-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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
========== ==========
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
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
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