-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HHXdN3ufV8V4LKrqrZLueSNrkw8UZWrRhEBLVgNWqCOx+NeDqiB/ynIoqn1ufy7Y 5bA1qzbVOWnisv2xqTiBbg== 0000045379-98-000019.txt : 19981113 0000045379-98-000019.hdr.sgml : 19981113 ACCESSION NUMBER: 0000045379-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANNAFORD BROTHERS CO CENTRAL INDEX KEY: 0000045379 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 010085930 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07603 FILM NUMBER: 98744663 BUSINESS ADDRESS: STREET 1: 145 PLEASANT HILL RD CITY: SCARBOROUGH STATE: ME ZIP: 04074 BUSINESS PHONE: 2078832911 10-Q 1 THIRD QUARTER 1998 FORM 10-Q -1- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7603 HANNAFORD BROS. CO. (Exact name of Registrant as specified in its charter) Maine 01-0085930 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 145 Pleasant Hill Road, Scarborough, Maine 04074 (Address of principal executive offices; Zip Code) Registrant's telephone number, including area code: (207) 883-2911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of November 2, 1998, there were 42,283,491 outstanding shares of Common Stock, $.75 par value, the only authorized class of common stock of the Registrant. Form 10-Q HANNAFORD BROS. CO. 1-7603 OCTOBER 3, 1998 INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Consolidated Balance Sheets, October 3, 1998 and January 3, 1998 3-4 Consolidated Statements of Earnings, Three Months Ended October 3, 1998 and September 27, 1997 5 Consolidated Statements of Earnings, Nine Months Ended October 3, 1998 and September 27, 1997 6 Consolidated Statements of Cash Flows Nine Months Ended October 3, 1998 and September 27, 1997 7-8 Notes and Schedules to Consolidated Financial Statements 9-11 Item 2. Management's Discussion and Analysis of Third Quarter 1998 Results 12-22 PART II - OTHER INFORMATION Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8K 23 Signatures 24 HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Dollars in thousands) (UNAUDITED) October 3, January 3, 1998 1998 ------------ ------------ Current assets: Cash and cash equivalents $ 42,874 $ 57,663 Accounts receivable, net 17,420 14,918 Inventories 196,010 188,767 Prepaid expenses 7,482 7,801 Deferred income taxes 5,000 6,912 ---------- ---------- Total current assets 268,786 276,061 Property, plant and equipment, net 821,991 777,909 Leased property under capital leases, net 55,962 58,516 Other assets: Goodwill, net 64,538 67,552 Deferred charges, net 25,859 28,724 Computer software costs, net 18,556 16,551 Miscellaneous assets 1,791 1,877 ---------- ---------- Total other assets 110,744 114,704 ---------- ---------- $1,257,483 $1,227,190 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands except per share amounts) (UNAUDITED) October 3, January 3, 1998 1998 ------------ ------------ Current liabilities: Current maturities of long-term debt $ 18,108 $ 18,155 Obligations under capital leases 1,977 1,873 Accounts payable 175,646 182,252 Accrued payroll 26,310 25,526 Other accrued expenses 23,356 24,553 Income taxes 4,967 2,829 ---------- ---------- Total current liabilities 250,364 255,188 Deferred income tax liabilities 21,760 18,265 Other liabilities 37,705 41,171 Long-term debt 229,497 235,850 Obligations under capital leases 74,449 75,687 Shareholders' equity: Class A Serial Preferred stock, no par, authorized 2,000 shares - - Class B Serial Preferred stock, par value $.01 per share, authorized 28,000 shares - - Common stock, par value $.75 per share: Authorized 110,000 shares; 42,280 and 42,279 shares outstanding 31,754 31,754 Additional paid-in capital 110,402 115,130 Preferred stock purchase rights 423 423 Retained earnings 503,699 456,063 ---------- ---------- 646,278 603,370 Less common stock in treasury 59 and 59 shares 2,570 2,341 ---------- ---------- Total shareholders' equity 643,708 601,029 ---------- ---------- $1,257,483 $1,227,190 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) (UNAUDITED) THREE MONTHS ENDED October 3, September 27, 1998 1997 ------------ ------------ Sales and other revenues $854,675 $820,115 Cost of sales 637,026 617,055 -------- -------- Gross margin 217,649 203,060 Selling, general and administrative expenses 169,276 160,066 -------- -------- Operating profit 48,373 42,994 Interest expense, net 6,773 6,050 -------- -------- Earnings before income taxes 41,600 36,944 Income taxes 15,768 14,147 -------- -------- Net earnings $ 25,832 $ 22,797 ======== ======== Earnings per share: Basic $ .61 $ .54 ======== ======== Diluted $ .60 $ .53 ======== ======== Cash dividends per share $ .150 $ .135 ======== ======== Weighted average number of common shares outstanding Basic 42,278 42,290 ======== ======== Diluted 42,925 42,714 ======== ======== See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) (UNAUDITED) NINE MONTHS ENDED October 3, September 27, 1998 1997 ------------- ------------- Sales and other revenues $2,473,342 $2,355,725 Cost of sales 1,849,762 1,772,400 ---------- ---------- Gross margin 623,580 583,325 Selling, general and administrative expenses 496,136 469,183 ---------- ---------- Operating profit 127,444 114,142 Interest expense, net 19,925 19,635 ---------- ---------- Earnings before income taxes 107,519 94,507 Income taxes 40,853 36,242 ---------- ---------- Net earnings $ 66,666 $ 58,265 ========== ========== Earnings per share: Basic $ 1.58 $ 1.38 ========= ========== Diluted $ 1.55 $ 1.37 ========= ========== Cash dividends per share $ .450 $ .405 ========= ========== Weighted average number of common shares outstanding Basic 42,285 42,288 ========= ========== Diluted 42,903 42,707 ========= ========== See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED) NINE MONTHS ENDED October 3, September 27, 1998 1997 ------------- ------------- Cash flows from operating activities: Net income $ 66,666 $ 58,265 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 71,941 67,733 (Increase) decrease in inventories (7,243) 8,362 (Increase) decrease in receivables and prepayments (2,135) 1,257 Increase (decrease) in accounts payable and accrued expenses (10,485) 21,463 Increase in income taxes payable 2,139 2,153 Increase in deferred taxes 5,407 3,170 Other operating activities (387) (202) -------- -------- Net cash provided by operating activities 125,903 162,201 -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (112,473) (116,086) Sale of property, plant and equipment, net 8,005 2,145 (Increase) decrease in deferred charges 767 (7,591) Increase in computer software costs (5,315) (4,958) -------- -------- Net cash used in investing activities (109,016) (126,490) -------- -------- Cash flows from financing activities: Principal payments under capital lease obligations (1,288) (1,330) Proceeds from issuance of long-term debt 20,000 20,000 Payments of long-term debt (26,401) (21,929) Issuance of common stock 8,397 7,381 Purchase of treasury stock (13,355) (10,855) Dividends paid (19,029) (17,134) -------- -------- Net cash used in financing activities (31,676) (23,867) -------- -------- Net increase (decrease) in cash and cash equivalents (14,789) 11,844 Cash and cash equivalents at beginning of period 57,663 42,505 -------- -------- Cash and cash equivalents at end of period $ 42,874 $ 54,349 ======== ======== See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information (in thousands) (UNAUDITED) NINE MONTHS ENDED October 3, September 27, 1998 1997 ------------- ------------- Cash paid during the first nine months for: Interest (net of amount capitalized, $1,665 in 1998 and $2,616 in 1997) $19,062 $18,643 ======= ======= Income taxes $33,293 $30,049 ======= ======= Supplemental disclosure of non-cash investing and financing activity Capital lease obligations of $1,166,000 and $4,550,000 were incurred during the nine month period ended October 3, 1998 and September 27, 1997 respectively, when the Company entered into real estate leases. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the amounts shown reflect all adjustments necessary to present fairly the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The year-end consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report. The preparation of the Company's consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the end of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 2. EARNINGS PER COMMON SHARE Basic earnings per share of common stock have been determined by dividing net earnings by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share reflect the potential dilution that would occur if existing stock options were exercised. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. 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. Net income reflects the application of the LIFO method based upon estimated annual inflation. LIFO expense was $1.2 million in the first three quarters of 1998 and $.6 million in the first three quarters of 1997. In the third quarter of 1998, LIFO expense was $.4 million as compared to $.2 million in the third quarter of 1997. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: (in thousands) (Unaudited) October 3, January 3, 1998 1998 ------------- ------------ Land and improvements $ 141,766 $ 129,752 Buildings 300,302 279,310 Furniture, fixtures & equipment 495,054 454,564 Leasehold interests & improvements 315,439 277,560 Construction in progress 8,255 29,124 ---------- ---------- 1,260,816 1,170,310 Less accumulated depreciation and amortization 438,825 392,401 ---------- ---------- $ 821,991 $ 777,909 ========== ========== HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. LONG-TERM DEBT In April 1998, the Company received the proceeds of a $20 million senior uncollateralized debt financing. The term of the debt is 10 years with an average life of 7 years and an interest rate of 6.3%. 6. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130 Reporting Comprehensive Income, which requires the separate reporting of all changes to shareholders' equity, and SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information, which revises existing guidelines about the level of financial disclosure of a company's operations. Both statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has determined that the new standards will not necessitate any changes to existing financial reporting. In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting For the Costs of Computer Software Developed For or Obtained For Internal-Use. The SOP will be effective for the Company beginning January 3, 1999 (fiscal 1999). The SOP will require the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The Company currently capitalizes these costs. Although amounts capitalized in fiscal 1999 must be adjusted to conform to this SOP, the Company does not anticipate that there will be a material impact on its results of operations or financial position after SOP 98-1 is adopted. In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities, which requires entities to report all derivatives at fair value as assets or liabilities in their statements of financial position. This statement is effective for financial statements issued for fiscal periods beginning after June 15, 1999. The Company does not currently have any derivative instruments or hedging activities to report under this standard. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES Sales and other revenues rose 5.0% for the first three quarters of 1998, to $2.473 billion, an increase of $118 million over the first three quarters of 1997. Supermarket sales increased $112 million or 4.9%. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $6 million. Sales from supermarkets that were open in both periods reported ("identical store sales") were up 1.0%. Comparable store sales, which include results from expanded and relocated stores, increased 1.7% in the first three quarters of 1998. In the third quarter of 1998, sales and other revenues were $855 million, an increase of $35 million or 4.2% over those reported for the same period of 1997. Identical store sales increased 1.0% in the third quarter, while comparable store sales were up 1.6%. It should be noted that sales from the Independence Day holiday period were included in the second quarter of this year and the third quarter last year, but identical and comparable store sales have been adjusted to reflect this holiday shift. GROSS MARGIN During the first nine months of 1998, gross margins increased to 25.2% of sales and other revenues in comparison to 24.8% for the comparable 1997 period. For the third quarter of 1998, gross margin was 25.5% versus 24.8% for the third quarter of 1997. The 1998 increases are the result of improved selling margins in certain of the Company's marketing territories. The Company continues to focus on maintaining a competitive pricing strategy. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to 20.1% of sales and other revenues in the first three quarters of 1998 as compared to 19.9% in the comparable 1997 period. For the third quarter of 1998, selling, general and administrative expenses were HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19.8% of sales and other revenues up from 19.5% for the third quarter of 1997. Payroll and payroll related expenses, which exceeded 50% of selling, general and administrative expenses in all periods presented, increased as a percentage of sales in the 1998 reporting periods. INTEREST EXPENSE, NET Net interest expense expressed as a percentage of sales and other revenues was 0.8% in the first three quarters of 1998 and the first three quarters of 1997. Net interest expense was 0.8% in the third quarter of 1998 versus 0.7% in the third quarter of 1997. The third quarter increase is primarily the result of a reduction in capitalized interest due to the Company's decreased construction activities. INCOME TAXES The effective income tax rate decreased in the first three quarters of 1998 to 38.0% from 38.3% in the corresponding period of 1997. In the third quarter of 1998 the effective income tax rate decreased to 37.9% from 38.3% in the third quarter of 1997. These lower rates are the result of a reduction 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 fiscal 1998 to be in the 37.8% to 38.1% range. NET EARNINGS AND EARNINGS PER COMMON SHARE Net earnings increased 14.4% in the first three quarters of 1998 to $67 million or 2.7% of sales and other revenues, an increase of approximately $9 million from 1997 first three quarters net earnings of $58 million or 2.5% of sales and other revenues. Net earnings increased 13.3% in the third quarter of 1998 to $26 million or 3.0% of sales and other revenues, an increase of approximately $3 million from 1997 third quarter net earnings of $23 million or 2.8% of sales and other revenues. Expressed as a percentage of sales, net earnings increased in both the third quarter and first three quarters of 1998 as increased sales and margins, coupled with a reduction in the income tax rate, were only partially offset by higher selling, general and administrative expenses. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Basic earnings per common share in the first three quarters of 1998 were $1.58 as compared to $1.38 in the first three quarters of 1997, an increase of 14.5%. Diluted earnings per common share (Note 2) were $1.55 in the first three quarters of 1998 as compared to $1.37 in the first three quarters of 1997. Basic earnings per common share were $.61 in the third quarter of 1998 versus $.54 in the third quarter of 1997, an increase of 13.0%. Diluted earnings per common share (Note 2) were $.60 in the third quarter of 1998 as compared to $.53 in the third quarter of 1997. The Company continues to evaluate its home shopping service in the Boston, Massachusetts market called Hannaford's HomeRuns(R). This service generated a net loss of approximately $.11 per common share in the first three quarters of 1998 and $.08 per common share in the first three quarters of 1997. Management estimates that this service will reduce both basic and diluted earnings by a minimum of $.13 per common share in fiscal 1998. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Measures of liquidity for the periods presented are as follows: (Dollars in millions) October 3, January 3, 1998 1998 ---------- ---------- Cash and cash equivalents $43 $58 Working capital (FIFO inventory) $38 $39 Unused lines of revolving credit $68 $54 Unused lines of short-term credit $ 5 $30 Current ratio (FIFO inventory) 1.15 1.15 Cash and cash equivalents decreased $15 million to $43 million at the end of the third quarter of 1998. This decrease was the result of cash used in financing and investing activities partially offset by cash provided by operating activities. Lines of credit represent a continuing source of capital and are available for purposes of short-term financing. At October 3, 1998, the Company had $24 million outstanding on its revolving lines of credit. Management believes that the Company is in a solid financial position to carry out its current expansion and operating plans. CASH FLOWS FROM OPERATING ACTIVITIES Cash provided by operating activities was $126 million in the first three quarters of 1998, a decrease of $36 million from $162 million provided in the first three quarters of 1997. This decrease is primarily attributable to a decrease in accounts payable and an increase in inventories. The fluctuations within these accounts are part of the Company's normal business operations. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities decreased $17 million in the first three quarters of 1998 to $109 million from $126 million in the first three quarters of 1997. This decrease is the result of the Company's reduced capital investment and the increased net book value of assets sold during the current year. During the first three quarters of 1998, the Company completed the sale of certain assets relating to supermarkets that were closed in January 1998 which had been written down to their estimated fair values in the fourth quarter of 1997. Capital investments totaled $118 million in the first three quarters of 1998 and were composed of $112 million in additions to property, plant and equipment, $5 million in deferred charges and computer software costs and $1 million in non-cash capital lease additions. These capital investments consist primarily of costs incurred in building and equipping new and expanded supermarkets and in improvements necessary to maintain current facilities and systems. In 1998, the Company expects to spend in excess of $140 million on new, relocated and expanded stores to open in 1998 and 1999 and improvements necessary to maintain current facilities and systems. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the first three quarters of 1998, the Company opened 13 supermarkets including 8 new stores, 2 relocations and 3 expansions. These supermarkets, together with their square footage of selling area, are listed below: Square Footage Location Selling Area Northeast Machias, ME (expansion) 18,000 Lincoln, ME (expansion) 19,000 Rindge, NH 39,000 Herkimer, NY 41,000 Hampstead, NH 34,000 Southeast Rocky Mount, NC 41,000 Gastonia, NC 42,000 Richmond, VA (expansion) 34,000 York County, VA 41,000 Virginia Beach, VA 40,000 Portsmouth, VA 41,000 Southport, NC (relocation) 30,000 Wilmington, NC (relocation) 34,000 In 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 during 1998. The Company plans to invest approximately $50 million in new, remodeled and expanded stores in its key southeastern markets in 1998. During the fourth quarter of 1998, the Company expects to open one expanded supermarket as well as a number of remodeled stores. This program is subject to continuing change and review as conditions warrant. Net square footage of retail selling space is expected to increase by approximately 4.2% in 1998. Construction will also start on a number of stores to be opened in 1999. Current projections for 1999 indicate that the Company's square footage of selling area will increase by approximately 4.5%, including five new stores and four expansions. This growth does not reflect the investment to remodel twelve existing stores, significantly modernizing the store formats. By the end of 1999, about two-thirds of the Company's stores will have been newly constructed, expanded or remodeled within the last five years. The 1998 capital program is being financed by internally generated funds, leases and long-term debt. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CASH FLOWS FROM FINANCING ACTIVITIES Cash used in financing activities was $32 million in the first three quarters of 1998 as compared to $24 million in the first three quarters of 1997. This reduction in cash flows of $8 million is principally the result of increased payments of long-term debt. The Company purchased 317,000 shares of common stock during the first three quarters of 1998 at a cost of $13 million. The majority of this repurchased stock was used to fund the Company's stock based benefit plans with the balance being held in treasury. This amount was offset by proceeds of $8 million received during the first three quarters of 1998 from the issuance of 317,000 shares of treasury stock. The Company paid $19 million in dividends to common shareholders in the first three quarters of 1998. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year 2000 Issues Year 2000 (Y2K) issues arise from the inability of some computer-based systems to properly recognize and process dates after December 31, 1999. Most of the Company's key business processes (such as, product procurement, warehousing, product delivery, inventory identification, retail sales and financial information reporting) depend on computer-based systems. In 1996, the Company initiated a readiness plan to address Y2K issues. The readiness plan addresses three major segments: (1) IT systems including mainframe, PC-desktop and in-store systems; (2) non-IT (facilities) systems including all retail stores, distribution centers, corporate offices and other owned real estate; and (3) business partners including product vendors, utility and communication providers, banks and landlords. Phases of the readiness plan common to each major segment include data collection, assessment and prioritization, resolution, testing and implementation, and monitoring ongoing compliance. The Company currently expects to complete all phases of its readiness plan as follows: IT Systems Mainframe Fourth Quarter 1998 Network First Quarter 1999 PC-Desktop First Quarter 1999 In-store Second Quarter 1999 Facilities Systems First Quarter 1999 Business Partners Ongoing HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company will send surveys to all business partners during the fourth quarter of 1998, requesting information regarding the status of their individual Y2K compliance efforts. The most important suppliers of products and services will be contacted in person or by telephone for verification of their status. More than 40% of the Company's IT systems utilize a standard calendar routine. This routine has been reprogrammed to be Y2K compliant. In addition, the Company plans to extend this calendar routine to nearly all IT systems where it was not previously used. This standardization has simplified the Company's remediation efforts and has reduced the cost of the readiness plan. As a final step, the Company will test systems deemed critical by running them in a fully integrated Y2K environment. Critical systems include, but are not limited to, product procurement systems for supermarkets and warehouses, in-store retail sales systems and centralized financial systems including payroll and banking relations. The Company has used outside consultants to help with various phases of the readiness plan. However, the Company is relying on its own associates to verify all test results prior to implementation. Based on current information, management expects that the Company will not experience significant disruption in operations as a result of Y2K issues. Management believes it has identified the principal hardware and software modifications that must be made in order to address the most significant Y2K issues. To date, the Company has not established a contingency plan for possible Y2K interruptions. Management will establish contingency plans based on actual testing experience and assessment of outside risks. The Company anticipates that it will have a fully developed contingency plan by the second quarter of 1999. This plan will be reviewed and updated throughout the balance of 1999. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Because the Company's Y2K compliance is partially dependent upon key business partners also being Y2K compliant on a timely basis, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its results of operations, financial condition and cash flows. The possible consequences to the Company of not being fully Y2K compliant include temporary supermarket closings, delays in the delivery of grocery products, errors in purchase orders and other financial transactions and the inability to efficiently process customer purchases. In addition, business disruptions could result from the loss of power or the loss of communication links between supermarkets, warehouses and headquarters locations. However, management believes that the Company's store base is broad enough to minimize the impact of isolated disruptions. The total cost associated with anticipated Y2K modifications is not material to the Company's results of operations, financial condition or cash flows. The total estimated cost of the readiness plan, including the cost of internal resources, is approximately $4 to $5 million, of which approximately $3 million has been incurred through the end of the third quarter of 1998. Most of the Company's additional budgeted Y2K expenditures are earmarked for completion of facilities systems testing and for continuing interaction with business partners. These costs do not include amounts capitalized in the normal course of business to replace or upgrade older, outdated systems whose replacement was not accelerated due to Y2K issues. All costs are being funded by operating cash flows and the costs of the readiness plan are being expensed as incurred. Management does not anticipate deferring any technology-related projects due to these costs or the implementation of its readiness plan. The cost of the conversions and the projected completion dates are based on management's best estimates and will be updated as additional information becomes available. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION From time to time, information provided by the Company or statements made by its associates may contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. Examples of such statements in this report include those concerning the Year 2000 issue, the Company's expected future tax rates, projected costs of the home shopping service, construction schedules and capital expenditures. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors and risks including, but not limited to the following: (1) Hannaford's future operating results are dependent on its ability to achieve increased sales and to control expenses. Factors such as lower than expected inflation, product cost fluctuations particularly in perishable categories, changes in product mix or the use of promotional items, both of which may affect pricing strategy, continued or increased competitive pressures from existing competitors and new entrants, including price cutting strategies, and deterioration in general or regional economic conditions are all factors which could adversely affect sales projections. Other components of operating results could be adversely affected by state or federal legislation or regulation that increases costs, interest rates or the Company's cost of borrowing, by increases in labor rates due to low unemployment or other factors, by unanticipated costs related to the opening and closing of stores or by the inability to control various expense categories. (2) Hannaford's future growth is dependent on its ability to expand its retail square footage. Increases in interest rates or the Company's cost of capital, the unavailability of funds for capital expenditures and the inability to develop new stores or convert existing stores as rapidly as planned are all risks to projected future expansion. (3) Adverse determinations with respect to pending or future litigation or other material claims against Hannaford could affect actual results. Furthermore, the market price of Hannaford common stock could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the retail sector, especially in the supermarket industry, as well as general economic conditions and other factors external to Hannaford. PART II Item 5: Other Information A limited review was made of the results of the three-month and nine-month periods ended October 3, 1998, by PricewaterhouseCoopers, L.L.P. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation SK 15 Letter of PricewaterhouseCoopers, L.L.P. furnished pursuant to Regulation SX. 23 Letter of PricewaterhouseCoopers, L.L.P. regarding incorporation by reference to certain Forms S-8 of the Registrant. 27 Financial Data Schedule (b) There were no reports on Form 8-K filed during the quarter ended October 3, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANNAFORD BROS. CO. Date November 12, 1998 Blythe J. McGarvie Executive Vice President (Chief Financial Officer) Date November 12, 1998 Charles H. Crockett Assistant Secretary EX-15 2 LETTER OF PRICEWATERHOUSECOOPERS Exhibit 15 REPORT OF INDEPENDENT ACCOUNTANTS October 21, 1998 To the Board of Directors and Shareholders of Hannaford Bros. Co.: We have reviewed the accompanying consolidated balance sheet of Hannaford Bros. Co. and Subsidiaries as of October 3, 1998, and the related consolidated statements of earnings and cash flows for the three month and nine month periods ended October 3, 1998 and September 27, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We previously audited and expressed an unqualified opinion on the Company's consolidated financial statements for the year ended January 3, 1998 (not presented herein). In our opinion, the information set forth in the accompanying balance sheet as of January 3, 1998, is fairly stated in all material respects, in relation to the statement of financial position from which it has been derived. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. s/PricewaterhouseCoopers L.L.P. Portland, Maine EX-23 3 CONSENTS Exhibit 23 November 9, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 RE: Hannaford Bros. Co. Registrations on Form S-8 We are aware that our report dated October 21, 1998 on our review of interim financial information of Hannaford Bros. Co. and Subsidiaries as of October 3, 1998 for the three month and nine month periods ended October 3, 1998 and September 27, 1997, and included in this Form 10-Q is incorporated by reference in the Company's registration statements on Form S-8 (Numbers 2-77902, 2-98387, 33-1281, 33-22666, 33-31624, 33-41273, 33-60119, 33-60655, 33-60691, 333-41381 and 333-53109). Pursuant to rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the Registration Statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. s/PricewaterhouseCoopers L.L.P. Portland, Maine EX-27 4 ART.5 FDS FOR 3RD QUARTER 1998
5 1,000 9-MOS JAN-02-1999 OCT-03-1998 42,874 0 18,075 655 196,010 268,786 1,260,816 438,825 1,257,483 250,364 363,411 0 0 31,754 611,954 1,257,483 2,473,342 2,473,342 1,849,762 1,849,762 496,136 0 19,925 107,519 40,853 66,666 0 0 0 66,666 1.58 1.55
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