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 1997 consisted of 53 weeks of operations as compared to 52 weeks in both 1996 and 1995. This anomaly occurs periodically since the Company closes its fiscal year on the Saturday closest to December 31.
Consolidated sales and other revenues for 1997 were $3,226 million, an increase of 9.1% over last year's sales and other revenues of $2,958 million. Identical store sales were up 0.4% for fiscal year 1997 as compared to an increase of 3.2% in 1996. Comparable store sales were up 2.3% for fiscal year 1997.
A pre-tax, non-cash accounting charge of $40 million was recorded in the fourth quarter. Most of this charge relates to a write-down in the value of assets, including goodwill, in certain southeastern stores. The write-down was prompted by SFAS No. 121 (Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of), which results in goodwill being allocated on a store-by-store basis. SFAS No. 121 did not exist when the Company entered the Southeast in 1994 (see Note 4 of Notes to Consolidated Financial Statements).
The Registrant ships food and food-related products from its distribution centers to an additional 21 independent retail food stores. Sales to these wholesale accounts amounted to 2.1% of total sales in 1997. 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 148 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 Save(R), Hannaford(R) and Wilson's(SM). 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 100 pharmacies within the Registrant's supermarkets and combination stores.
Of the Registrant's 101 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 47 supermarkets located in Virginia, North Carolina and South Carolina. Eighteen of these stores were acquired by the Registrant in July 1994, six were acquired in September 1995 and twenty-three were newly constructed during 1995, 1996 and 1997. These stores range in size from 16,300 to 48,700 square feet of selling area.
The Registrant operates 113 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.
On January 16, 1998, the Registrant announced that it would close seven non-core stores, two in South Carolina, four in North Carolina and one in Virginia. These closings have occurred as of this filing.
In 1998, the Registrant expects to open several new stores in New York, New Hampshire, North Carolina and Virginia and will expand or relocate a number of others.
The following tables set forth certain statistical information regarding the Registrant's operations at the dates indicated:
FISCAL YEAR NUMBER OF STORES 1993 1994 1995 1996 1997
Beginning 93 93 118 134 139 Opened 4 10 13 13 15 Closed (4) (5) (3) (7) (6) Sold 0 0 0 (1) 0 Acquired 0 20 6 0 0 Ending 93 118 134 139 148
AVERAGE SQUARE FEET OF SELLING AREA PER STORE 29,800 30,100 31,100 32,300 33,400
TOTAL SQUARE FEET OF SELLING AREA 2,771,000 3,547,000 4,166,000 4,490,000 4,947,130
As illustrated by the foregoing tables, the Registrant has continued to expand its food store operations.
During 1997, net selling square footage increased 10.2%. The Registrant opened ten new food stores with selling areas ranging from 32,600 square feet to 40,800 square feet, relocated five existing stores to larger, new facilities and closed one store temporarily while it is being expanded.
During 1998, the Registrant expects to open eight new food stores, three of which will be located in the northeastern market area and five in the Southeast. The new stores will range from 32,000 square feet to 39,000 square feet of selling area. Also in the Southeast, the Registrant will relocate two of its existing stores to new facilities and close seven stores that have limited opportunity for profitable growth. It is expected that net retail selling area will increase approximately 4.2% in 1998.
As part of its ongoing expansion program, the Registrant will also consider the acquisition of additional supermarkets, if attractive opportunities become available.
The Registrant's distribution facilities which support its retail operations include:
1. An owned 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. An owned 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. An owned 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.
4. An owned 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.
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 evaluating a home shopping service called Hannaford's HomeRuns(R). 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, and there is no delivery charge on orders over $60.
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 Save(R)" to "Hannaford(R)".
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. Wholesale sales are not material.
No material expenditures were made during fiscal 1995, 1996 or 1997 on research activities relating to new or improved products, services or techniques.
The Registrant does not foresee that material capital outlays will be needed nor that material increases in operating expenses will be incurred for the purpose of compliance with any statutory requirement respecting environmental quality.
As of January 3, 1998, the Registrant had approximately 7,500 full-time and 14,900 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 59 of its 148 food stores and leases the remaining 89 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 northeastern 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 3, 1998, consisted of:
SQUARE SQUARE FOOTAGE FOOTAGE SELLING UNITS GROSS AREA AREA (in thousands)
Stores 148 6,915 4,947 Distribution and administrative facilities 5 1,860 -- Total 153 8,775 4,947
The following table sets forth expiration dates of leased facilities, assuming exercise of all renewal options:
LEASE ADMINISTRATIVE EXPIRATION FOOD STORES FACILITIES
1998-2007 4 2008-2017 4 2018-thereafter 81 1 89 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 1997.
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 53 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 40 Senior Vice President & 08/10/94 General Manager, Southeast Operations
Mr. Anicetti was elected Senior Vice President and General Manager, Southeast Operations in December 1995. He had been Senior Vice President, Retail Operations for the southeast since 1994 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 44 Senior Vice President, 01/02/92 Marketing, Merchandising & Distribution
Mr. Fritzson was elected Senior Vice President, Marketing, Merchandising and Distribution in December 1995. He had been Senior Vice President, Marketing since 1994, 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.
THOMAS B. FURBER 36 Vice President 05/12/97
Mr. Furber was elected Vice President in December 1995. He has been employed by the Registrant in various management capacities since June 1990.
ANDREW P. GEOGHEGAN, ESQ. 47 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 50 Senior Vice President, 08/10/94 Northeast Operations
Mr. Hodge was elected Senior Vice President, Northeast Operations in December 1995. He had been Senior Vice President, Retail Operations since 1994 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.
SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE:
BLYTHE J. MCGARVIE 41 Senior Vice President, 11/14/94 Chief Financial Officer
Ms. McGarvie was elected Senior Vice President and designated Chief Financial Officer in May 1995. 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.
LARRY A. PLOTKIN 47 Senior Vice President, 10/06/81 Corporate Development
Mr. Plotkin was elected Senior Vice President, Corporate Development in May 1995. He had been Senior Vice President, Development & Planning from 1992 to 1995, Senior Vice President, Development and Finance from 1990 to 1992, Vice President from 1989 to 1990, Vice President Wellby Super Drug Stores from 1987 to 1989 and Vice President Corporate Development from 1981 to 1987. He has been employed by the Registrant since 1972 in various real estate capacities.
MICHAEL J. STROUT 43 Senior Vice President, 12/19/94 Human Resources
Mr. Strout rejoined the Registrant as Senior Vice President, Human Resources 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.
ANDREW N. WESTLUND 45 Vice President, 10/04/92 Distribution
Mr. Westlund was elected Vice President, Distribution in 1992. He served as Vice President - Warehousing in 1992 after holding the position of Director, Warehouse Operations-New York since his employment in 1989. He was previously employed by Super Valu, Minneapolis, Minnesota as Warehouse Manager.
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 1996 and 1997.
QUARTERLY SALE PRICE DIVIDENDS HIGH LOW PER SHARE
1st Quarter, 1996 $29.375 $23.000 .120 2nd Quarter, 1996 33.125 27.000 .120 3rd Quarter, 1996 34.250 30.000 .120 4th Quarter, 1996 34.000 29.875 .120
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 1997 was the forty-ninth consecutive year that dividends were paid on the Common Stock and the thirty-fifth consecutive year that the aggregate dividend paid per share (after adjusting for stock splits) has increased. On February 13, 1998, the Board of Directors voted to increase the quarterly dividend to $.15 per share for the dividend due to be paid on March 26, 1998. Future dividends will depend on the Registrant's earnings and financial condition.
Item 6.
Item 6. Selected Financial Data
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
In 1997, the Company achieved increased sales of 9.1%. The increased sales were achieved by expanding supermarket selling area by 10.2%, a 2.3% increase in comparable store sales and an extra week of operations in the current year. Fiscal year 1997 contained 53 weeks of operations as compared to 52 weeks in 1996. A pre-tax, non-cash accounting charge of $40 million was recorded in the fourth quarter of 1997. Most of this charge related to a write-down in the value of assets, including goodwill, in certain southeastern stores (Note 4). Consolidated net earnings for fiscal 1997 amounted to $60 million, down 20.7% from last year's $75 million. Before the accounting charge, consolidated earnings for 1997 were $84 million or an increase of 12.2% over 1996 earnings.
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:
PERCENTAGE OF SALES YEAR-TO-YEAR PERCENTAGE AND OTHER REVENUES CHANGE IN DOLLAR VALUES EXCEPT PER SHARE AMOUNTS FISCAL 1997 FISCAL 1996 FISCAL YEAR COMPARED TO COMPARED TO 1997 1996 1995 FISCAL 1996 FISCAL 1995
100.0% 100.0% 100.0% Sales and other revenues 9.1% 15.2%
24.8 24.2 24.0 Gross margin 11.8 15.9
Selling, general and 19.7 19.2 18.7 administrative expenses 11.9 18.1 1.3 - - Impairment loss - -
3.8 5.0 5.3 Operating profit (15.6) 8.1
0.8 0.8 0.8 Interest expense, net 19.0 14.6
3.0 4.2 4.5 Earnings before income taxes (21.8) 7.0
1.2 1.7 1.8 Income taxes (23.4) 6.7
1.8% 2.5% 2.7% Net earnings (20.7) 7.1
$1.41 $1.78 $1.67 Basic earnings per share (20.8) 6.6
$1.40 $1.76 $1.66 Diluted earnings per share (20.5) 6.0
$ .54 $ .48 $ .42 Cash dividends 12.5 14.3
Sales
Sales and other revenues rose 9.1% in 1997, to $3,226 million, an increase of $269 million over 1996 results. Sales from supermarkets that were open in both periods presented, adjusted to exclude the 53rd week ("identical store sales"), increased $11 million or 0.4%. Additional supermarket sales of $248 million resulted from the net impact of new, expanded, relocated and closed stores coupled with the 53rd week of operations in 1997. Fiscal year 1997 contained 53 weeks of operations as compared to 52 weeks in 1996. This additional week accounted for approximately $58 million of the 1997 sales increase. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $10 million. Comparable store sales, which include results from expanded and relocated stores on a 52-week basis in both years presented, increased 2.3% in 1997.
Identical store sales, adjusted to exclude the 53rd week, were down 0.2% in the fourth quarter of 1997, while comparable store sales were up 1.6% in the quarter. The Company attributes a portion of the identical store sales decline in the last quarter to a very low inflation rate in food prices, the current competitive environment and a decrease in the availability of food stamps.
In 1996, sales and other revenues were $2,958 million, an increase of $390 million or 15.2% over 1995 results. Retail sales increased $372 million or 15.0%. Identical store sales reflected an increase of 2.5%. Other sales and revenues, which include trucking, wholesale, real estate and miscellaneous retail operations, increased $18 million in 1996.
Gross Margin
Gross margins increased in 1997 to 24.8% of sales and other revenues in comparison to 24.2% in 1996. The 1997 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. The Company continues to focus on maintaining a competitive pricing strategy.
Gross margins increased in 1996 to 24.2% of sales and other revenues in comparison to 24.0% in 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to 19.7% of sales and other revenues in 1997 as compared to 19.2% in 1996. 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 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.
Selling, general and administrative expenses increased to 19.2% of sales and other revenues in 1996 as compared to 18.7% in 1995. This increase is principally the result of additional costs of establishing the Company's position in its southeastern markets.
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 will 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 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 of average debt levels coupled with a decrease in invested cash which is reflected as a decrease in interest income.
Net interest expense in 1996 was $22 million, an increase of 14.6% from 1995 net interest expense of $19 million. This increase is primarily the result of an increase in average debt levels coupled with a decrease in invested cash.
Income Taxes
The provision for income taxes includes both federal and state income taxes. The effective tax rate decreased in 1997 to 38.8% from 39.6% in 1996 and 39.7% in 1995. These lower effective tax rates are the result of reductions in the Company's overall state income tax rate. Assuming there are no federal or state income tax rate changes, the Company expects the effective tax rate for 1998 and thereafter to be in the 37.8% to 38.2% range.
Net Earnings and Earnings Per Common Share
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 would have been $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.
Net earnings for the fourth quarter of 1997 were $1 million, a decrease of 93.5% over 1996 fourth quarter net earnings of $21 million. Basic earnings per common share exhibited a similar percentage decrease to $.03 for the fourth quarter of 1997 versus $.50 for the fourth quarter of 1996. This decrease is the result of the impairment loss. Before the impairment loss, net earnings were $26 million, an increase of 23.8% over the $21 million reported in 1996 and basic earnings per share were $.62, an increase of 24.0% over the $.50 reported in 1996.
Net earnings increased 7.1% in 1996 to $75 million or 2.5% of sales and other revenues, an increase of $5 million from 1995 net earnings of $70 million or 2.7% of sales and other revenues. 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 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 $1.76 reported for 1996. Before the impairment charge, basic earnings per common share would have been $2.00 as compared to $1.78 in 1996, an increase of 12.4%. Management estimates that the extra week of operations in the fourth quarter of 1997 increased net earnings by approximately $.04 per share. The Company is evaluating a home shopping service in the Boston, Massachusetts market called Hannaford's HomeRuns(R). This service generated a net loss of approximately $.11 per share in 1997 and $.05 per share in 1996. Management will continue to evaluate this business venture in 1998.
Basic earnings per common share in 1996 were $1.78 as compared to $1.67 in 1995, an increase of 6.6%. Diluted earnings per common share were $1.76 in 1996 as compared to $1.66 in 1995, an increase of 6.0%.
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.
During 1997, the Company accelerated its task of addressing the Year 2000 technology application issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failure or miscalculations, causing disruptions of operations. Management has developed a comprehensive Year 2000 compliance plan and initiated its implementation. The Company currently anticipates that this comprehensive program will be successfully completed in order to minimize any business interruptions resulting from this issue. The Company currently expects that its cost to complete this work will not be material to the Company's financial results.
CAPITAL RESOURCES AND LIQUIDITY
Overview
Measures of liquidity for each of the last three fiscal years are as follows: (Dollars in millions) January 3, December 28, December 30, 1998 1996 1995
Cash and cash items $58 $43 $ 7 Working capital (FIFO inventory) $39 $39 $39 Unused lines of revolving credit $54 $48 $64 Unused lines of short-term credit $30 $35 $44 Current ratio (FIFO inventory) 1.15 1.16 1.23
The Company continued to maintain a strong capital position at the end of fiscal 1997. Cash and cash items increased $15 million to $58 million at the end of the year. Lines of credit represent a continuing source of capital and are available for purposes of short-term financing. At January 3, 1998, the Company had $38 million outstanding on its revolving lines of credit. The Company is in a solid financial position to carry out its current expansion and growth plans in 1998.
In February 1996, the Company authorized a program to repurchase up to $75 million in shares of Hannaford common stock over 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. In 1997, the Company reacquired approximately 400,000 shares at a cost of $14 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 $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 has no net impact on cash provided by operating activities.
Cash provided by operating activities was $201 million in 1996, an increase of $63 million over the $138 million provided in 1995. This increase is primarily attributable to an overall decrease in net working capital items coupled with improved results of operations and higher depreciation and amortization. Inventories increased $34 million when comparing December 28, 1996 with December 30, 1995. This increase is attributable to additional retail inventory in new stores coupled with higher warehouse inventory due to the opening of the Company's new distribution facility in the Southeast. Accounts payable, accrued expenses and other liabilities increased $78 million over the same period reflecting the overall growth of the Company's operations.
Cash Flows from Investing Activities
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 as evidenced by 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. These 1997 capital investments were primarily composed of costs incurred in building and equipping new and expanded supermarkets and in improvements necessary to maintain current facilities and systems.
Net retail selling space for supermarkets increased 10.2% in 1997 to 4,947,000 square feet at year-end, an increase of 457,000 square feet over 1996 year-end sales area. The Company opened seventeen supermarkets including ten new stores, five relocations and two expansions, and temporarily closed one supermarket as it undergoes a substantial expansion. A number of 1997 supermarket construction starts will not be completed until 1998.
The number of supermarkets and square footage of selling area at year-ends 1997, 1996 and 1995 are summarized below:
SUPERMARKETS Number of Square Footage Units Selling Area
1997 148 4,947,000 1996 139 4,490,000 1995 134 4,166,000
Newly constructed supermarkets in 1997, together with their square footage of selling area, are listed below: SQUARE FOOTAGE LOCATION SELLING AREA
Northeast Chelmsford, MA 35,000 Dracut, MA 30,000 Guilderland, NY 33,000 Rutland, VT 34,000
Southeast Shallotte, NC 35,000 Danville, VA 41,000 Wilmington, NC (Murrayville Rd.) 35,000 Wilmington, NC (Carolina Beach) 41,000 Richmond, VA (Rt. 1 and Parham) 44,000 Charlotte, NC (Independence Blvd.) 41,000 Virginia Beach, VA (Shore Drive) 35,000 Virginia Beach, VA (Princess Anne) 40,000 Newport News, VA 37,000 Rock Hill, SC 40,000 Charlotte, NC (Eastland Mall) 41,000 Richmond, VA (Willow Lawn) 34,000 Virginia Beach, VA (Republic Drive) 40,000
During January 1998, the Company closed seven southeastern stores in non-core markets with limited opportunity for profitable growth. These closures will allow the Company to focus on its key southeastern market regions in 1998. The Company plans to invest approximately $50 million in new and remodeled stores in its key southeastern markets in 1998.
Cash used in investing activities increased $59 million during 1996 to $217 million from $158 million in 1995. This increase is primarily the result of the Company's increased capital investment in 1996. Total capital investments totaled $231 million in 1996 and were composed of $215 million in additions to property, plant and equipment, $8 million in deferred charges and computer software costs and $8 million in non-cash capital lease additions. These 1996 capital investments were primarily composed of costs incurred in building and equipping new and expanded supermarkets and in the construction of a new distribution facility in the Southeast. The distribution facility, located in Butner, North Carolina, began shipping product in November 1996.
Cash Flows from Financing Activities
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. 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 lines of credit. During 1996, the Company received $75 million of proceeds from a senior uncollateralized debt financing and $31 million of proceeds from borrowings on its revolving line of credit. In 1997, the Company made payments of $14 million on its long-term debt as compared to $29 million in 1996. This decrease of $15 million is the result of the Company, during 1996, utilizing a portion of its long-term debt proceeds to repay $11 million on its revolving lines of credit. In 1997, the Company purchased 400,000 shares of common stock at a cost of $14 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. These amounts were offset by proceeds of $10 million received during 1997 from the issuance of approximately 399,000 shares of treasury stock. The Company paid $23 million in dividends to common shareholders in 1997.
Quarterly cash dividends declared during 1997 totaled $.54 per common share, an increase of 12.5% over the $.48 per share declared during 1996. This was the thirty-fifth 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 1997 represented 27.3% of net earnings available to common shareholders before the impact of the non-cash impairment loss. In February 1998, the Company declared an increased quarterly dividend on its common stock of $.15 per share, payable March 26, 1998. The new quarterly dividend of $.15 per share represents an increase of 11.1% over the $.135 per share paid in each quarter of 1997.
Cash provided by financing activities was $51 million in 1996, an increase of $66 million from the $15 million of cash used in financing activities in 1995. This increase is the result of proceeds from the issuance of long-term debt partially offset by payments of long-term debt and purchases of treasury stock.
1998 Capital Program
Total capital expenditure commitments are projected to be in excess of $140 million in 1998, primarily for new store constructions, store relocations and expansions, equipment, vehicles and other asset expenditures. During 1998, 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 4% during 1998. Excluding the impact of the seven closed supermarkets, the Company's expansion program would yield an increase in retail square footage of approximately 8% during 1998. A number of projects scheduled to start in 1998 will not be completed until 1999. The 1998 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 statements, as defined in the Private Securities Litigation Reform Act of 1995. Examples of such statements in this report include those concerning the Company's expected future tax rates, Year 2000 technology application issue, 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, increases in interest rates or the Company's cost of borrowing, increases in labor rates due to low unemployment or other factors, unanticipated costs related to the opening and closing of stores or the inability to control various expense categories.
(2) Hannaford's future growth is dependent on its ability to expand its retail square footage. 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 the Company's projected future expansion.
(3) Adverse determinations with respect to pending or future litigation or other material claims against Hannaford could affect actual results.
(4) The costs of the Year 2000 issue and its action plan are management's best estimates, which were derived using assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans.
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.:
We have audited the consolidated financial statements of Hannaford Bros. Co. and Subsidiaries listed in Item 8 of this Form 10-K. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hannaford Bros. Co. and Subsidiaries as of January 3, 1998 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles.
s/Coopers & Lybrand
Portland, Maine January 21, 1998
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands) January 3, December 28, 1998 1996
Current assets: Cash and cash items $ 57,663 $ 42,505 Accounts receivable, net 14,918 17,384 Inventories (note 1C) 188,767 191,658 Prepaid expenses 7,801 5,834 Deferred income taxes (note 8) 6,912 4,589 Total current assets 276,061 261,970
Property, plant and equipment, net (notes 1D, 2 and 4) 777,909 723,176
Leased property under capital leases, net (note 3) 58,516 59,918
Other assets: Goodwill, net (notes 1F and 4) 67,552 95,654 Deferred charges, net (note 1G) 28,724 26,332 Computer software costs, net (note 1H) 16,551 13,658 Miscellaneous assets 1,877 3,019 Total other assets 114,704 138,663
$1,227,190 $1,183,727
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands except share amounts) January 3, December 28, 1998 1996 Current liabilities: Current maturities of long-term debt (note 2) $ 18,155 $ 14,213 Obligations under capital leases (note 3) 1,873 1,775 Accounts payable 182,252 177,895 Accrued payroll 25,526 22,554 Other accrued expenses 24,553 21,205 Income taxes 2,829 2,532 Total current liabilities 255,188 240,174
Deferred income tax liabilities (note 8) 18,265 23,757
Other liabilities 41,171 47,917
Long-term debt (note 2) 235,850 227,525
Obligations under capital leases (note 3) 75,687 75,198
Shareholders' equity (notes 5 and 7):
Class A Serial Preferred stock, no par, authorized 2,000,000 shares - - Class B Serial Preferred stock, par value $.01 per share, authorized 28,000,000 shares - - Common stock, par value $.75 per share: Authorized 110,000,000 shares; January 3, 1998: Issued 42,338,316 shares, outstanding 42,279,483 shares. December 28, 1996: Issued, 42,338,316 shares, outstanding 42,280,695 shares. 31,754 31,754 Additional paid-in capital 115,130 119,399 Preferred stock purchase rights 423 423 Retained earnings 456,063 419,459 603,370 571,035 Less common stock in treasury (January 3, 1998: 58,833 shares at cost, December 28, 1996: 57,621 shares at cost) 2,341 1,879 Total shareholders' equity 601,029 569,156 $1,227,190 $1,183,727
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts) FISCAL YEAR 1997 1996 1995
Sales and other revenues $3,226,433 $2,957,559 $2,568,061 Cost of sales 2,427,287 2,242,784 1,951,248
Gross margin 799,146 714,775 616,813 Selling, general and administrative expenses 635,355 568,033 481,017 Impairment loss (note 4) 39,950 - -
Operating profit 123,841 146,742 135,796
Interest expense, net (notes 1I and 2) 26,425 22,204 19,368
Earnings before income taxes 97,416 124,538 116,428
Income taxes (note 8) 37,769 49,333 46,227
Net earnings $ 59,647 $ 75,205 $ 70,201
Per share of common stock (note 1J):
Basic earnings per share $ 1.41 $ 1.78 $ 1.67
Diluted earnings per share $ 1.40 $ 1.76 $ 1.66
Cash dividends $ .54 $ .48 $ .42
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 1997 1996 1995 Cash flows from operating activities: Net income $ 59,647 $ 75,205 $ 70,201 Adjustments to reconcile net income to net cash provided by operating activities: Impairment loss 39,950 - - Depreciation and amortization 93,953 77,420 69,016 Decrease (increase) in inventories 2,891 (33,689) (25,545) Decrease (increase) in receivables and prepayments 599 (805) (1,196) Increase in accounts payable, accrued expenses and other liabilities 440 77,889 27,821 Increase (decrease) in income taxes payable 297 2,532 (5,409) Increase (decrease) in deferred taxes (7,815) 2,523 2,279 Other operating activities (446) 96 1,059 Net cash provided by operating activities 189,516 201,171 138,226
Cash flows from investing activities: Acquisition of property, plant and equipment (152,862) (215,067) (133,587) Sale of property, plant and equipment, net 6,143 5,958 2,607 Increase in goodwill and deferred charges (4,054) (1,930) (22,599) Increase in computer software costs (6,205) (5,933) (4,130) Net cash used in investing activities (156,978) (216,972) (157,709)
Cash flows from financing activities: Principal payments under capital lease obligations (1,788) (1,493) (1,404) Proceeds from issuance of long-term debt 26,600 106,500 11,400 Payments of long-term debt (14,418) (28,994) (18,452) Issuance of common stock 9,648 9,707 11,694 Purchase of treasury stock (14,379) (14,129) - Dividends paid (23,043) (20,302) (17,693) Net cash provided by (used in) financing activities (17,380) 51,289 (14,455)
Net increase (decrease) in cash and cash items 15,158 35,488 (33,938) Cash and cash items at beginning of year 42,505 7,017 40,955 Cash and cash items at end of year $ 57,663 $ 42,505 $ 7,017
See accompanying notes to consolidated financial statements.
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information
Cash paid during the year for: (In thousands)
1997 1996 1995
Interest (net of amount capitalized, $3,463 in 1997, $3,357 in 1996 and $2,529 in 1995) $26,396 $22,765 $21,986
Income taxes 41,202 42,577 49,254
Supplemental disclosure of noncash investing and financing activities
Capital lease obligations totalling $4,550,000, $7,652,000 and $1,997,000 were incurred during 1997, 1996 and 1995, respectively, when the Company entered into real estate leases.
Disclosure of accounting policy
For the purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments with maturities of three months or less when purchased, to be cash items.
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 3, 1998, for fiscal year 1997 (53 weeks), December 28, 1996, for fiscal year 1996 (52 weeks) and December 30, 1995, for fiscal year 1995 (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 84% of inventories were valued using the LIFO method in 1997 as compared to 71% in 1996. The LIFO method was elected in 1997 for the majority of inventories in the Company's southeastern operations. 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 $18,037,000 at January 3, 1998 and $17,076,000 at December 28, 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 1997 1996 3% Land and improvements $ 129,752 $ 117,218 3% Buildings 279,310 252,228 13% Furniture, fixtures and equipment 454,564 404,725 4% Leasehold interests and improvements 277,560 245,490 Construction in progress 29,124 31,850 1,170,310 1,051,511 Less accumulated depreciation and amortization 392,401 328,335 $ 777,909 $ 723,176
E. STORE OPENING COSTS
The noncapital expenditures incurred in opening new stores or remodelling existing stores are expensed in the year in which 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 $5,534,000 in 1997, $5,140,000 in 1996 and $4,448,000 in 1995.
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 $3,599,000 in 1997, $3,246,000 in 1996 and $5,609,000 in 1995.
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. All capitalized software costs are amortized on a straight-line method over a period of five years. Amortization expense charged to operations was $3,312,000 in 1997, $2,338,000 in 1996 and $2,448,000 in 1995.
I. CAPITALIZED INTEREST
The Company capitalizes interest as a part of the cost of acquiring and constructing certain assets. Capitalized interest was $3,463,000 in 1997, $3,357,000 in 1996 and $2,529,000 in 1995.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. EARNINGS PER COMMON SHARE
Effective for the 1997 fiscal year, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128 - EARNINGS PER SHARE. The Statement requires dual presentation of basic and diluted earnings per share of common stock on the consolidated statements of earnings. 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. Following is a reconciliation of the dual presentations of earnings per share for the fiscal years presented.
(Amounts in 000's) NET COMMON EARNINGS INCOME SHARES PER (NUMERATOR) (DENOMINATOR) SHARE
FISCAL 1997
Basic earnings per share $59,647 42,287 $1.41 Dilutive potential shares 445 Diluted earnings per share $59,647 42,732 $1.40
FISCAL 1996
Basic earnings per share $75,205 42,298 $1.78 Dilutive potential shares 323 Diluted earnings per share $75,205 42,621 $1.76
FISCAL 1995
Basic earnings per share $70,201 42,092 $1.67 Dilutive potential shares 260 Diluted earnings per share $70,201 42,352 $1.66
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 items, accounts receivable and notes receivable: The carrying amounts reported in the balance sheet for these items approximate their fair value.
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 $254,005,000 at January 3, 1998. The fair value of the long-term debt is estimated to be $259,519,000 at January 3, 1998.
L. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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 are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has determined that the new standards will not have a material impact to existing financial reporting.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. EXTERNAL FINANCING
At January 3, 1998, 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 3, 1998, there were $38,100,000 of outstanding borrowings under these credit lines with a weighted-average interest rate of 7.0%. 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 unused, uncommitted short-term lines of credit with three banks totalling $36,000,000 at January 3, 1998. Of this amount, approximately $6,100,000 is reserved to support outstanding standby letters of credit which guarantee payment of certain insurance claims and premiums.
In February 1997, the Company received the proceeds of a $20,000,000 senior uncollateralized debt financing. The term of the debt is 12 years, with an average life of 10 years and an interest rate of 7.41%.
At January 3, 1998, real estate and equipment with a net book value of approximately $84,082,000 served as collateral for debt of approximately $73,648,000.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net interest expense was as follows: (In thousands)
1997 1996 1995
Interest on debt $20,108 $17,460 $15,302 Capital lease interest 9,902 9,351 9,105 Capitalized interest (3,463) (3,357) (2,529) Interest income (122) (1,250) (2,510) $26,425 $22,204 $19,368
Long-term debt consists of the following:
(In thousands) 1997 1996
Uncollateralized senior notes due in varying annual installments through 2016 with interest from 6.16% to 8.97%. $136,250 $123,500
Collateralized by real estate, due in varying installments through 2011 with interest from 7.55% to 10.35% 70,665 75,255
Uncollateralized revolving credit loans with interest from 6.34% to 7.44% 38,100 31,500
Collateralized by equipment, due in varying installments through 1999 with interest from 6.30% to 7.72%. 2,983 4,417
Other 6,007 7,066
254,005 241,738
Less current portion 18,155 14,213 $235,850 $227,525
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 3, 1998, are as follows:
(In thousands) 1998 $ 18,155 1999 20,918 2000 30,215 2001 33,404 2002 25,733 2003 and thereafter 125,580 $254,005
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, transportation vehicles 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) 1997 1996
Real property $84,494 $83,047 Less accumulated amortization 25,978 23,129 Net real property under capital leases $58,516 $59,918
Amortization of property under capital leases was $4,322,000 in 1997, $4,004,000 in 1996 and $3,866,000 in 1995.
Future minimum rental payments under capital lease obligations and operating leases at January 3, 1998, are as follows: (In thousands) CAPITAL OPERATING LEASES LEASES
1998 $ 11,730 $ 20,881 1999 11,934 20,148 2000 12,050 18,442 2001 11,919 17,176 2002 12,147 16,668 2003 and thereafter 118,996 176,593
Total minimum lease payments 178,776 $269,908
Less: Imputed interest (at rates from 6.50% to 21.13%) 101,216 Present value of net mini- mum lease payments 77,560 Less current obligations 1,873 Long-term obligations $ 75,687
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 $2,406,000 and $7,506,000, 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)
1997 1996 1995
Capital leases: Contingent rentals $ 194 $ 169 $ 166
Operating leases: Minimum rentals 20,584 19,019 13,847 Contingent rentals 714 491 517 Rentals from subleases (1,492) (690) (222) 19,806 18,820 14,142 $20,000 $18,989 $14,308
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 upon STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 121 - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. Based on a review of certain Company locations, in 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 relates to supermarket assets and related costs for stores that were closed in January 1998 and are being held for sale or disposal, and $15,950,000 relates to supermarket assets which will continue to be used in the operations of the Company. Management expects to complete the sale or disposal of the assets relative to the closed supermarkets, whose estimated fair values are approximately $8,987,000, within one year from the dates of closure. In 1997 the operating losses of these closed supermarkets were not material.
Management's estimated future discounted cash flows from these supermarket locations indicated that such cash flows were insufficient to recover the asset carrying values. Therefore, such carrying values were written down to estimated fair value less costs to sell. Under SFAS NO. 121, the potential impairment evaluation is made on an individual supermarket basis and involves considerable management judgment as to the expected future sales and profitability of each individual supermarket. Actual results of these supermarkets may differ from management's estimates.
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 will become effective upon the expiration of the Company's existing rights plan on February 4, 1998. The replacement plan is substantially identical to the existing 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 during 1997 and 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. Since 1995 the Company has issued to the Sobey Parties the following shares of common stock pursuant to their purchase rights under the agreement: 1996, 19,600 shares and 1995, 132,000 shares. 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 and the resulting slowdown in the growth of Company shares outstanding, the Sobey Parties purchased no additional shares in 1997.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. EMPLOYEE BENEFIT PLANS
The Company has 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. At September 30, 1997 and 1996, the plan's measurement dates, the discount rates used in determining the actuarial present values of the projected benefit obligations were 7.50% and 8.25%, respectively; the long-term rate of increase in compensation levels was assumed to be 4.5% in both years. The expected long-term rate of return on plan assets used in determining net pension expense was 10.5% for 1997, 9.5% for 1996, and 9.0% for 1995.
In October 1996, the Board of Directors approved an amendment to the plan which converts it to a cash balance plan. This amendment was effective January 1, 1998, and has resulted in the remeasurement of the plan's projected benefit obligation. The accrued pensions costs as of January 3, 1998 and the net pension expense for the year then ended, reflect the plan's remeasurement.
The components of net pension expense were as follows:
(In thousands)
1997 1996 1995
Service cost $ 3,117 $ 4,709 $ 4,248 Interest expense 5,613 5,155 4,916 Actual return on plan assets (20,074) (7,194) (8,566) Net amortization and deferral 13,252 1,662 3,769
Net pension expense $ 1,908 $ 4,332 $ 4,367
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following summarizes the funded status of the plan at January 3, 1998 and December 28, 1996:
(In thousands) 1997 1996
Actuarial present value of benefit obligations: Vested benefit obligation $71,707 $59,828 Accumulated benefit obligation $76,474 $63,849
Projected benefit obligation $81,942 $68,864 Plan assets at fair value 88,385 70,391
Plan assets greater than projected benefit obligation (6,443) (1,527)
Unrecognized net asset at transition 308 352
Unrecognized net gain 13,141 7,359
Unrecognized prior service cost (2,611) (2,895)
Accrued pension cost $ 4,395 $ 3,289
The Company also provides certain health care and life insurance benefits for retired employees. The discount rates used to determine the accumulated benefit obligation at September 30, 1997 and 1996, the plan's measurement date, were 7.50% and 8.25%, respectively. A 6.0% annual rate of increase in the per capita costs of covered health care was assumed for 1998, gradually decreasing to 5% by the year 2000. A 1% increase in the assumed rate of increase would not have a material effect on the benefit obligation or expense. The Company does not separately fund this plan.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of postretirement benefit expense were as follows:
(In thousands)
1997 1996 1995 Service cost $ 35 $ 70 $ 65 Interest expense 248 438 530 Net amortization and deferral (60) 167 231
Net periodic postretirement benefit expense $ 223 $ 675 $ 826
The following summarizes the status of the plan at January 3, 1998 and December 28, 1996: (In thousands) 1997 1996 Accumulated benefit obligation:
Retirees $ 2,138 $ 3,836 Actives - eligible to retire 361 559 Actives - not eligible to retire 619 985
Total obligation 3,118 5,380
Unrecognized transition obligation (8,283) (8,847) Unrecognized net gain 6,273 5,003 Accrued postretirement benefit liability $ 1,108 $ 1,536
The Company also provides a defined contribution 401(k) plan to substantially all employees. Amounts charged to expense for this plan were $2,916,000 in 1997, $3,076,000 in 1996 and $2,744,000 in 1995. The Company also administers a supplemental executive retirement plan for which the cost was not significant.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. EMPLOYEE STOCK PLANS
The 1985 Incentive Stock Option Plan (the final grants under which expired on May 4, 1996) and the 1988 Stock Plan 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. The 1988 Stock Plan allows the granting of both incentive stock options and non-qualified stock options. Under the 1988 Stock Plan, 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 Plan, 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 (seven years in the case of the 1985 Incentive Stock Option Plan). Incentive stock option activity for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, was as follows:
(Share Amounts in Thousands) 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price
Outstanding at beginning of year 1,422 $24.91 1,362 $22.37 1,185 $20.43 Granted 367 34.63 359 30.39 336 26.75 Exercised (261) 22.85 (287) 19.63 (137) 16.08 Cancelled (16) 30.89 (12) 26.74 (22) 23.66 Outstanding at end of year 1,512 27.57 1,422 24.91 1,362 22.37 Exercisable at end of year 912 24.02 902 22.42 860 20.85
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Non-qualified stock option activity for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, was as follows:
(Share Amounts in Thousands) 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price
Outstanding at beginning of year 366 $28.18 218 $24.60 103 $22.09 Granted 127 36.15 189 31.30 116 26.85 Exercised (13) 27.89 (35) 19.96 - - Cancelled - - (6) 29.01 (1) 25.04 Outstanding at end of year 480 30.29 366 28.18 218 24.60 Exercisable at end of year 252 26.68 151 24.60 80 22.19
Available for future grants (all plans) 92 - 569 - 1,089 -
Exercise prices for options outstanding as of January 3, 1998 ranged from $18.81 to $43.44. 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 116,849 shares, for which $2,595,828 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 3, 1998, grants had been exercised by employees for the purchase of 111,509 shares and 834,915 shares remained available for issuance under the Plan. As of February 1998, $2,926,442 had been received by the Company upon issuance of these shares and the balance of shares available for future issuance was reduced to 723,711.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 1995, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards (SFAS) No. 123 - Accounting for Stock Based Compensation". This statement 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), "Accounting for Stock Issued to Employees". 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) 1997 1996 1995
Net earnings As reported $59,647 $75,205 $70,201 Proforma 56,436 72,567 68,814
Basic earnings per share As reported $1.41 $1.78 $1.67 Proforma 1.33 1.71 1.63
During the phase-in period of SFAS No. 123, the fair value of stock options included in the proforma accounts for fiscal 1997, 1996 and 1995 is not necessarily indicative of the future effects on net income and earnings per share.
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: 1997 1996 1995
Risk-free interest rate 6.85% 7.03% 6.61% Dividend yield 1.55% 1.54% 1.60% Expected volatility 19.42% 19.44% 18.77% Expected life 4.5 yrs. 4.9 yrs. 4.6 yrs.
The weighted-average grant date fair values of options granted during 1997, 1996 and 1995 were $8.84, $8.28 and $6.76, 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)
1997 1996 1995 Current Federal $37,028 $38,842 $35,689 State 4,790 7,969 8,259 41,818 46,811 43,948 Deferred Federal (2,801) 2,276 2,024 State (1,248) 246 255 (4,049) 2,522 2,279 Total income tax expense $37,769 $49,333 $46,227
The reconciliation of income tax computed at the United States Federal statutory tax rates to income tax expense is:
(In thousands)
1997 1996 1995
Amount Percent Amount Percent Amount Percent
Tax at U.S. statutory rate $34,096 35.00% $43,588 35.00% $40,750 35.00% State income taxes, net of federal tax benefit 3,487 3.58 5,280 4.24 5,530 4.75 Other - net 186 .19 465 .37 (53) (.05)
$37,769 38.77% $49,333 39.61% $46,227 39.70%
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 for the fiscal years ended January 3, 1998 and December 28, 1996 were as follows:
(In thousands)
1997 1996
Deferred Tax Liabilities:
Depreciation and amortization $33,238 $38,729 Other 3,427 4,398 36,665 43,127
Deferred Tax Assets:
Capital leases (7,588) (6,870) Insurance reserves (10,380) (9,412) Associate benefit plans (4,736) (5,400) Other (2,608) (2,277) (25,312) (23,959)
11,353 19,168
Net current deferred tax assets 6,912 4,589
Net non-current deferred tax liabilities $18,265 $23,757
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, 1998.
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, 1998.
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, 1998.
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, 1998.
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............................. 26
Consolidated Balance Sheets - January 3, 1998 and December 28, 1996.......................................... 27-28
Consolidated Statements of Earnings - Fiscal Years Ended, Janaury 3, 1998, December 28, 1996 and December 30, 1995... 29
Consolidated Statements of Changes in Shareholders' Equity - Fiscal Years Ended, January 3, 1998, December 28, 1996 and December 30, 1995.................... 30
Consolidated Statements of Cash Flows - Fiscal Years Ended, January 3, 1998, December 28, 1996 and December 30, 1995.................... 31-32
Notes to Consolidated Financial Statements.................... 33-54
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 Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603).
3.2 - By-Laws of the Registrant Incorporated by reference to Exhibit 3.2 to the
PAGES Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603).
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 10.25 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 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Employees' Retirement Plan, effective January 1, 1998, 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 28, 1996 (SEC File No. 1-7603).
10.4 - 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).
10.5 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Supplemental Executive Retirement Plan, effective January 1, 1998, a copy of which was filed
PAGES
as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603).
10.6 - 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).
10.7 - 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) and (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).
10.8 - The Third Amendment to the Registrant's 1993 Long Term 66 Incentive Plan, effective December 15, 1997.
10.9 - The Amended and Restated Hannaford Bros. Co. 1993 Long 67-71 Term Incentive Plan, effective January 4, 1998, subject to approval by the Shareholders of the Registrant.
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10.10 - There are incorporated herein by reference (i) the Registrant's 1980 Long Term Incentive Plan, a copy of which was filed as Exhibit 10B to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1981 (SEC File No. 1-7603); (ii) an Amendment to said Plan, 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, 1987 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, 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 2, 1988 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1988 (SEC File No. 1-7603); (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603) and (vi) the Fifth Amendment to said Plan, a copy of which was filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (SEC File No. 1-7603).
10.11 - 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).
10.12 - There are incorporated herein by reference (i) an Employment Continuity Agreement between the Registrant and Hugh G. Farrington, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603); (ii) the First Amendment to said Agreement, 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 2, 1993 (SEC File No. 1-7603) and (iii) the Second Amendment to said Agreement, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603).
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10.13 - Amended and Restated Employment Continuity Agreement 72-79 between the Registrant and Hugh G. Farrington, effective January 1, 1998.
10.14 - There are incorporated herein by reference (i) a 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 December 29, 1990 (SEC File No. 1-7603); (ii) the First Amendment to Form of said Agreement, 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 2, 1993 (SEC File No. 1-7603) and (iii) the Second Amendment to form of said Agreement, a copy of which was filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603).
10.15 - Amended and Restated Standard Form of Employment 80-87 Continuity Agreement between the Registrant and various of its executive offices, effective January 1, 1998.
10.16 - 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).
10.17 - 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
PAGES
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 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).
10.18 - 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).
10.19 - There is incorporated herein by reference the Hannaford Savings and Investment Plan (Merging and Amending the Hannaford Northeast Savings and Investment Plan and the Hannaford Southeast Savings and Investment Plan), effective January 1, 1998, a copy of which was filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603).
10.20 - 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).
10.21 - 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
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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).
10.22 - 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).
10.23 - 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).
10.24 - 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).
10.25 - Hannaford Bros. Co. 1998 Stock Option Plan, effective upon 88-99 approval by the Shareholders of the Registrant.
10.26 - Hannaford Bros. Co. 1998 Restricted Stock Plan, effective 100-107 February 13, 1998.
10.27 - 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
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(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).
10.28 - 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).
10.29 - There are incorporated herein by reference (i) a Letter Agreement between the Registrant and Norman E. Brackett, dated June 30, 1995, a copy of which was filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603) and (ii) a Consulting Agreement between the Registrant and Norman E. Brackett, dated June 30, 1995, a copy of which was filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603).
10.30 - 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).
21 - Subsidiaries of the Registrant............................ 108
23 - Consents of Accountants................................... 109
27 - Financial Data Schedule
(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 Sr. Vice President, Chief Financial Officer (Principal Financial Officer) March 9, 1998
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/Bruce G. Allbright s/Robert D. Bolinder Walter J. Salmon Bruce G. Allbright Robert D. Bolinder Chairman of the Board Director Director Director March 9, 1998 March 9, 1998 March 9, 1998
s/William T. End s/James W. Gogan s/Blythe J. McGarvie William T. End James W. Gogan Blythe J. McGarvie Director Director Sr. Vice President, March 9, 1998 March 9, 1998 Chief Financial Officer (Principal Accounting Officer) March 9, 1998
s/Richard K. Lochridge s/Renee M. Love Richard K. Lochridge Renee M. Love s/Hugh G. Farrington Director Director Hugh G. Farrington March 9, 1998 March 9, 1998 President Chief Executive Officer Director s/Claudine B. Malone s/Robert J. Murray March 9, 1998 Claudine B. Malone Robert J. Murray Director Director March 9, 1998 March 9, 1998
s/David F. Sobey s/Robert L. Strickland David F. Sobey Robert L. Strickland Director Director March 9, 1998 March 9, 1998