ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
Hannaford Bros. Co. (the "Registrant" or the "Company") was incorporated in Maine in 1902 as the successor to a business established by the Hannaford family in 1883. Its principal executive offices are located at 145 Pleasant Hill Road, Scarborough, Maine 04074.Its telephone number is (207) 883-2911.
Approximately 25.6% of the outstanding shares of the Registrant's common stock, par value $.75 per share, is owned by certain members of the Sobey family of Stellarton, Nova Scotia, and certain companies and trusts controlled by them (the "Sobey Parties").
Fiscal year 1998 consisted of 52 weeks of operations as compared to 53 weeks in 1997 and 52 weeks in 1996. The Company closes its fiscal year on the Saturday closest to December 31.
Consolidated sales and other revenues for 1998 were $3.324 billion, an increase of 3.0% over 1997 sales and other revenues of $3.226 billion. Identical store sales were up 2.2% for fiscal year 1998 compared to an increase of 0.4% in 1997. Comparable store sales were up 2.4% for fiscal year 1998. Both identical and comparable store sales have been adjusted to exclude the 53rd week in 1997.
The Registrant ships food and food-related products from its distribution centers to an additional 19 independent retail food stores. Sales to these wholesale accounts amounted to 2.1% of total sales in 1998. Other revenues from such activities as home shopping, trucking, real estate and retail services amounted to about 1.5% of total sales.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Registrant, through its operations and those of its subsidiaries, is principally involved in the retail food business. The Registrant considers its business a single segment under the applicable reporting rules. See Item 8, Financial Statements and Supplementary Data.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Registrant is a multi-regional food retailer, with 150 supermarkets located throughout Maine, New Hampshire and Vermont, and in parts of New York, Massachusetts, Virginia, North Carolina and South Carolina. Its stores are operated primarily under the names Shop 'n Save7 and Hannaford7. The Registrant offers consumers comprehensive product variety and outstanding freshness and quality in perishables, at competitive prices, from modern and convenient facilities. The Registrant also operates 108 pharmacies within the Registrant's supermarkets and combination stores.
Of the Registrant's 104 supermarkets in the northeastern region of the United States, more than 75% are either new or have been expanded or relocated in the past 10 years. During this period, a number of smaller outdated facilities have been closed or sold.
The Registrant operates 46 supermarkets located in Virginia, North Carolina and South Carolina. Eleven of these stores were acquired by the Registrant in July 1994, six were acquired in September 1995 and twenty-nine were newly constructed since 1995.
The Registrant operates 124 combination stores with selling areas ranging from 22,300 to 61,700 square feet. These combination stores offer under one roof the traditional all-department supermarket, together with other services and expanded lines of general merchandise.
The following tables set forth certain statistical information regarding the Registrant's operations at the dates indicated:
FISCAL YEAR NUMBER OF STORES 1994 1995 1996 1997 1998 ---- ---- ---- ---- ----
Beginning 93 118 134 139 148 Opened 10 13 13 15 11 Closed (5) (3) (7) (6) (9) Sold 0 0 (1) 0 0 Acquired 20 6 0 0 0 --- --- --- --- --- Ending 118 134 139 148 150 === === === === ====
AVERAGE SQUARE FEET OF SELLING AREA PER STORE 30,100 31,100 32,300 33,400 34,500
TOTAL SQUARE FEET OF SELLING AREA 3,547,000 4,166,000 4,490,000 4,947,000 5,171,000
As illustrated by the foregoing tables, the Registrant has continued to expand its food store operations.
During 1998, net selling square footage increased 4.5%. The Registrant opened eight new food stores with selling areas ranging from 34,100 square feet to 42,300 square feet, relocated two existing stores to larger, new facilities and closed seven non-core southeast stores that had limited potential for profitable growth.
During 1999, the Registrant expects to open four new food stores, one of which will be located in a northeastern market and three in southeastern markets. The new stores will have 42,300 square feet of selling area. The Registrant will undertake a number of major remodeling projects in 1999 that improve its presentation to consumers, but that do not add square footage. It is expected that net retail selling area will increase approximately 3.7% in 1999.
As part of its ongoing expansion program, the Registrant will also consider the acquisition of additional supermarkets, if attractive opportunities become available.
The Registrant owns four distribution facilities which support its retail operations, as follows:
1. Distribution facility in South Portland, Maine, which primarily services certain store locations in Maine, New Hampshire and Massachusetts. This facility warehouses grocery, fresh fruits and vegetables, frozen foods, meat, and dairy products in approximately 521,000 square feet of floor area, and has dock facilities for 89 highway trailers. This distribution center, as well as the others, has a dedicated on-line computerized warehouse management system, which efficiently controls the movement of product through the facility and schedules labor for greater efficiency and productivity. Productivity in the distribution facilities also has been enhanced through the use of employee incentive payment programs.
2. Distribution center and office facility in Schodack, New York, which primarily services certain store locations in New York, Vermont, New Hampshire and Massachusetts. This facility warehouses grocery, fresh fruits and vegetables, meat, dairy and frozen food products in approximately 489,000 square feet of floor area and has dock facilities for 129 highway trailers. Although approvals have been received to expand this facility to approximately 1,200,000 square feet, the Registrant has no current plans to do so. This distribution center operates under a team management system which the Registrant calls Socio-Technical Systems.
3. Distribution center in Butner, North Carolina, which services all of the Registrant's store locations in North Carolina, South Carolina and Virginia. This facility warehouses grocery, fresh fruits and vegetables, frozen foods, meat and dairy products in approximately 431,000 square feet of floor area and has dock facilities for 112 highway trailers. This facility was opened in November 1996 and incorporates increased staging areas for crossdocking, a mezzanine for slower moving items and other modern distribution techniques. The site on which this distribution center is located includes land for additional expansion of the distribution center to approximately 750,000 square feet.
4. A 200,000 square foot distribution facility in Winthrop, Maine. This facility distributes health and beauty care products, specialty foods, pharmaceuticals and some general merchandise to all of the Registrant's retail outlets. This facility has converted from a conventional management system to a team-based one similar to that used in the Schodack, New York, distribution center.
Hannaford Trucking Company, a wholly-owned subsidiary, transports merchandise to and from the Registrant's distribution facilities and is licensed as an irregular route common carrier with 48 state authority. Hannaford Trucking Company also hauls products for third-party customers, thereby reducing the number of miles that its trucks travel empty.
In the Boston, Massachusetts market the Registrant is continuing to test a home shopping service called Hannaford's HomeRuns7. Consumers shop from a catalog, placing their order via phone, fax or the Internet. Orders are selected at a dedicated fulfillment center and delivered the next day. Prices are competitive with those in local supermarkets.
Innovation in operating systems for competitive advantage is an important component of the Registrant's strategy, and the Registrant is committed to investing in new technology and the development of new systems. The Registrant seeks to be an industry leader in the application of new technology and systems to improve customer service, productivity and financial information.
Raw materials, as such, are not essential to the business of the Registrant.
During 1997, the Registrant completed the conversion of its primary private brand from "Shop 'n Save7" to "Hannaford7".
Seasonal business affects the Registrant's operations in that sales are generally greater in the second half of the year than in the first. (See Note 9 of Notes to Consolidated Financial Statements.)
Inventory levels are maintained at distribution centers and all retail locations in amounts adequate to minimize "out of stock" conditions.
Backlog is not material to the Registrant's business.
No material portion of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
At the retail level, the Registrant's supermarkets are in direct competition with regional, national and local food and drug chains, as well as "supercenters", some of which have greater resources than the Registrant, and with other independent operators. In addition, certain of the independent stores served by the Registrant as wholesale customers are located in the same trade areas as the Registrant's own stores.
In its wholesale operations, the Registrant directly competes with other regional wholesalers, some of which supply franchised retail outlets. The loss of any one or a few of the wholesale customers would not have a materially adverse effect on the Registrant.
No material expenditures were made during fiscal 1996, 1997 or 1998 on research activities relating to new or improved products, services or techniques.
The Registrant does not foresee that material capital outlays will be needed or that material increases in operating expenses will be incurred for the purpose of compliance with any statutory requirement respecting environmental quality.
As of January 2, 1999, the Registrant had approximately 7,900 full-time and 15,700 part-time employees.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
Neither the Registrant nor any of its subsidiaries engages in any operations in foreign countries, nor is a material portion of sales and revenues derived from retail customers in foreign countries.
ITEM 2.
ITEM 2. PROPERTIES
The Registrant owns 58 of its 150 food stores and leases the remaining 92 locations. It owns all 4 of its distribution facilities and leases its general office facility in Scarborough, Maine. The Registrant's properties are located in Maine, New Hampshire, Vermont, northern Massachusetts, eastern upstate New York, southern Virginia, North Carolina and South Carolina. The Registrant believes that its properties are well maintained and are appropriate for its business needs.
The number of stores and facilities operated and the square feet of space at January 2, 1999, consisted of:
(In thousands)
Square Square Footage Footage Selling Units Gross Area Area
Stores 150 7,224 5,171 Distribution and administrative facilities 5 1,860 -- --- ----- ----- Total 155 9,084 5,171
The following table sets forth expiration dates of leased facilities, assuming exercise of all renewal options:
Lease Administrative Expiration Food stores Facilities
1999-2008 2 2009-2018 4 2019-thereafter 86 1 ---- --- 92 1
Further information concerning the Registrant's distribution facilities appears under Item 1 at pages 5-6 above, which information is incorporated herein by reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings, including ordinary routine litigation incidental to the business, to which the Registrant is a party or to which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Executive Officers of the Registrant is set forth below.
Under the by-laws of the Registrant, all Executive Officers hold office, at the pleasure of the Board of Directors, until the Annual Meeting of the Directors next following their election or until others are elected and qualified in their stead.
There are no family relationships between any of the Executive Officers of the Registrant nor were there any special arrangements or understandings regarding the selection of any officer. SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE:
HUGH G. FARRINGTON 54 President 09/30/77 Chief Executive Officer
Mr. Farrington was elected President in 1984 and designated Chief Executive Officer in 1992. He had held the position of Chief Operating Officer from 1984 to 1992. He had been Executive Vice President from 1981 until his election as President. He has been employed by the Registrant in various operating, supervisory and executive capacities since 1968.
RICHARD A. ANICETTI 41 Executive Vice President - 08/10/94 Southeast Operations
Mr. Anicetti was elected Executive Vice President - Southeast Operations in May 1998. He had been Senior Vice President and General Manager, Southeast Operations since December 1995, Senior Vice President, Retail Operations for the southeast from 1994 to 1995, and Vice President - Retail Operations/General Manager, New Hampshire and Massachusetts from 1989 to 1994. He has been employed by the Registrant since 1980 in various retail management capacities.
SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE:
PAUL A. FRITZSON 45 Executive Vice President, 01/02/92 Strategic Development
Mr. Fritzson was elected Executive Vice President - Strategic Development in May 1998. He had been Senior Vice President, Marketing, Merchandising and Distribution since December 1995, Senior Vice President, Marketing from 1994 to 1995, Vice President - Marketing from 1992 to 1994 and Vice President, General Merchandise from 1990 to 1992. He had served previously in various staff and merchandising capacities since 1978.
ANDREW P. GEOGHEGAN, ESQ. 48 Senior Vice President, 09/14/87 Secretary & General Counsel
Mr. Geoghegan was elected Senior Vice President, Secretary and General Counsel in May 1996. He joined the Registrant as Vice President, General Counsel in September 1987. He was elected Secretary in 1992. From 1979 to 1987 he was in private law practice with the firm of Kassoy, Lopez & Geoghegan Law Corporation, Beverly Hills, California, specializing in corporate, tax and real estate law.
RONALD C. HODGE 51 Executive Vice President - 08/10/94 Sales & Northeast Operations
Mr. Hodge was elected Executive Vice President - Sales & Northeast Operations in May 1998. He had been Senior Vice President, Northeast Operations since December 1995, Senior Vice President, Retail Operations from 1994 to 1995 and Vice President - Retail Operations/General Manager, New York and Vermont from 1989 to 1994. He has been employed by the Registrant in various retail management capacities since 1980.
BLYTHE J. MCGARVIE 42 Executive Vice President, 11/14/94 Chief Financial Officer
Ms. McGarvie was elected Executive Vice President and Chief Financial Officer in May 1998. She had been Senior Vice President and Chief Financial Officer from 1995 to 1998. She joined the Registrant as Senior Vice President - Finance in November 1994. From 1991 to 1994 she was Chief Administrative Officer for the Pacific Rim Group of Sara Lee Corporation. From 1985 to 1991 she was employed by Kraft General Foods in various finance positions.
SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE:
MICHAEL J. STROUT 44 Executive Vice President, 12/19/94 Human Resources
Mr. Strout was elected Executive Vice President - Human Resources in May 1998. He had served as Senior Vice President - Human Resources since rejoining the Registrant in December 1994. From 1990 through 1994 he was Vice President - Human Resources and later Senior Vice President - Human Resources at Tops Markets, Inc., Buffalo, New York. From 1985 to 1990 Mr. Strout had been employed by the Registrant in various Human Resource management positions.
Part II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Registrant has been listed on the New York Stock Exchange since July 18, 1986. The following table sets forth the dividends per share and the high and low sales prices of the Common Stock on the New York Stock Exchange composite tapes during each quarter of 1997 and 1998.
QUARTERLY SALE PRICE DIVIDENDS HIGH LOW PER SHARE
1st Quarter, 1998 $46.438 $38.750 .150 2nd Quarter, 1998 46.938 43.375 .150 3rd Quarter, 1998 47.000 41.250 .150 4th Quarter, 1998 53.000 40.063 .150
1st Quarter, 1997 $36.000 $33.125 .135 2nd Quarter, 1997 36.250 30.500 .135 3rd Quarter, 1997 37.000 32.750 .135 4th Quarter, 1997 44.125 34.563 .135
There are approximately 17,000 record holders of the Common Stock. Fiscal 1998 was the fiftieth consecutive year that dividends were paid on the Common Stock and the thirty-sixth consecutive year that the aggregate dividend paid per share (after adjusting for stock splits) has increased. On February 12, 1999, the Board of Directors voted to increase the quarterly dividend to $.165 per share for the dividend due to be paid on March 25, 1999. Future dividends will depend on the Registrant's earnings and financial condition.
Item 6.
Item 6. Selected Financial Data
FORM 10-K HANNAFORD BROS. CO. 1-7603 JANUARY 2, 1999
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This analysis of the Company's results of operations and financial condition should be read in conjunction with the accompanying consolidated financial statements, including the notes thereto, and the information presented in the summary of selected financial data. All footnote references are to Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Overview
Sales and other revenues for 1998 amounted to $3.324 billion, an increase of 3.0% over last year's sales and other revenues of $3.226 billion. Fourth quarter sales and other revenues in 1998 were $850 million, as compared to $871 million, a decrease of 2.4%. Identical store sales, adjusted to exclude the 53rd week in 1997, were up 2.2% in the fourth quarter and up 1.3% for the year. Comparable store sales, also adjusted for the 53rd week in 1997, were up 2.4% in the fourth quarter and 1.9% for the year 1998.
Consolidated net earnings in 1998 were up 12.1% and fourth quarter earnings were up 7.0% over 1997, before consideration of a 1997 pre-tax, non-cash accounting charge of $40 million. On a reported basis, consolidated net earnings for fiscal year 1998 were $95 million, which represents an increase of 58.7% over the $60 million reported last year. Diluted net earnings per common share were $2.21, as compared to $1.40 last year. For the fourth quarter, consolidated net earnings were $28 million, as compared to the $1 million reported last year. Diluted net earnings per common share in the quarter were $.65 this year compared to $.03 for the same period in 1997.
The following table sets forth, for the years indicated, the percentages which selected items in the consolidated statements of earnings are to sales and other revenues and the percentage change in the dollar values of such items as compared to the indicated prior year:
YEAR-TO-YEAR PERCENTAGE PERCENTAGE OF SALES CHANGE IN DOLLAR VALUES AND OTHER REVENUES 1998 1997 EXCEPT PER SHARE AMOUNTS Compared to Compared to 1998 1997 1996 1997 1996
100.0% 100.0% 100.0% Sales and other revenues 3.0% 9.1% ===== ===== =====
25.4 24.8 24.2 Gross margin 5.5 11.8
Selling, general and 20.0 19.7 19.2 administrative expenses 4.6 11.9 - 1.3 - Impairment loss (100.0) - ----- ----- -----
5.4 3.8 5.0 Operating profit 44.5 (15.6)
0.8 0.8 0.8 Interest expense, net 0.6 19.0 ----- ----- -----
4.6 3.0 4.2 Earnings before income taxes 56.3 (21.8)
1.7 1.2 1.7 Income taxes 52.7 (23.4) ----- ----- -----
2.9% 1.8% 2.5% Net earnings 58.7 (20.7) ===== ===== =====
Earnings per share: $2.24 $1.41 $1.78 Basic 58.9 (20.8) ==== ==== ====
$2.21 $1.40 $1.76 Diluted 57.9 (20.5) ==== ==== ====
$ .60 $ .54 $ .48 Cash dividends per share 11.1 12.5 ==== ==== ====
Sales
Sales and other revenues rose 3.0% in 1998, to $3.324 billion, an increase of $97 million over 1997 results. Fiscal year 1998 contained 52 weeks of operations as compared to 53 weeks in 1997. This additional week accounted for approximately $58 million of additional sales in 1997. The Company's real sales growth in 1998 exceeded 6.7% after adjusting for the 53rd week of sales in 1997 and the 1997 sales attributable to seven non-core southeastern supermarkets closed in January 1998. Sales from supermarkets that were open in both periods presented, adjusted to exclude the 53rd week of sales in 1997 ("identical store sales"), increased $39 million or 1.3%. Additional supermarket sales of $53 million resulted from the net impact of new, expanded, relocated and closed stores offset by the 53rd week of sales in 1997. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $5 million. Comparable store sales, which include results from expanded and relocated stores on a 52-week basis in both years presented, increased 1.9% in 1998.
Identical store sales were up 2.2% in the fourth quarter of 1998 while comparable store sales were up 2.4% in the quarter. The Company attributes these increases to a strong holiday sales season.
In 1997, sales and other revenues were $3.226 billion, an increase of $269 million or 9.1% over 1996 results. Retail sales increased $259 million or 9.0%. Identical store sales reflected an increase of 0.4% while comparable store sales increased 2.3%. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $10 million.
Gross Margin
Gross margins increased in 1998 to 25.4% of sales and other revenues in comparison to 24.8% in 1997. The 1998 increase is the result of improved selling margins in most of the Company's marketing territories. A portion of this increase was the result of an inventory shrinkage reduction initiative which combined store level associates and vendor partners using integrated information technology. The Company continues to focus on maintaining a competitive pricing strategy.
Gross margins increased in 1997 to 24.8% of sales and other revenues in comparison to 24.2% in 1996. This increase is the result of improved selling margins in certain of the Company's marketing territories coupled with better operations in the Southeast, including the Company's new distribution facility which began product delivery in November 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to 20.0% of sales and other revenues in 1998 as compared to 19.7% in 1997. Payroll and payroll related expenses, which exceeded 50% of selling, general and administrative expenses in both years, increased as a percentage of sales in the current year. In addition to increased direct labor costs, the Company incurred increased costs related to its employee benefit plans (Note 6).
Selling, general and administrative expenses increased to 19.7% of sales and other revenues in 1997 as compared to 19.2% in 1996. In addition to rising payroll costs, the 1997 increase reflects higher advertising costs and depreciation charges. The increases in these components of selling, general and administrative expenses reflect the high level of store openings in 1997 coupled with the continuing costs of establishing the Company's position in the Southeast.
Impairment Loss
The Company recorded a non-cash charge of $40 million in the fourth quarter of fiscal 1997 (Note 4). Expressed as a percentage of sales the impairment loss was 1.3% of sales and other revenues. Approximately $24 million of the impairment loss relates to supermarket assets and related costs for seven southeastern stores in non-core markets that were closed in January 1998. The remaining $16 million relates to supermarket assets which continue to be used in the operations of the Company.
Interest Expense, Net
Net interest expense expressed as a percentage of sales and other revenues was 0.8% in all years presented.
Net interest expense in 1998 was $27 million, an increase of 0.6% from 1997 interest expense of $26 million. This slight increase is primarily the result of a decrease in capitalized interest from reduced construction activity offset by a decrease in average debt levels.
Net interest expense in 1997 was $26 million, an increase of 19.0% from 1996 net interest expense of $22 million. This increase is primarily the result of an increase in average debt levels coupled with a decrease in invested cash which is reflected as a decrease in interest income.
Income Taxes
The provision for income taxes includes both federal and state income taxes. The effective tax rate decreased in 1998 to 37.9% from 38.8% in 1997 and 39.6% in 1996. These lower effective tax rates are the result of reductions in the Company's overall state income tax rate. In addition, the 1998 reduced rate was positively impacted by a tax benefit related to the Company's donation of food products. Assuming there are no federal or state income tax rate changes, the Company expects the effective tax rate for 1999 and thereafter to be in the 37.8% to 38.2% range.
Net Earnings and Earnings Per Common Share
Net earnings increased 58.7% in 1998 to $95 million or 2.9% of sales and other revenues, an increase of $35 million from 1997 net earnings of $60 million or 1.8% of sales and other revenues. Before the 1997 fourth quarter impairment loss, net earnings for 1998 increased by 12.1% over 1997 results. This increase is the result of increased sales and gross margin coupled with a reduced income tax provision, partially offset by an increase in selling, general and administrative expenses.
Net earnings for the fourth quarter of 1998 were $28 million versus 1997 fourth quarter net earnings of $1 million. Basic and diluted earnings exhibited a similar increase to $.66 per common share for the fourth quarter of 1998 versus $.03 per common share for the fourth quarter of 1997. This increase is primarily the result of the impairment loss. Before the impairment loss, net earnings for the fourth quarter of 1998 were up 7.0% over 1997 results.
Net earnings decreased 20.7% in 1997 to $60 million or 1.8% of sales and other revenues, a decrease of $15 million from 1996 net earnings of $75 million or 2.5% of sales and other revenues. This decrease is primarily the result of the impairment loss that was booked in the fourth quarter of 1997. Before the impairment loss, net earnings for 1997 were $84 million, an increase of 12.3% over the $75 million reported in 1996. This increase is the result of increased sales and gross margin, partially offset by an increase in selling, general and administrative expenses.
Basic earnings per common share in 1998 were $2.24 as compared to $1.41 in 1997, an increase of 58.9%. Diluted earnings per common share (Note 1J) were $2.21 in 1998, an increase of 57.9% from $1.40 reported for 1997. Before the impairment charge, diluted earnings per common share were $2.24 in 1998 as compared to $1.99 in 1997, an increase of 12.6%. Management estimates that the extra week of operations in the fourth quarter of 1997 increased net earnings by approximately $0.04 per share.
Basic earnings per common share in 1997 were $1.41 as compared to $1.78 in 1996, a decrease of 20.8%. Diluted earnings per common share (Note 1J) were $1.40 in 1997, a decrease of 20.5% from the $1.76 reported for 1996. Before the impairment charge, basic earnings per common share were $2.00 as compared to $1.78 in 1996, an increase of 12.4%.
The Company is continuing to test a home shopping service in the Boston, Massachusetts market called Hannaford's HomeRuns(R). The majority of its customer orders are generated from an internet-based, virtual shopping experience. This service generated a net loss of approximately $0.16 per share in 1998, $0.11 in 1997 and $.05 per share in 1996. Management will continue to test this business venture in 1999.
Year 2000 Issues
Year 2000 (Y2K) issues arise from the inability of some computer-based systems to properly recognize and process dates after December 31, 1999. The Company is dependent on computer hardware, software, systems and processes ("IT Systems") and non-information technology systems, such as telephones, clocks, scales, refrigeration controllers and other equipment containing embedded microprocessor technology ("Facilities Systems"). Most of the Company's key business processes, such as product procurement, warehousing, product delivery, inventory and labor management, retail sales and financial information reporting, depend on these systems.
In 1996, the Company initiated a readiness plan to address Y2K issues. The readiness plan addresses two major segments: (1) IT Systems including mainframe, PC-desktop and in-store systems; and (2) Facilities Systems including all retail stores, distribution centers, corporate offices and other owned real estate. Phases of the readiness plan common to each segment include data collection, assessment and prioritization, resolution, testing and implementation, and monitoring ongoing compliance. The Company currently expects to complete all phases of its readiness plan as follows:
IT Systems Mainframe Completed Network March 1999 PC-Desktop August 1999 In-store August 1999
Facilities Systems June 1999
More than 40% of the Company's IT Systems utilize a standard calendar routine. This routine has been reprogrammed to be Y2K compliant. In addition, the Company is extending this calendar routine to nearly all IT
Systems where it was not previously used. This standardization has simplified the Company's remediation efforts and has reduced the cost of the readiness plan. As a final step, the Company will test systems deemed critical by running them in a fully integrated Y2K environment. Critical systems include, but are not limited to, product procurement systems for supermarkets and warehouses, in-store retail sales systems and centralized financial systems including payroll and banking activities. The Company has used outside consultants to help with various phases of the readiness plan. However, the Company is relying on its own associates to verify all test results prior to implementation.
The readiness plan for all IT Systems is progressing on schedule. The Company's mainframe applications have been remediated and tested in a Y2K environment. In addition, all mainframe systems software has been tested with an actual calendar rollover from 1999 to 2000. The Company has completed all mainframe Y2K work and will continue to monitor ongoing compliance.
Facilities Systems work has been completed at all retail stores and corporate offices. The Y2K readiness plan for Distribution Centers and other owned real estate is currently scheduled to be completed by June 1999.
In addition to the readiness plan addressing IT and Facilities Systems, the Company contacted critical business partners (product suppliers, service providers, and those with which the Company exchanges information) in January 1999, requesting information regarding the status of their individual Y2K compliance plans. This effort will also consist of analyzing specific partners' responses and personally contacting those deemed most critical, for verification of their status. The Company currently expects that all critical business partners will have been contacted and Y2K readiness verified by June 1999.
Based on current information, management expects that the Company will not experience significant disruption in operations as a result of Y2K issues. Management believes it has identified the principal hardware and software modifications that must be made in order to address the most significant Y2K issues. The Company is currently in the process of establishing a contingency plan to address mission critical processes in the event of a Y2K caused failure. Management will establish the plan based on actual testing experience and assessment of outside risks. The Company currently anticipates that it will have a fully developed contingency plan by June 1999. This plan will be reviewed and updated throughout the balance of 1999.
Because the Company's Y2K compliance is partially dependent upon key business partners also being Y2K compliant on a timely basis, there can be no guarantee that the Company's overall efforts will prevent a material adverse impact on its results of operations, financial condition and cash flows. The possible consequences to the Company of not being fully Y2K compliant include temporary supermarket closings, delays in the delivery of merchandise, errors in purchase orders and other financial transactions and the inability to efficiently process customer purchases. In addition, business disruptions could result from the loss of power or the loss of communication links between supermarkets, warehouses and headquarters locations. However, management believes that the Company's store base is broad enough to minimize the impact of isolated disruptions.
The total cost associated with anticipated Y2K modifications is not material to the Company's results of operations, financial condition or cash flows. The total estimated cost of the readiness plan, including the cost of internal resources, is approximately $4 to $5 million, of which approximately $3.5 million has been incurred through the end of 1998. Most of the Company's additional budgeted Y2K expenditures are earmarked for completion of Facilities Systems testing, PC-desktop remediation, and for continuing interaction with business partners. These costs do not include amounts capitalized in the normal course of business to replace or upgrade older, outdated systems whose replacement was not accelerated due to Y2K issues. All costs are being funded by operating cash flows, and the costs of the readiness plan are being expensed as incurred. Management does not anticipate deferring any technology-related projects due to these costs or the implementation of its readiness plan. The cost of the conversions and the projected completion dates are based on management's current best estimates and are subject to revision as additional information becomes available.
Other Items and Impact of Inflation
Seasonal business affects the Company's operations in that sales are generally greater in the second half of the year (Note 9).
In recent years, the impact of inflation on the Company's operating results has been minimal, reflecting generally lower rates of inflation in the economy. The Company's business is characterized by large purchases and high sales volumes extended across diverse product lines, rapid inventory turns and low profit margins. In this environment, vendor price changes are typically passed on to the customer. The Company does not believe inflation or deflation has significantly affected its competitive position in the industry. However, since price changes do cause sales dollars to fluctuate, the use of the LIFO method of accounting for inventories reduces the impact of price changes on earnings by matching current costs with current revenues.
CAPITAL RESOURCES AND LIQUIDITY
Overview
Measures of liquidity at the end of the last three fiscal years were as follows: (Dollars in millions) 1998 1997 1996 ---------- ------------ ------------
Cash and cash equivalents $60 $58 $43 Working capital (FIFO inventory) $56 $39 $39 Unused lines of revolving credit $58 $54 $48 Unused lines of short-term credit $ 1 $30 $35 Current ratio (FIFO inventory) 1.22 1.15 1.16
The Company continued to maintain a strong capital position at the end of fiscal 1998. Cash and cash equivalents increased $2 million to $60 million at the end of the year. This increase was the result of cash provided by operating activities offset by cash used in financing and investing activities. Lines of credit represent a continuing source of capital and are available for purposes of short-term financing. At January 2, 1999, the Company had $34 million outstanding on its revolving lines of credit. The Company is in a solid financial position to carry out its current internal expansion and potential external growth plans in 1999.
In February 1999, the Company renewed a stock repurchase program authorizing the repurchase of up to $100 million in shares of Hannaford common stock over the next three years. The program authorizes purchases on the open market and through privately negotiated transactions. Shares repurchased by the Company are held as treasury shares and are available to the Company for use in funding its stock-based benefit plans and, when authorized, for other corporate purposes. During 1998, the Company reacquired 360,000 shares at a cost of $15 million, all of which were used to fund issuances under stock-based benefit plans.
Cash Flows from Operating Activities
Cash provided by operating activities was $184 million in 1998, a slight decrease from the $190 million provided in 1997. This decrease is primarily attributable to an increase in inventories, receivables and prepayments, partially offset by an increase in deferred taxes. The fluctuations within these accounts are part of the Company's normal business operations.
Cash provided by operating activities was $190 million in 1997, a decrease of $11 million from the $201 million provided in 1996. This decrease is primarily attributable to a reduction in cash flows provided by net working capital items partially offset by an increase in depreciation and amortization. The impairment loss was a non-cash charge. Although it impacted certain components of cash flows from operating activities, it had no net impact on cash provided by operating activities.
Cash Flows from Investing Activities
Cash used in investing activities decreased $24 million during 1998 to $133 million from $157 million in 1997. This decrease is the result of the Company's reduced capital investment coupled with the increased net book value of assets sold during the year. During 1998, the Company completed the sale of certain assets relating to supermarkets that were closed in January 1998 and written down to their estimated fair values in 1997.
Capital investments totaled $143 million in 1998 and were composed of $136 million in additions to property, plant and equipment, $6 million in computer software costs and deferred charges and $1 million in non-cash capital lease additions. These 1998 capital investments consist primarily of costs incurred in building and equipping new, expanded and remodeled stores and for improvements necessary in maintaining current facilities and systems.
Net retail selling space for supermarkets increased 4.5% in 1998 to 5,171,000 square feet at year-end, an increase of 224,000 square feet over 1997 year-end sales area. During 1998, the Company opened fourteen supermarkets including eight new stores, two relocations and four expansions. In January 1998, the Company closed seven southeastern stores in non-core markets with limited opportunity for profitable growth.
The number of supermarkets and square footage of selling area at year-ends 1998, 1997 and 1996 are summarized below:
SUPERMARKETS Number of Square Footage Units Selling Area
1998 150 5,171,000 1997 148 4,947,000 1996 139 4,490,000
New, relocated and expanded supermarkets in 1998, together with their square footage of selling area, are listed below:
Square Footage Location Selling Area
Northeast Machias, ME (expansion) 18,000 Lincoln, ME (expansion) 19,000 Rindge, NH 39,000 Herkimer, NY 41,000 Hampstead, NH 34,000 St. Albans, VT (expansion) 40,000
Southeast Rocky Mount, NC 41,000 Gastonia, NC 42,000 Richmond, VA (expansion) 34,000 York County, VA 41,000 Virginia Beach, VA 40,000 Portsmouth, VA 41,000 Southport, NC (relocation) 30,000 Wilmington, NC (relocation) 34,000
During 1998, the Company also opened a number of remodeled supermarkets. The growth in the Company's square footage of selling area does not reflect this investment to remodel twelve existing stores, significantly modernizing the store formats. By the end of 1999, approximately two-thirds of the Company's supermarkets will have been newly constructed, expanded or remodeled within the last five years.
Cash used in investing activities decreased $60 million during 1997 to $157 million from $217 million in 1996. This decrease is primarily the result of the Company's reduced capital investment in 1997 following the construction of a new distribution facility in the Southeast in 1996. Capital investments totaled $168 million in 1997 and were composed of $153 million in additions to property, plant and equipment, $10 million in deferred charges and computer software costs and $5 million in non-cash capital lease additions.
Cash Flows from Financing Activities
Cash used in financing activities was $49 million in 1998, as compared to $17 million in 1997. This reduction in cash flows of $32 million is primarily the result of increased payments of long-term debt coupled with reduced proceeds from the issuance of long-term debt. During 1998, the Company received $20 million of proceeds from a senior uncollateralized debt financing. During 1997, the Company received $20 million of proceeds from a senior uncollateralized debt financing and $7 million of proceeds from borrowings on its revolving line of credit. In 1998, the Company made $35 million in payments on its long-term debt as compared to $14 million in 1997. This increase of $21 million is the result of the Company, during 1998, making $12 million in prepayments on its long-term debt obligations coupled with the repayment of $4 million on its revolving lines of credit (Note 2). In 1998, the Company purchased 418,000 shares of common stock at a cost of $18 million. The majority of this repurchased stock was used to fund the Company's stock based benefit plans with the balance being held in treasury. This amount was offset by proceeds of $11 million received during 1998 from the issuance of 392,000 shares of treasury stock.
The Company paid $25 million in dividends to common shareholders in 1998. Quarterly cash dividends declared during 1998 totaled $.60 per common share, an increase of 11.1% over the $.54 per share declared during 1997. This was the thirty-sixth consecutive year that the aggregate dividend paid per common share, after adjustment for stock splits and stock dividends, has increased. Common stock dividend payments in 1998 represented 26.8% of net earnings available to common shareholders. In February 1999, the Company declared an increased quarterly dividend on its common stock of $.165 per share, payable March 25, 1999. The new quarterly dividend of $.165 per share represents an increase of 10.0% over the $.15 per share paid in each quarter of 1998.
Cash used in financing activities was $17 million in 1997 as compared to $51 million of cash provided by financing activities in 1996. This decrease in cash flows of $68 million is principally the result of reduced proceeds from the issuance of long-term debt.
1999 Capital Program
Total capital expenditure commitments are projected to be in excess of $160 million in 1999, primarily for new store constructions, store relocations, expansions and remodels, equipment, vehicles and other asset expenditures. During 1999, this program will be subject to continuing change and review as conditions warrant. Net square footage of retail selling space is expected to increase by approximately 3.7% during 1999. A number of projects scheduled to start in 1999 will not be completed until 2000. The 1999 capital program is expected to be financed by internally generated funds, long-term debt and leases.
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company or statements made by its associates may contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. Examples of such statements in this report include those concerning the Year 2000 issue, the Company's expected future tax rates, construction schedules and capital expenditures. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors and risks including, but not limited to, the following:
(1) Hannaford's future operating results are dependent on its ability to achieve increased sales and to control expenses. Factors such as lower than expected inflation, product cost fluctuations particularly in perishable categories, changes in product mix or the use of promotional items, both of which may affect pricing strategy, continued or increased competitive pressures from existing competitors and new entrants, including price cutting strategies, and deterioration in general or regional economic conditions are all factors which could adversely affect sales projections. Other components of operating results could be adversely affected by state or federal legislation or regulation that increases costs, interest rates or the Company's cost of borrowing, by increases in labor rates due to low unemployment or other factors, by unanticipated costs related to the opening and closing of stores or by the inability to control various expense categories.
(2) Hannaford's future growth is dependent on its ability to expand its retail square footage, either de-novo or through acquisitions. Increases in interest rates or the Company's cost of capital, the unavailability of funds for capital expenditures and the inability to develop new stores or convert existing stores as rapidly as planned are all risks to projected future expansion.
(3) Adverse determinations with respect to pending or future litigation or other material claims against Hannaford could affect actual results.
Furthermore, the market price of Hannaford common stock could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the retail sector, especially in the supermarket industry, as well as general economic conditions and other factors external to Hannaford.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Presented below are the Registrant's Consolidated Balance Sheets, Consolidated Statements of Earnings, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flows and accompanying Notes to Consolidated Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders of Hannaford Bros. Co.:
In our opinion, the consolidated financial statements listed in Item 8 of this Form 10-K present fairly, in all material respects, the financial position of Hannaford Bros. Co. and Subsidiaries at January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999, 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/PricewaterhouseCoopers, LLP
Portland, Maine January 21, 1999
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands) January 2, January 3, 1999 1998 ------------ ------------
Current assets: Cash and cash equivalents $ 59,722 $ 57,663 Accounts receivable, net 22,869 14,918 Inventories (note 1C) 201,219 188,767 Prepaid expenses 6,116 7,801 Deferred income taxes (note 8) 5,952 6,912 --------- --------- Total current assets 295,878 276,061
Property, plant and equipment, net (notes 1D, 2 and 4) 823,368 777,909
Leased property under capital leases, net 54,911 58,516 (note 3) Other assets: Goodwill, net (notes 1F and 4) 63,517 67,552 Deferred charges, net (note 1G) 25,074 28,724 Computer software costs, net (note 1H) 19,318 16,551 Miscellaneous assets 2,472 1,877 --------- --------- Total other assets 110,381 114,704 --------- ---------
$1,284,538 $1,227,190
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands except per share amounts) January 2, January 3, 1999 1998 ------------ ------------ Current liabilities: Current maturities of long-term debt (note 2) $ 19,296 $ 18,155 Obligations under capital leases (note 3) 2,108 1,873 Accounts payable 186,626 182,252 Accrued payroll 27,254 25,526 Other accrued expenses 23,873 24,553 Income taxes 442 2,829 --------- --------- Total current liabilities 259,599 255,188
Deferred income tax liabilities (note 8) 28,859 18,265
Other liabilities 38,734 41,171
Long-term debt (note 2) 220,130 235,850
Obligations under capital leases (note 3) 73,866 75,687
Shareholders' equity (notes 5 and 7):
Class A Serial Preferred stock, no par, authorized 2,000 shares - - Class B Serial Preferred stock, par value $.01 per share, authorized 28,000 shares - - Common stock, par value $.75 per share: Authorized 110,000 shares; 42,338 and 42,338 shares issued. 31,754 31,754 Additional paid-in capital 109,664 115,130 Preferred stock purchase rights 423 423 Retained earnings 525,344 456,063 --------- --------- 667,185 603,370 Less common stock in treasury 85 and 59 shares 3,835 2,341 --------- --------- Total shareholders' equity 663,350 601,029 --------- --------- $1,284,538 $1,227,190
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts) FISCAL YEAR 1998 1997 1996 ----------- ---------- ----------
Sales and other revenues $3,323,588 $3,226,433 $2,957,559 Cost of sales 2,480,346 2,427,287 2,242,784 --------- --------- ---------
Gross margin 843,242 799,146 714,775 Selling, general and administrative expenses 664,357 635,355 568,033 Impairment loss (note 4) - 39,950 - --------- --------- ---------
Operating profit 178,885 123,841 146,742
Interest expense, net (notes 1I and 2) 26,577 26,425 22,204 --------- --------- ---------
Earnings before income taxes 152,308 97,416 124,538
Income taxes (note 8) 57,661 37,769 49,333 --------- --------- ---------
Net earnings $ 94,647 $ 59,647 $ 75,205 ========= ========= =========
Earnings per share (note 1J):
Basic $ 2.24 $ 1.41 $ 1.78 ========= ========= ========= Diluted $ 2.21 $ 1.40 $ 1.76 ========= ========= =========
Cash dividends per share $ .60 $ .54 $ .48 ========= ========= =========
Weighted average number of common shares outstanding Basic 42,277 42,287 42,298 ========= ========= ========= Diluted 42,884 42,732 42,621 ========= ========= =========
See accompanying notes to consolidated financial statements.
FORM 10-K HANNAFORD BROS. CO. 1-7603 JANUARY 2, 1999
HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 1998 1997 1996 Cash flows from operating activities: Net income $ 94,647 $ 59,647 $ 75,205 Adjustments to reconcile net income to net cash provided by operating activities: Impairment loss - 39,950 - Depreciation and amortization 96,739 93,953 77,420 (Increase) decrease in inventories (12,452) 2,891 (33,689) (Increase) decrease in receivables and prepayments (6,202) 599 (805) Increase in accounts payable and accrued expenses 2,986 440 77,889 Increase (decrease) in income taxes payable (2,387) 297 2,532 Increase (decrease) in deferred taxes 11,554 (7,815) 2,523 Other operating activities (1,081) (446) 96 -------- -------- -------- Net cash provided by operating activities 183,804 189,516 201,171
Cash flows from investing activities: Acquisition of property, plant and equipment (135,904) (152,862) (215,067) Sale of property, plant and equipment, net 9,156 6,143 5,958 Increase in computer software costs (7,262) (6,205) (5,933) (Increase) decrease in deferred charges 911 (4,054) (1,930) Net cash used in investing activities (133,099) (156,978) (216,972)
Cash flows from financing activities: Principal payments under capital lease obligations (1,740) (1,788) (1,493) Proceeds from issuance of long-term debt 20,000 26,600 106,500 Payments of long-term debt (34,580) (14,418) (28,994) Issuance of common stock 11,048 9,648 9,707 Purchase of treasury stock (18,008) (14,379) (14,129) Dividends paid (25,366) (23,043) (20,302) -------- -------- -------- Net cash (used in) provided by financing activities (48,646) (17,380) 51,289 -------- -------- --------
Net increase in cash and cash equivalents 2,059 15,158 35,488 Cash and cash equivalents at beginning of year 57,663 42,505 7,017 -------- -------- -------- Cash and cash equivalents at end of year $ 59,722 $ 57,663 $ 42,505 ======== ======== ========
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information
(In thousands)
1998 1997 1996 ---- ---- ----
Cash paid during the year for: Interest (net of amount capitalized, $1,935 in 1998, $3,463 in 1997 and $3,357 in 1996) $27,397 $26,396 $22,765
Income taxes 47,658 41,202 42,577
Supplemental disclosure of noncash investing and financing activities
Capital lease obligations totalling $1,166,000, $4,550,000 and $7,652,000 were incurred during 1998, 1997 and 1996, respectively, when the Company entered into real estate leases.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF BUSINESS
The Company and its subsidiaries are principally involved in the distribution and retail sale of food, prescription drugs and related products through supermarkets and combination stores. The Company's stores are located in Maine, New Hampshire, Vermont, Massachusetts, upstate New York, Virginia, North Carolina and South Carolina.
B. PRINCIPLES OF CONSOLIDATION
The Company's fiscal year ends on the Saturday closest to December 31. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of January 2, 1999, for fiscal year 1998 (52 weeks), January 3, 1998, for fiscal year 1997 (53 weeks), and December 28, 1996, for fiscal year 1996 (52 weeks). All significant intercompany accounts and transactions have been eliminated in consolidation.
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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
C. INVENTORIES
Inventories consist primarily of groceries, meat, produce, general merchandise and pharmaceuticals. The majority of grocery, pharmaceutical and general merchandise inventories are valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. Approximately 87% of inventories were valued using the LIFO method in 1998 as compared to 84% in 1997. Other inventories are stated at the lower of cost (first-in, first-out) or market. The current cost of groceries, general merchandise and pharmaceuticals exceeded the LIFO valuation by $19,583,000 at January 2, 1999, $18,037,000 at January 3, 1998 and $17,076,000 at December 28, 1996. LIFO expense charged to cost of goods sold was $1,546,000 in 1998, $961,000 in 1997 and $1,468,000 in 1996.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold interests and improvements are amortized on the straight-line method over the shorter of estimated useful life or lease term. The costs of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in the results of operations. Property, plant and equipment consists of the following:
AVERAGE DEPRECIATION (In thousands) RATE 1998 1997 - ------------ -------- -------- 3% Land and improvements $ 141,706 $ 129,752 3% Buildings 300,708 279,310 13% Furniture, fixtures and equipment 506,512 454,564 4% Leasehold interests and improvements 324,106 277,560 Construction in progress 8,790 29,124 --------- --------- 1,281,822 1,170,310 Less accumulated depreciation and amortization 458,454 392,401 --------- --------- $ 823,368 $ 777,909 ========= =========
E. STORE OPENING COSTS
The noncapital expenditures incurred in opening new stores or remodeling existing stores are expensed as they are incurred.
F. GOODWILL
Goodwill, which represents the excess of costs of assets acquired over the fair value of their net assets at dates of acquisition, is being amortized on the straight-line method over various periods not exceeding 20 years. The Company evaluates, on an ongoing basis, the carrying value of goodwill and will make a specific provision when impairment is identified (Note 4). Goodwill amortization expense charged to operations was $4,035,000 in 1998, $5,534,000 in 1997 and $5,140,000 in 1996.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. DEFERRED CHARGES
Deferred charges consist primarily of costs of obtaining new store sites, covenants-not-to-compete, tradenames and initial direct lease costs. Costs of obtaining new store sites, if ultimately developed, are capitalized and depreciated over the estimated useful lives of the related assets. Other intangible assets acquired in connection with acquisitions are amortized on the straight-line method over periods ranging from five to ten years. Lease costs are amortized on the straight-line method over the base lease term.
Amortization expense related to these deferred charges was $3,715,000 in 1998, $3,599,000 in 1997 and $3,246,000 in 1996.
H. CAPITALIZED COMPUTER SOFTWARE COSTS
Capitalized computer software costs consist of costs to purchase and develop software. The Company capitalizes internally developed software costs based on a project-by-project analysis of each project's significance to the Company and its estimated useful life. The majority of capitalized software costs are amortized on a straight-line method over a period of five years. Amortization expense charged to operations was $4,495,000 in 1998, $3,312,000 in 1997 and $2,338,000 in 1996.
In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting For the Costs of Computer Software Developed For or Obtained For Internal-Use. The SOP will be effective for the Company beginning January 3, 1999 (fiscal 1999). SOP 98-1 will require the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. Amounts capitalized in fiscal 1999 must be adjusted to conform to SOP 98-1. The Company does not anticipate that there will be a material impact on its results of operations or financial position after SOP 98-1 is adopted.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
I. CAPITALIZED INTEREST
The Company capitalizes interest as part of the cost of acquiring and constructing certain assets. Capitalized interest was $1,935,000 in 1998, $3,463,000 in 1997 and $3,357,000 in 1996.
J. EARNINGS PER COMMON SHARE
Basic earnings per share of common stock have been determined by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that would occur if existing stock options were exercised and have been determined by dividing net earnings by the weighted average number of diluted shares of common stock outstanding during the year.
K. FAIR VALUE DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, accounts receivable and notes receivable: The carrying amounts reported in the balance sheet for these items approximate their fair values.
Long-term debt: The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of the Company's long-term debt, including current maturities, was approximately $239,426,000 at January 2, 1999. The fair value of the long-term debt is estimated to be $249,549,000 at January 2, 1999.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
L. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement Of Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income, which requires the separate reporting of all changes to shareholders' equity, and SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information, which revises existing guidelines about the level of financial disclosure of a company's operations. Both statements were effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has determined that these new standards do not necessitate any changes to existing financial reporting.
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities, which requires entities to report all derivatives at fair value as assets or liabilities in their statements of financial position. This statement is effective for financial statements issued for fiscal periods beginning after June 15, 1999. The Company does not currently have any derivative instruments or hedging activities to report under this standard.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. EXTERNAL FINANCING
At January 2, 1999, the Company had revolving credit lines with several banks totalling $92,000,000 with interest rates determined by different borrowing options including prime, quoted money market or LIBOR plus a premium. At January 2, 1999, there were $34,100,000 of outstanding borrowings under these credit lines with a weighted-average interest rate of 5.8%. The agreements provide for conversion of revolving credit loans to term loans with principal payments due in quarterly installments over a period of four years. The loan agreements contain certain restrictive covenants, which among other provisions, require maintenance of certain levels of working capital, debt and tangible net worth. The lines require a commitment fee of 0.21% on the unused portion of the line. There are no compensating balances required during the commitment period.
In addition, the Company had an unused, uncommitted short-term bank line of credit of $11,000,000 at January 2, 1999. Of this amount, approximately $10,295,000 is reserved to support outstanding standby letters of credit which guarantee payment of certain insurance claims and premiums.
In April 1998, the Company received the proceeds of a $20,000,000 senior uncollateralized debt financing. The term of the debt is 10 years with an average life of 7 years and an interest rate of 6.3%.
At January 2, 1999, real estate and equipment with a net book value of approximately $79,490,000 served as collateral for debt of approximately $60,897,000.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net interest expense was as follows: (In thousands)
1998 1997 1996 ---- ---- ----
Interest on debt $19,012 $20,108 $17,460 Capital lease interest 9,630 9,902 9,351 Capitalized interest (1,935) (3,463) (3,357) Interest income (130) (122) (1,250) ------ ------ ------ $26,577 $26,425 $22,204 ====== ====== ======
Long-term debt consists of the following:
(In thousands) 1998 1997
Uncollateralized senior notes due in varying annual installments through 2016 with interest from 6.2% to 9.0%. $139,600 $136,250
Collateralized by real estate, due in varying installments through 2011 with interest from 7.5% to 10.3% 59,619 70,665
Uncollateralized revolving credit loans with interest from 5.6% to 6.5% 34,100 38,100
Collateralized by equipment, due in 1999 with interest from 6.3% to 7.4%. 1,278 2,983
Other 4,829 6,007 ------- -------
239,426 254,005
Less current portion 19,296 18,155 ------- ------- $220,130 $235,850 ======= =======
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The uncollateralized senior note agreements contain certain restrictive covenants, which among other provisions, limit total debt and require minimum levels of tangible net worth.
Maturities of long-term debt at January 2, 1999, are as follows:
(In thousands) 1999 $ 19,296 2000 24,791 2001 25,581 2002 26,229 2003 25,650 2004 and thereafter 117,879 ------- $239,426
HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LEASED ASSETS AND LEASE COMMITMENTS
The Company's financial structure includes leases of certain stores, office facilities, and equipment. Initial lease terms range from 3 to 45 years with the majority of lease terms between 20 and 25 years. Substantially all leases contain renewal options. Certain leases contain a provision for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. Most of the real estate leases provide that the Company pay taxes, insurance and maintenance applicable to the leased premises.
The Company's investment in real property under capital leases was as follows: (In thousands) 1998 1997 ---- ----
Real property $82,500 $84,494 Less accumulated amortization 27,589 25,978 ------ ------ Net real property under capital leases $54,911 $58,516 ====== ======
Amortization of property under capital leases was $4,217,000 in 1998, $4,381,000 in 1997 and $4,004,000 in 1996.
Future minimum rental payments under capital lease obligations and operating leases at January 2, 1999, are as follows: (In thousands) Capital Operating Leases Leases
1999 $ 11,784 $ 21,541 2000 11,900 19,979 2001 11,769 18,668 2002 11,997 18,132 2003 12,139 16,975 2004 and thereafter 110,541 171,055 ------- -------
Total minimum lease payments 170,130 $266,350
Less: Imputed interest (at rates from 6.50% to 21.13%) 94,156 Present value of net mini- mum lease payments 75,974 Less current portion 2,108 Long-term portion of obligations $ 73,866
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Minimum payments for capital and operating leases have not been reduced by minimum sublease rentals of $2,507,000 and $8,797,000, respectively, due in the future under noncancellable subleases. They also do not include contingent rentals that may be payable under certain leases.
Total rent expense, net of executory costs, was as follows:
(In thousands)
1998 1997 1996 ---------- ---------- ----------
Capital leases: Contingent rentals $ 123 $ 194 $ 169 ------ ------ ------
Operating leases: Minimum rentals 21,439 20,584 19,019 Contingent rentals 2 714 491 Rentals from subleases (1,843) (1,492) (690) ------ ------ ------ 19,598 19,806 18,820 ------ ------ ------ $19,721 $20,000 $18,989 ====== ====== ======
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. IMPAIRMENT LOSS
In December 1997, the Company determined that certain of its supermarket assets and identifiable intangibles, including goodwill, were impaired. Based on a review of Company locations and considering the expected operating cash flows along with the estimated market value of the assets as if they were to be sold or disposed of, an impairment loss of $39,950,000 was recognized. Approximately $24,000,000 of the asset impairment loss related to supermarket assets and associated costs for stores that were closed in January 1998 and being held for sale or disposal, and $15,950,000 related to supermarket assets which the Company continued to use in its operations. In 1997 the operating losses of these closed supermarkets were not material.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. CAPITAL STOCK
In December 1997, the Company adopted a Shareholder Rights Plan which became effective upon the expiration of the Company's existing rights plan on February 4, 1998. The replacement plan is substantially identical to the previous plan, except for modification to the exercise and redemption prices of the new rights, and the term of the rights plan. The terms of the plan provide for a dividend distribution of one right for each share of Hannaford common stock to holders of record at the close of business on February 4, 1998. The rights will become exercisable only in the event an acquiring party (excluding the Sobey Parties under certain circumstances and certain other persons) accumulates 20% or more of Hannaford voting stock, or if a party announces an offer which would result in it owning 30% or more of Hannaford voting stock. The rights will expire on February 4, 2001. Each right will entitle the holder to buy one one-hundredth of a share of a series of junior participating preferred stock of Hannaford at a price of $60. In addition, upon the occurrence of a merger or other business combination, certain self-dealing transactions with an owner of 20% or more of Hannaford voting stock or the acquisition by a person or group of 30% or more of Hannaford voting stock, holders of the rights will be entitled to purchase either participating preferred stock of Hannaford or shares in an "acquiring entity" at half of market value. Hannaford will be entitled to redeem the rights at 1 cent per right any time until the tenth day following the acquisition by an acquiring person or group of a 20% position in its voting stock.
In May 1997, the shareholders of the Company approved an amendment to the Hannaford Bros. Co. Employee Stock Purchase Plan. This amendment increased the total authorized shares for this Plan by an additional 750,000 shares thereby permitting continued use of the Plan in future years.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In May 1996, the Company amended and extended its existing standstill agreement with certain shareholders ("the Sobey Parties"). The amendment extends the term of the standstill agreement to December 31, 1998, subject to automatic renewal for successive one-year periods (but not beyond December 31, 2000) unless by July 31 of a given year either the Company or any of the Sobey Parties gives written notice of an intention not to further extend the term of the standstill agreement. The amendment also made technical changes to the agreement which will allow the Company greater flexibility in the use of common stock to compensate employees and directors and permitted adoption of a new Shareholder Rights Plan through February 4, 2001, on substantially the same terms as the prior Rights Plan. The amendment maintains the Sobey Parties' ownership limit at approximately 25.6% of the Company's voting stock, except in certain circumstances specified by the agreement. Under the agreement, whenever the Company issues shares of voting stock to third parties, the Sobey Parties generally have the right to purchase sufficient shares from the Company to maintain a 25.6% level of ownership. In 1996, the Company issued 19,600 common shares to the Sobey Parties pursuant to their purchase rights under the agreement. All sales to the Sobey Parties pursuant to the standstill agreement have been made at market prices. Due to the Company's share repurchase program to fund stock-based benefit plans no new shares were issued by the Company, and so the Sobey Parties purchased no additional shares in 1997 or 1998.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory, defined benefit pension plan covering approximately 50% of its employees. The plan provides for payment of retirement benefits on the basis of employees' length of service and earnings. The Company's policy is to fund the plan based upon legal requirements and tax regulations. Plan assets consist of common stocks, cash and cash equivalents and fixed income investments. The Board of Directors approved an amendment to the plan which converted it to a cash balance plan effective January 1, 1998. This resulted in the remeasurement of the plan's projected benefit obligation. The accrued pension costs as of January 2, 1999 and January 3, 1998, together with the 1998 and 1997 net pension expense, reflect the plan's remeasurement.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 132 - Employers' Disclosures about Pensions and Other Postretirement Benefits which changes the disclosures previously required by SFAS No. 87 and SFAS No. 106. The Company has adopted SFAS No. 132 and has restated its disclosures of pension and other postretirement benefits for the years ended January 2, 1999 and January 3, 1998. The Company also maintains an unfunded supplemental executive retirement plan that provides benefits in excess of those limited in the cash balance plan by maximum compensation and benefit limitations.
The Company also provides a defined contribution 401(k) plan to substantially all employees. Amounts charged to expense for this plan were $6,561,000 in 1998, $2,916,000 in 1997 and $3,076,000 in 1996. Effective for 1998, the Company increased the percentage of its matching contribution to this 401(k) plan.
In addition, the Company provides certain health care and life insurance benefits for retired employees ("postretirement benefits"). Substantially all employees may become eligible for these benefits if they reach early or normal retirement age and accrue 10 years of service while working for the Company. The postretirement health care plan is contributory for most participants with retiree contributions adjusted annually. Life insurance benefits are not available for employees who retired after January 1, 1996.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables set forth the change in plans' benefit obligations and assets as well as the plans' funded status reconciled with the amounts shown in the Company's financial statements at January 2, 1999 (1998 plan year) and January 3, 1998 (1997 plan year):
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For measurement purposes, a 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.0% for 2000 and remain at that level thereafter.
The projected benefit obligation and accumulated benefit obligation for the unfunded supplemental executive retirement plan were $2,192,000 and $2,176,000 respectively as of January 2, 1999 and $2,259,000 and $2,257,000 respectively as of January 3, 1998. The projected benefit obligation for the defined benefit plan was $95,800,000 with a fair value of plan assets of $90,718,000 at January 2, 1999.
A 1% change in the assumed health care cost trend rates would not have a material effect on the benefit obligation or expense of postretirement benefits.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. EMPLOYEE STOCK PLANS
The 1988 and 1998 Stock Plans provide for the granting to officers and other key employees options to purchase common stock at 100% of the market price on the date of grant. Under the 1988 Stock Plan 2,800,000 shares were authorized for grant and under the 1998 Stock Plan 6,000,000 shares were authorized for grant. The 1988 and 1998 Stock Plans allow the granting of both incentive stock options and non-qualified stock options. Under the 1988 and 1998 Stock Plans, both incentive stock options and non-qualified stock options may have various vesting schedules, but generally none are exercisable until at least one year following the grant. All options may be exercised for cash or by exchanging currently owned shares, or both. Under the 1988 and 1998 Plans, exchanged shares may trigger the granting of non-qualified "reload" options for the balance of the original option term. Original option grants expire ten years from the date of grant. Incentive stock option activity for the last three fiscal years was as follows:
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Exercise prices for options outstanding as of January 2, 1999 ranged from $18.81 to $50.63. The weighted-average remaining contractual life of these options is approximately 7.6 years.
The Employee Stock Purchase Plan enables participating employees to purchase common stock through payroll deduction of up to 5% of eligible compensation. The Company pays interest on the accumulated withholdings. These amounts may be used to purchase shares of company stock at the option price (lesser of: (a) 85% of the fair market value at the date of grant or (b) the greater of the market price at the close of business on the exercise date or $10.00 per share). During 1997, employees purchased 117,000 shares, for which $2,596,000 was paid to the Company. During 1998, employees purchased 112,000 shares, for which $2,941,000 was paid to the Company. On May 12, 1997, shareholders approved an additional 750,000 shares of common stock to be allocated to this plan. As of January 2, 1999, grants had been exercised by employees for the purchase of 98,000 shares and 723,000 shares remained available for issuance under the Plan. As of February 1999, $3,089,000 had been received by the Company upon issuance of these shares and the balance of shares available for future issuance was reduced to 625,000.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statement of Financial Accounting Standards (SFAS) No. 123 requires a fair value based method of accounting for employee stock options and would result in expense recognition for the Company's employee stock plans. It also permits a Company to continue to measure compensation expense for such plans using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25). The Company has elected to follow APB 25 in accounting for its employee stock plans, and accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock plans been determined based on the fair value requirements of SFAS No. 123, the Company's net income and basic earnings per share would have been reduced to the proforma amounts indicated below:
(In thousands except earnings per share) 1998 1997 1996
Net earnings As reported $94,647 $59,647 $75,205 Proforma 90,585 56,436 72,567
Basic earnings per share As reported $2.24 $1.41 $1.78 Proforma 2.14 1.33 1.71
The fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1998 1997 1996 ---- ---- ----
Risk-free interest rate 5.65% 6.85% 7.03% Dividend yield 1.40% 1.55% 1.54% Expected volatility 20.17% 19.42% 19.44% Expected life 4.4 yrs. 4.5 yrs. 4.9 yrs.
The weighted-average grant date fair values of options granted during 1998, 1997 and 1996 were $10.33, $8.84 and $8.28, respectively.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES
The components of the provision for income taxes were as follows:
(In thousands)
1998 1997 1996 -------- -------- -------- Current Federal $39,944 $37,028 $38,842 State 6,135 4,790 7,969 ------ ------ ------ 46,079 41,818 46,811 ------ ------ ------ Deferred Federal 10,514 (2,801) 2,276 State 1,068 (1,248) 246 ------ ------ ------ 11,582 (4,049) 2,522 ------ ------ ------ Total income tax expense $57,661 $37,769 $49,333 ====== ====== ======
The reconciliation of income tax computed at the United States Federal statutory tax rates to income tax expense was as follows:
(In thousands)
1998 1997 1996 -------- -------- ---------
Tax at U.S. statutory rate $53,307 35.00% $34,096 35.00% $43,588 35.00% State income taxes, net of federal tax benefit 4,630 3.04 3,487 3.58 5,280 4.24 Other - net (276) (.18) 186 .19 465 .37 ------ ----- ------ ----- ------ -----
$57,661 37.86% $37,769 38.77% $49,333 39.61% ====== ===== ====== ===== ====== =====
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred income taxes arise because of differences in the treatment of income and expense items for financial reporting and income tax purposes. Significant components of the Company's deferred tax assets and liabilities at the end of the last two fiscal years were as follows:
(In thousands)
1998 1997 ---- ----
Deferred Tax Liabilities:
Depreciation and amortization $43,824 $33,238 Other 2,880 3,427 ------- ------- 46,704 36,665
Deferred Tax Assets:
Capital leases (8,027) (7,588) Insurance reserves (10,314) (10,380) Associate benefit plans (4,681) (4,736) Other (775) (2,608) ------- ------- (23,797) (25,312)
22,907 11,353
Net current deferred tax assets 5,952 6,912 ------- -------
Net non-current deferred tax liabilities $28,859 $18,265 ======= =======
The Company expects to realize the deferred tax assets in the ordinary course of business operations in subsequent years, and, accordingly, has not established a valuation reserve relative to these amounts.
ITEM 9:
ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item, except for certain information relating to Executive Officers included in Part I, is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1999.
Part IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) 1., 2. Consolidated Financial Statements and Related Schedules PAGES
Report of Independent Accountants............................. 29
Consolidated Balance Sheets - January 2, 1999 and January 3, 1998............................................ 30-31
Consolidated Statements of Earnings - Fiscal Years Ended, Janaury 2, 1999, January 3, 1998 and December 28, 1996..... 32
Consolidated Statements of Changes in Shareholders' Equity - Fiscal Years Ended, January 2, 1999, January 3, 1998 and December 28, 1996...................... 33
Consolidated Statements of Cash Flows - Fiscal Years Ended, January 2, 1999, January 3, 1998 and December 28, 1996...................... 34-35
Notes to Consolidated Financial Statements.................... 36-57
Schedules I, II, III and IV are not included as they are not applicable.
3. Exhibits Required by Item 601 of Regulation S-K SEQUENTIAL PAGE NUMBER IN ORIGINAL 10-K
3.1 - Articles of Incorporation 68-83
3.2 - By-Laws of the Registrant Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603).
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4.1 - Instruments Defining the Rights of Included in Security Holders Exhibit 3
4.2 - There are incorporated herein by reference (i) a Rights Agreement dated as of February 4, 1988 between the Registrant and The First National Bank of Boston, as Rights Agent, a copy of which was filed as Exhibit 2 to the Registrant's Current Report on Form 8-K, dated February 16, 1988 (SEC File No. 1-7603) and (ii) an Appointment and Amendment Agreement dated September 22, 1992 to said Rights Agreement, substituting Continental Stock Transfer & Trust Company as Rights Agent, a copy of which was filed as Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603).
4.3 - There are incorporated herein by reference a (i) Rights Agreement dated as of February 4, 1998 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent, a copy of which was filed as Exhibit 4.1 to the Registrant's Registration Statement on Form 8-A, dated January 23, 1998 (SEC File No. 1-7603).
10.1 - There are incorporated herein by reference (i) an Amended and Restated Agreement, dated as of February 4, 1988, among the Registrant and various Sobey Parties, a copy of which was filed as Exhibit 1 to the Registrant's Current Report on Form 8-K, dated February 16, 1988 (SEC File No. 1-7603); (ii) an Amendment Agreement dated as of January 1, 1992 to said Agreement with the Sobey Parties, substituting certain Sobeys Inc. employee benefit plans as parties thereto, a copy of which was filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603) and (iii) a Second Amendment Agreement dated as of May 14, 1996, which extends the term of the agreement and makes other technical changes, a copy of which was filed as Exhibit 1 to the Registrant's current report on Form 8-K, dated May 14, 1996 (SEC File No. 1-7603).
NOTE: Compensatory plans and arrangements and management contracts are filed as Exhibits 10.2 through 10.27 below.
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10.2 - There are incorporated herein by reference (i) the amended and restated Hannaford Bros. Co. Employees' Retirement Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603).
10.3 - The Hannaford Cash Balance Plan (formerly known as the Amended and Restated Hannaford Bros. Co. Employees' Retirement Plan), effective January 1, 1998. 84-163
10.4 - There is incorporated herein by reference the First Amendment to The Cash Balance Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 1998.
10.5 - There are incorporated herein by reference (i) the amended and restated Supplemental Executive Retirement Plan, a copy of which was filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603) and (iii) the Second Amendment to said Plan, which was filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603).
10.6 - The Amended and Restated Hannaford Bros. Co. Supplemental Executive Retirement Plan, effective January 1, 1998. 164-174
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10.7 - There are incorporated herein by reference (i) the Amended and Restated Hannaford Bros. Co. Employee Stock Purchase Plan, a copy of which was filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 1996 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603).
10.8 - There are incorporated herein by reference (i) the Registrant's 1993 Long Term Incentive Plan, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603) and (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
10.9 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. 1993 Long Term Incentive Plan, a copy of which was filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
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10.10 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Annual Incentive Plan, effective December 7, 1995, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K For the fiscal year ended December 30, 1995 (SEC File No. 1-7603).
10.11 - There is incorporated herein by reference an Amended and Restated Employment Continuity Agreement between the Registrant and Hugh G. Farrington, a copy of which was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
10.12 - There is incorporated herein by reference an Amended and Restated Standard Form of Employment Continuity Agreement between the Registrant and various of its executive officers, a copy of which was filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
10.13 - There is incorporated herein by reference a standard form Deferred Compensation Agreement available to outside directors of the Registrant, a copy of which was filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1984 (SEC File No. 1-7603).
10.14 - There are incorporated herein by reference (i) the Amended and Restated Hannaford Bros. Co. Savings and Investment Plan, a copy of which was filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, which was filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's
PAGES
Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan (renamed the Hannaford Northeast Savings and Investment Plan), a copy of which was filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603).
10.15 - There is incorporated herein by reference (i) the Hannaford Southeast Savings and Investment Plan, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 8, 1995 (SEC Registration No. 33-60119), (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 (SEC File No. 1-7603); and (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603).
10.16 - The Hannaford Savings and Investment Plan (merging and 175-264 amending the Hannaford Northeast Savings and Investment Plan and the Hannaford Southeast Savings and Investment Plan), effective January 1, 1998.
10.17 - There is incorporated herein by reference the Hannaford Bros. Co. Nonqualified Savings and Investment Plan, effective January 1, 1998, a copy of which was filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603).
10.18 - There are incorporated herein by reference (i) the Registrant's Amended and Restated Deferred Compensation Plan available to certain management employees of the Registrant, a copy of which was filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1988 (SEC File No. 1-7603) and (ii) the First Amendment said Plan, a copy of which was filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603).
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10.19 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Deferred Compensation Plan for Officers, effective January 1, 1998, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1997 (SEC File No. 1-7603).
10.20 - There is incorporated herein by reference a standard form of Deferred Compensation Agreement available to certain management employees pursuant to the Registrant's Amended and Restated Deferred Compensation Plan, a copy of which was filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603).
10.21 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. 1988 Stock Plan, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 27, 1995 (SEC Registration No. 33-60655).
10.22 - There is incorporated herein by reference the Hannaford Bros. Co. 1998 Stock Option Plan, a copy of which was filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
10.23 - There is incorporated herein by reference the Hannaford Bros. Co. 1998 Restricted Stock Plan, a copy of which was filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
10.24 - There is incorporated herein by reference (i) the Hannaford Bros. Co. Stock Ownership Plan for Outside Directors, approved by shareholders May 24, 1995 and effective January 1, 1996, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 27, 1995 (SEC Registration No. 33-60691) and (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603).
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10.25 - There are incorporated herein by reference (i) an Agreement, dated February 11, 1991, between the Registrant and James L. Moody, Jr., a copy of which was filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603) and (ii) an Amendment to said Agreement, dated May 14, 1992, a copy of which was filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603).
10.26 - There is incorporated herein by reference a Letter Agreement between the Registrant and James J. Jermann, dated July 8, 1996, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996 (SEC File No. 1-7603).
10.27 - There is incorporated herein by reference a Consulting and Non-Competition Agreement between the Registrant and Larry A. Plotkin, dated June 11, 1998, a copy of which was filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 1998 (SEC File No. 1-7603).
21 - Subsidiaries of the Registrant............................ 265
23 - Consents of Accountants................................... 266
27 - Financial Data Schedule 267-268
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 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.
HANNAFORD BROS. CO.
s/Blythe J. McGarvie Blythe J. McGarvie Executive Vice President, Chief Financial Officer (Principal Financial Officer) March 11, 1999
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.
s/Walter J. Salmon s/Robert D. Bolinder s/William T. End Walter J. Salmon Robert D. Bolinder William T. End Chairman of the Board Director Director Director March 11, 1999 March 11, 1999 March 11, 1999
s/Richard K. Lochridge s/Renee M. Love s/Blythe J. McGarvie Richard K. Lochridge Renee M. Love Blythe J. McGarvie Director Director Exec. Vice President, March 11, 1999 March 11, 1999 Chief Financial Officer (Principal Accounting Officer) March 11, 1999
s/Claudine B. Malone s/Robert J. Murray Claudine B. Malone Robert J. Murray s/Hugh G. Farrington Director Director Hugh G. Farrington March 11, 1999 March 11, 1999 President Chief Executive Officer Director s/David F. Sobey s/John R. Sobey March 11, 1999 David F. Sobey John R. Sobey Director Director March 11, 1999 March 11, 1999
s/Robert L. Strickland s/Robert J. Tarr, Jr. Bruce G. Allbright Robert L. Strickland Robert J. Tarr, Jr. Director Director Director March 11, 1999 March 11, 1999