i) is made at the request of a third party who had taken steps reasonably calculated to effect a Change in Control that later occurred, or (ii) otherwise arose in connection with or anticipation of a Change in Control that later occurred.
Section 2(c). Limitations on Change in Control Benefits. Change in Control benefits will cease immediately if:
(i) You attain Normal Retirement Age, or
(ii) You begin to receive early retirement benefits under the Company's Retirement Plan.
In addition, You will not be entitled to receive any benefits under the Change in Control policy unless You irrevocably waive any benefits due to You under the Severance Policy set forth in Section 3 of this Agreement and repay any benefits previously received by You under such Severance Policy.
Section 3. Severance Policy.
Section 3(a). Entitlement to Receive Severance Benefits. Until Your Normal Retirement Date, You are entitled to receive severance benefits (as defined below) for any involuntary termination of employment that is not a Termination for Cause. Receipt of severance benefits is conditioned upon Your compliance with Sections 6 and 7 of this Agreement.
Section 3(b). Severance Benefits. Where the terms of Section 3(a) are met and You have not yet attained Normal Retirement Age, You will receive for a period of one month per year of service to the Company, but not more than 24 months nor less than 3 months:
(i) Your base salary at the rate in effect on the date prior to termination;
(ii) bonus continuation based on the average bonus percentage paid during the three prior years under the Company's executive bonus plan; and
(iii) medical and life insurance coverage comparable to that provided to other officers who remain in the employ of the Company.
Section 3(c). Limitations on Severance Benefits. Severance benefits will cease immediately, even if the severance benefit period computed under the formula has not yet expired, if:
(i) You attain Normal Retirement Age;
(ii) You begin to receive early retirement benefits under the Company's Retirement Plan; or
(iii) You fail to comply with the conditions set forth in Section 6 and Section 7 of this Agreement.
Section 4. Non-Exclusivity of Rights.
Nothing in this Agreement shall prevent or limit Your continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which You may qualify, nor shall anything herein limit or otherwise affect such rights as You may have under any stock option or other agreement with the Company. Amounts which are vested benefits or which You are otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of Termination shall be payable in accordance with such plan, policy, practice or program. If You have received benefits under the Severance Policy or Change in Control Policy, You may continue personal medical insurance coverage and coverage for any eligible dependants after the end of the period of paid coverage by paying
premiums at the group rates that the Company pays (as adjusted annually).
Section 5. Payment of Applicable Taxes.
The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
Section 6. Confidential Information.
Section 6(a). Officer's Acknowledgment. You acknowledge that preservation of a continuing business relationship between the Company and its customers, representatives, and employees is of critical importance to the continued business success of the Company and that it is the active policy of the Company to guard as confidential certain information not available to the public relating to the business affairs of the Company. In view of the foregoing, You agree that any and all "Confidential Information" (as defined in Section 1(d)) that is created, developed or discovered by or for the Company, or acquired by or for the Company from others, and that comes into Your knowledge or possession during or in the course of Your employment with the Company, shall be received by You as an employee of the Company and not in any way for Your own benefit, and that You shall have no rights and shall acquire no rights therein. You further agree that any and all Confidential Information that is invented, created, written, developed, furnished or produced by You during the term of Your employment with the Company shall be the exclusive property of the Company, and that You shall have no right, title or interest of any kind therein or thereto or in and to any results or proceeds therefrom.
Section 6(b). General Restrictions on Use of Confidential Information. Unless specifically authorized in writing by the Company's Board, You shall not, without limitation as to time or place, use any Confidential Information except on Company business during Your period of employment and shall not disclose Confidential Information to any other person or company, except for disclosure on Company business. Upon Your Termination of employment with the Company for whatever reason, You shall promptly deliver to the Company all Confidential Information and other materials of the Company in Your possession or under Your control.
Section 6(c). Non-Solicitation and Non-Raiding. To forestall the disclosure or use of Confidential Information in breach of Section 6(b), and in consideration of this Agreement, Officer agrees that for a period of two (2) years after termination of Your employment, You shall not, for Yourself or any third party, directly or indirectly (i) divert or attempt to divert from the Company any business of any kind in which it is engaged, or interference with any of its suppliers or customers, or (ii) solicit for employment any person employed by the Company, during the period of such person's employment and for a period of one year after the termination of such person's employment with the Company.
Section 6(d). Survival. Notwithstanding any provision of the Agreement to the contrary, the provisions of this Section 6 shall survive the termination or expiration of this Agreement, shall be valid and
enforceable, and shall be a condition precedent to Your receiving any amounts payable hereunder.
Section 7. Covenant Not to Compete.
You hereby covenant and agree, which covenants and agreements are of the essence of this Agreement, that at no time during the entire term of employment with the Company, nor for a period of two (2) years immediately following the Termination thereof (regardless of whether said termination is voluntary or involuntary) will You for Yourself or on behalf of any other person or company without the prior written approval of the Company's Board of Directors:
(i) participate in the management of, or accept any employment or consultation work with any company that directly or indirectly carries on supermarket or drug store operations within twenty-five (25) miles of any store location operated by the Company or any of its subsidiaries,
(ii) induce any customers of the Company with whom You have had contacts or relationships, directly or indirectly, during and within the scope of Your employment with the Company to curtail or cancel their business with the Company; or
(iii) induce, or attempt to influence, any employee of the Company to terminate employment.
However, nothing in this Section 7 shall prohibit You from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor.
Section 8. Remedies for Breach of Agreement.
If You commit a breach or threaten to commit a breach of any of the provisions of this Agreement, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed as between the parties that any such breach or threatened breach will cause irreparable injury to the Company and that money damages cannot provide an adequate remedy to the Company. In addition, the Company may take all such other actions and remedies available to it under law or in equity and shall be entitled to such damages as it can show it has sustained by reason of such breach, together with court costs and attorneys fees. This Agreement shall not limit, affect, or impair the Company's rights under general law pertaining to an officer's fiduciary duties to his employer, the law of unfair competition, or any other rights and remedies which may be available to the Company in addition to those expressly set forth in this Agreement.
Section 9. Termination of Agreement.
This Agreement will terminate upon Your death, in which case Your heirs shall be entitled to receive Your accrued salary and benefits as of the date of termination.
Section 10. Binding Effect.
The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. This Agreement is personal to You and without the prior written consent of the Company shall not be assignable by You otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Your heirs, executors and administrators.
Section 11. Successors to the Company.
The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly, absolutely and unconditionally assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
Section 12. Notice.
All notices and other communications hereunder shall be in writing and may be personally delivered, deposited in the United States mail (first class postage prepaid, return receipt requested), transmitted by telecopier or telex, or sent by a private messenger or carrier which issues delivery receipts, addressed as follows:
If to You: ________________________________ ________________________________ ________________________________
If to the Company: Giant Food, Inc. Attn: Chief Administrative Officer 6300 Sheriff Road Landover, Maryland 20785
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective upon receipt.
Section 13. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
Section 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland.
Section 15. Waiver of Breach. Forbearance by either party to require performance of any provision hereof shall not constitute or be deemed a waiver by such party of such provision or of the right thereafter to enforce the same, and no waiver by either party to any breach or default hereunder shall constitute or be deemed a waiver of any subsequent breach or default, whether of the same or similar nature or if any other nature, or a waiver of the provisions or provisions breached or with respect to which such default occurred.
Section 16. Entire Agreement. This Agreement contains the entire understanding of the Company and You with respect to the subject matter hereof. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. This Agreement may not be changed, modified or amended in whole or in part except by writing and signed by both parties.
IN WITNESS WHEREOF, You have hereunto set Your hand and, pursuant to the authorization from its Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.
[Name of Officer] GIANT FOOD, INC.
By: Name: Pete L. Manos Title: Chairman of the Board, President, and Chief Executive Officer
EXHIBIT 11
GIANT FOOD INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
Fifty-three weeks ended February 28, 1998, fifty-two weeks ended February 22, 1997 and February 24, 1996
1997 1996 1995 Basic Earnings: Net income $ 71,190,000 $ 85,504,000 $102,153,000
Basic weighted average number of common shares 60,056,932 59,778,489 59,360,234
Primary earnings per common share $1.19 $1.43 $1.72
Diluted Earnings: Net income $ 71,190,000 $ 85,504,000 $102,153,000
Basic weighted average number of common shares 60,056,932 59,778,489 59,360,234
Incremental shares from assumed exercise of options * 354,068 648,511 375,204
Diluted weighted average 60,411,000 60,427,000 59,735,438
Diluted earnings per common share $1.18 $1.42 $1.71
* The assumed exercise of stock options is at average market price reduced by the number of shares which could have been purchased with the proceeds from the exercise of such options, net of income tax effect.
EXHIBIT 21
GIANT FOOD INC. AND SUBSIDIARIES
Subsidiaries
State of Subsidiary Incorporation
Giant of Friendship, Inc. District of Columbia Giant of Maryland, Inc. Maryland Giant of Salisbury, Inc. Maryland Giant Construction Company, Inc. District of Columbia GF McLean Shopping Center, Inc. Virginia GFS Realty, Inc. Delaware Warex-Jessup, Inc. Maryland Bursil, Inc. Delaware Cole Engineering, Inc. (formerly Cole Carpets, Inc.)Maryland LECO, Inc. (formerly Viva Pharmaceuticals, Inc.) Delaware Giant Automatic Money Systems, Inc. Maryland Shaw Community Supermarket, Inc.(1) District of Columbia Bayside Traffic Services of Maryland, Inc. Maryland Super G, Inc. Maryland Montrose Crossing, Inc. Maryland Friendship Macomb SC, Inc. District of Columbia Giant of Talbot Co., Inc. Maryland Giant of Cherry Hill, Inc. New Jersey
(1) Giant Food Inc. owns 85% of the voting securities of Shaw Community Supermarket, Inc., and 100% of the voting securities of all other subsidiaries.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-64745, 33-33049, and 33-21992) and in the Prospectuses constituting part of the Registration Statements on Forms S-3 (Nos. 33-40851 and 33-45261) of Giant Food Inc. of our report dated March 30, 1998 appearing on page 20 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP Washington, D.C. May 19, 1998