-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 2, 1999
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 1, 1999, there were 42,251,617 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 2, 1999
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets, October 2, 1999 and
January 2, 1999 3-4
Consolidated Statements of Earnings, Three Months
Ended October 2, 1999 and October 3, 1998 5
Consolidated Statements of Earnings, Nine Months
Ended October 2, 1999 and October 3, 1998 6
Consolidated Statements of Cash Flows
Nine Months Ended October 2, 1999
and October 3, 1998 7-8
Notes and Schedules to Consolidated Financial
Statements 9-12
Item 2. Management's Discussion and Analysis of
Third Quarter 1999 Results 13-22
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
(In thousands)
(UNAUDITED)
October 2, January 2,
1999 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 52,665 $ 59,722
Accounts receivable, net 25,033 22,869
Inventories 221,469 201,219
Prepaid expenses 6,770 6,116
Deferred income taxes 7,742 5,952
---------- ----------
Total current assets 313,679 295,878
Property, plant and equipment, net 834,384 818,106
Leased property under capital leases, net 54,377 54,911
Other assets:
Goodwill, net 59,181 63,517
Deferred charges, net 24,280 25,074
Computer software costs, net 24,557 24,580
Miscellaneous assets 1,937 2,472
---------- ----------
Total other assets 109,955 115,643
---------- ----------
$1,312,395 $1,284,538
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 2, January 2,
1999 1999
------------ ------------
Current liabilities:
Current maturities of long-term debt $ 20,634 $ 19,296
Obligations under capital leases 2,394 2,108
Accounts payable 209,657 186,626
Accrued payroll 30,007 27,254
Other accrued expenses 24,740 23,873
Income taxes 2,697 442
---------- ----------
Total current liabilities 290,129 259,599
Deferred income tax liabilities 27,406 28,859
Other liabilities 40,394 38,734
Long-term debt 176,387 220,130
Obligations under capital leases 74,721 73,866
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;
42,338 and 42,338 shares issued 31,754 31,754
Additional paid-in capital 102,200 109,664
Preferred stock purchase rights 423 423
Retained earnings 574,163 525,344
---------- ----------
708,540 667,185
Less common stock in treasury
99 and 85 shares 5,182 3,835
---------- ----------
Total shareholders' equity 703,358 663,350
---------- ----------
$1,312,395 $1,284,538
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 2, October 3,
1999 1998
------------ ------------
Sales and other revenues $881,934 $854,675
Cost of sales 646,290 637,026
-------- --------
Gross margin 235,644 217,649
Selling, general and administrative
expenses 183,509 169,276
Merger related costs 7,179 -
-------- --------
Operating profit 44,956 48,373
Interest expense, net 5,570 6,773
-------- --------
Earnings before income taxes 39,386 41,600
Income taxes 15,061 15,768
-------- --------
Net earnings $ 24,325 $ 25,832
======== ========
Earnings per share:
Basic $ .58 $ .61
======== ========
Diluted $ .56 $ .60
======== ========
Cash dividends per share $ .165 $ .150
======== ========
Weighted average number of common shares
outstanding Basic 42,192 42,278
======== ========
Diluted 43,146 42,925
======== ========
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 2, October 3,
1999 1998
------------- -------------
Sales and other revenues $2,575,383 $2,473,342
Cost of sales 1,895,798 1,849,762
---------- ----------
Gross margin 679,585 623,580
Selling, general and administrative
expenses 541,980 496,136
Merger related costs 7,179 -
---------- ----------
Operating profit 130,426 127,444
Interest expense, net 17,615 19,925
---------- ----------
Earnings before income taxes 112,811 107,519
Income taxes 43,082 40,853
---------- ----------
Net earnings $ 69,729 $ 66,666
========== ==========
Earnings per share:
Basic $ 1.65 $ 1.58
========= ==========
Diluted $ 1.62 $ 1.55
========= ==========
Cash dividends per share $ .495 $ .450
========= ==========
Weighted average number of common shares
outstanding Basic 42,213 42,285
========= ==========
Diluted 42,964 42,903
========= ==========
See accompanying notes to consolidated financial statements.
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED
October 2, October 3,
1999 1998
------------- -------------
Cash flows from operating activities:
Net income $ 69,729 $ 66,666
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 77,103 71,941
Increase in inventories (20,250) (7,243)
Increase in receivables and prepayments (2,990) (2,135)
Increase (decrease) in accounts payable
and accrued expenses 28,003 (10,485)
Increase in income taxes payable 2,256 2,139
Increase (decrease) in deferred taxes (3,243) 5,407
Other operating activities 314 (387)
-------- --------
Net cash provided by operating
activities 150,922 125,903
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (86,183) (112,473)
Sale of property, plant and
equipment, net 8,099 8,005
(Increase) decrease in deferred charges (1,121) 767
Increase in computer software costs (5,127) (5,315)
-------- --------
Net cash used in investing activities (84,332) (109,016)
-------- --------
Cash flows from financing activities:
Principal payments under capital
lease obligations (1,523) (1,288)
Proceeds from issuance of long-term debt - 20,000
Payments of long-term debt (42,405) (26,401)
Issuance of common stock 11,451 8,397
Purchase of treasury stock (20,261) (13,355)
Dividends paid (20,909) (19,029)
-------- --------
Net cash used in
financing activities (73,647) (31,676)
-------- --------
Net decrease in cash and cash equivalents (7,057) (14,789)
Cash and cash equivalents at beginning
of period 59,722 57,663
-------- --------
Cash and cash equivalents at end of period $ 52,665 $ 42,874
======== ========
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 2, October 3,
1999 1998
------------- -------------
Cash paid during the first nine months for:
Interest (net of amount capitalized,
$1,426 in 1999 and $1,665 in 1998) $17,582 $19,062
======= =======
Income taxes $43,524 $33,293
======= =======
Supplemental disclosure of non-cash investing and financing activity
Capital lease obligations of $2,663,000 and $1,166,000 were incurred during
the nine-month periods ended October 2, 1999 and October 3, 1998,
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 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 reporting date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
2. MERGER AGREEMENT
On August 17, 1999 the Company entered into an Agreement and Plan of Merger
among the Company, Food Lion, Inc. ("Food Lion") and FL Acquisition Sub, Inc.
("Merger Sub"), a wholly-owned subsidiary of Food Lion, pursuant to which
Merger Sub would be merged with and into the Company and the Company would
continue as the surviving corporation (the "Merger"). On September 7, 1999,
the shareholders of Food Lion approved
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
a number of proposals, including (1) the conversion of Food Lion into a
holding company, (2) an amendment to its Articles of Incorporation to
change the company name to Delhaize America, Inc. (Delhaize), and (3) a
one-for-three reverse stock split of Food Lion's outstanding shares of
common stock (Classes A and B). Under the terms of the Merger Agreement and
subject to certain conditions, Delhaize will pay up to $79 per share
through a combination of cash and stock for all of the outstanding shares
of the Company. In addition, approximately $300 million of the Company's
debt will remain outstanding after the merger. Each share of common stock
of the Company issued and outstanding immediately prior to the effective
time of the Merger (excluding shares owned by Delhaize which will include
the shares received by Delhaize from the Sobey Parties pursuant to a
separate Stock Exchange Agreement referred to below) will be converted,
subject to proration as described in the Merger Agreement, into a right to
receive (A) $79.00 in cash, without interest, or (B) the number of shares
of Class A common stock of Delhaize equal to $79.00 divided by the greater
of (i) the average of the per share last sales prices of Delhaize Class A
common stock for the ten consecutive trading days prior to the closing date
of the merger or (ii) $27.00. This merger will be accounted for under the
purchase method of accounting and will be a taxable transaction under the
Internal Revenue Code.
In connection with the execution of the Merger Agreement, certain
shareholders (the "Sobey Parties") entered into a Stock Exchange Agreement
with Delhaize. Pursuant to the Stock Exchange Agreement, the Sobey Parties
agreed to exchange their shares in the Company for a combination of Delhaize
common stock and cash. The Sobey Parties also entered into a Voting Agreement
with Delhaize pursuant to which, among other things, the Sobey Parties agreed
to vote their shares of Company common stock (representing approximately
24.7% of the outstanding Company common stock) in favor of the Merger.
The Company expects the Merger to be consummated in the first or second
quarter of 2000 subject to approval of the Company's shareholders and
antitrust and other regulatory authorities and customary closing conditions.
Additional information regarding the Merger can be found in the Company's
current report on Form 8-K dated August 19, 1999.
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. 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.
4. RECLASSIFICATION
Certain reclassifications have been made in the prior year's balance sheet
to conform to classifications used in the current year.
5. 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 $1.3 million in the first three quarters of 1999 and $1.2
million in the first three quarters of 1998. LIFO expense was $.4 million in
both the third quarter of 1999 and the third quarter of 1998.
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
(In thousands)
(Unaudited)
October 2, January 2,
1999 1999
Land and improvements $ 152,660 $ 141,706
Buildings 321,647 300,708
Furniture, fixtures & equipment 501,203 501,250
Leasehold interests & improvements 325,192 324,106
Construction in progress 18,198 8,790
---------- ----------
1,318,900 1,276,560
Less accumulated depreciation and
amortization 484,516 458,454
---------- ----------
$ 834,384 $ 818,106
========== ==========
7. LEASED PROPERTY
(In thousands)
(Unaudited)
October 2, January 2,
1999 1999
Real property $85,163 $82,500
Less accumulated amortization 30,786 27,589
------- -------
$54,377 $54,911
======= =======
<PAGE>
Form 10-Q HANNAFORD BROS. CO. 1-7603 OCTOBER 2, 1999
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 4.1% in the first three quarters of 1999, to
$2.575 billion, an increase of $102 million over the first three quarters of
1998. Supermarket sales increased $95 million or 3.9%. Other sales and
revenues, which include wholesale, trucking, home delivery, real estate and
miscellaneous retail operations, increased $7 million. Sales from supermarkets
that were open in both periods reported ("identical store sales") were up
1.0%. Comparable store sales, which included results from expanded and
relocated supermarkets, increased 1.6% in the first three quarters of 1999.
In the third quarter of 1999, sales and other revenues were $882 million, an
increase of $27 million or 3.2% over those reported for the same period of
1998. Identical store sales increased 1.4% in the third quarter, while
comparable store sales were up 1.9%.
GROSS MARGIN
During the first nine months of 1999, gross margins increased to 26.4% of
sales and other revenues in comparison to 25.2% for the comparable 1998
period. For the third quarter of 1999, gross margins were 26.7% versus 25.5%
for the third quarter of 1998. These increases are the result of improved
selling margins in most of the Company's marketing territories coupled with
the results of an inventory shrinkage reduction initiative. The Company
continues to focus on maintaining a competitive pricing strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 21.0% of sales and
other revenues in the first three quarters of 1999 as compared to 20.1% in the
first three quarters of 1998. For the third quarter of 1999, selling, general
and administrative expenses were 20.8% of sales and other revenues versus
19.8% in the third quarter of
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998. These increases are primarily the result of higher payroll and payroll
related expenses, which exceeded 50% of selling, general and administrative
expenses in all periods presented. In addition, the Company incurred increased
advertising costs in both the third quarter and first three quarters of 1999,
as it undertook programs to build sales in several of its marketing areas.
MERGER RELATED COSTS
Charges for merger related costs of $7 million were recorded in the third
quarter of 1999 (Note 2) as a result of the pending merger with Delhaize
America, Inc. The majority of these costs represent professional fees paid to
outside parties. Additional merger related costs will be recorded in future
quarters as expenditures are incurred.
INTEREST EXPENSE, NET
Net interest expense expressed as a percentage of sales and other revenues was
0.7% in the first three quarters of 1999 as compared to 0.8% in the first
three quarters of 1998. Net interest expense was 0.6% in the third quarter of
1999 versus 0.8% in the third quarter of 1998. These decreases are primarily
the result of a decrease in average debt levels.
INCOME TAXES
The effective income tax rate increased slightly in the first three quarters
of 1999 to 38.2% from 38.0% in the corresponding period of 1998. In the third
quarter of 1999 the effective income tax rate increased to 38.2% from 37.9% in
the third quarter of 1998.
NET EARNINGS AND EARNINGS PER COMMON SHARE
Net earnings increased 4.6% in the first three quarters of 1999 to $70 million
or 2.7% of sales and other revenues, an increase of approximately $3 million
from 1998 first three quarters earnings of $67 million or 2.7% of sales and
other revenues. This increase was
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
negatively impacted by the merger related costs that were incurred in the
third quarter of 1999. Before the merger related costs, net earnings for the
first three quarters of 1999 would have been $74 million or 2.9% of sales and
other revenues, an increase of 11.3% over the $67 million reported in the
first three quarters of 1998. Expressed as a percentage of sales and other
revenues, this increase is the result of increased sales and margins, couple
with reduced interest expense, partially offset by higher selling, general and
administrative expenses.
Net earnings for the third quarter of 1999 were $24 million or 2.8% of sales
and other revenues, a decrease of 5.8% from 1998 third quarter net earnings of
$26 million or 3.0% of sales and other revenues. Before the merger related
costs, net earnings were $29 million or 3.3% of sales and other revenues, an
increase of 11.4% over the $26 million reported in the third quarter of 1998.
Basic earnings per common share in the first three quarters of 1999 were $1.65
as compared to $1.58 in the first three quarters of 1998, an increase of 4.4%.
Diluted earnings per common share (Note 3) were $1.62 in the first three
quarters of 1999 as compared to $1.55 in the first three quarters of 1998.
Before the merger related costs, basic earnings per common share were $1.76 in
the first three quarters of 1999 as compared to $1.58 in the first three
quarters of 1998, an increase of 11.4%. Before the merger related costs,
diluted earnings per common share increased 11.6% in the first three quarters
of 1999.
Basic earnings per common share were $.58 in the third quarter of 1999 versus
$.61 in the third quarter of 1998, a decrease of 4.9%. Diluted earnings per
common share exhibited a similar decrease of 6.6% during the quarter. Before
the merger related costs, basic and diluted earnings per common share in the
third quarter of 1999 increased 11.5% and 11.7%, respectively, over third
quarter 1998 results.
<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 is continuing to test an internet-based home shopping service in
the Boston, Massachusetts market called HomeRuns.com (formerly Hannaford's
HomeRuns(R)). This service generated a net loss of approximately $.17 per
share in the first three quarters of 1999 versus a net loss of approximately
$.12 in the first three quarters of 1998. During the third quarter of 1999
this service generated a net loss of $.06 versus a net loss of $.05 in the
third quarter of 1998. The Company previously announced that it was seeking a
strategic partner to promote and expand this business undertaking. The pending
merger with Delhaize America (Note 2) has not altered the Company's announced
plans for this business venture.
YEAR 2000 ISSUES
Through its readiness plan which was initiated in 1996, the Company has been
addressing computer software and hardware modifications or replacements to
enable transactions to process properly in the Year 2000 (Y2K). Included in
this plan is an examination of critical IT and non-IT systems, including
embedded chip technology at supermarket and distribution facilities. The
Company has currently completed all phases of its readiness plan as follows:
IT Systems
Mainframe Completed
Network Completed
PC-Desktop Completed
In-store Completed
Facilities Systems Completed
The readiness plan for IT and Facilities Systems was essentially completed as
previously scheduled.
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As part of its readiness plan, the Company has contacted all of its critical
business partners in order to ascertain their status on Y2K readiness. Based
on management's assessment of their responses, the Company believes that the
majority of its business partners are taking action to be Y2K complaint.
Despite these documented efforts, the Company could potentially experience
disruptions to some aspects of its activities and operations. Therefore, in
conjunction with its completed readiness plan, management formulated
contingency plans for critical functions and processes which may be
implemented to minimize the risk of interruption to its business in the event
of a Y2K disruption.
This contingency planning, which utilizes a business continuity approach,
focuses on the Company's ability to remain open for business with sufficient
inventories should some external infrastructure problems arise such as
electrical outages. Based on key assumptions concerning the readiness status
of public utilities, emergency response providers, federal, state and local
government agencies and the banking system, the Company has developed business
continuity strategies. Management then converted these strategies to detailed
contingency plans and completed its work in September 1999. For the remainder
of the year, the Company will continue to review its key assumptions in order
to validate its strategies and test the capabilities of its contingency plans.
In addition to its main focus of developing strategies to address the
Company's ability to purchase an adequate supply of product from vendors,
deliver it to its supermarkets and sell it to customers, contingency plans
have been established to address its ability to pay employees, collect and
remit on outstanding accounts, meet other regulatory and administrative needs,
and address various merchandising objectives.
In addition to its contingency plan, the Company has developed a Y2K
communication plan so that its customers and employees can understand the
Company's commitment to supply goods and services in its supermarkets before
and after the turn of the century. Employee communications are informational
in nature and designed to inform associates that appropriate action has been
taken to prepare for Y2K. Consumer communications are focusing on the
Company's effort to support its communities and customers with an adequate
supply of products on a normal retail schedule. In-store signage has been
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
developed to assist consumers in making informed buying decisions should they
feel the need to increase their stored stock of groceries, prescription drugs
and other related merchandise as Y2K approaches. The Company has increased its
inventory levels in anticipation of consumer demand. The Company intends to be
responsive to public inquiries regarding Y2K through press releases between
October and December of 1999. The Company is also prepared to represent the
food industry in its market areas as required by public officials or as
dictated by business needs.
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 $5 million, of which approximately $4.8 million has been
incurred through the end of the third quarter of 1999.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
Measures of liquidity for the periods presented are as follows:
(Dollars in millions)
October 2, January 2,
1999 1999
---------- ----------
Cash and cash equivalents $53 $60
Working capital (FIFO inventory) $44 $56
Unused lines of revolving credit $92 $58
Unused lines of short-term credit $ 1 $ 1
Current ratio (FIFO inventory) 1.15 1.22
The Company continued to maintain a strong capital position at October 2,
1999. Cash and cash equivalents decreased $7 million to $53 million at the end
of the third quarter of 1999. This decrease was primarily 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
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
of short-term financing. At October 2, 1999, the Company did not have any
borrowings on its revolving lines of credit in comparison to $34 million
outstanding at January 2, 1999. The Company is in a solid financial position
to carry out its current internal expansion and external growth plans in 1999.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $151 million in the first three
quarters of 1999, an increase of $25 million over the $126 million provided in
the first three quarters of 1998. This increase is primarily attributable to
an increase in cash flows provided by net working capital items coupled with
increased net earnings and increased depreciation and amortization. With the
exception of inventories and their impact upon accounts payable, the
fluctuations within working capital accounts are part of the Company's normal
business activities.
Inventory levels increased $20 million from year-end 1998 levels. This
increase is primarily the result of the Company's decision to increase its
retail and warehouse inventory levels of certain grocery, pharmaceutical and
general merchandise items in anticipation of consumer demand as the Year 2000
date approaches. Management will continue to monitor its inventory supplies as
well as actual and anticipated demand throughout the fourth quarter of 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities decreased $25 million in the first nine
months of 1999 to $84 million from $109 million in the first nine months of
1998. This decrease is the result of the Company's reduced capital investment
during the period.
Capital investments totaled $95 million in the first three quarters of 1999
and were composed of $86 million in additions to property, plant and
equipment, $6 million in deferred charges and computer software costs and $3
million in non-cash capital lease additions. These capital investments are
primarily composed of costs incurred in building and equipping new and
expanded supermarkets and in
<PAGE>
HANNAFORD BROS. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
improvements necessary to maintain current facilities and systems. The Company
expects to spend in excess of $140 million in 1999 on a capital program that
will increase net retail selling area by approximately 4% in 1999. This
program is subject to continuing change and review as conditions warrant.
Construction will also start on a number of stores to be opened in 2000. The
1999 capital program is being financed by internally generated funds, leases
and long-term debt.
During the first three quarters of 1999, the Company opened six supermarkets
including three new stores and three expansions. These supermarkets, together
with their square footage of selling area, are listed below:
Square Footage
Location Selling Area
Richmond, VA (expansion) 38,000
Charlotte, NC 41,000
Bucksport, ME (expansion) 16,000
Apex, NC 41,000
Richmond, VA 41,000
Ossipee, NH (expansion) 17,000
During the fourth quarter of 1999, the Company expects to open two
supermarkets (one new store and one expanded store). The 1999 capital program
also included eight major remodels and a number of minor ones, which do not
add square footage but are important to the Company's presentation and its
ability to build sales.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash used in financing activities was $74 million in the first three quarters
of 1999 as compared to $32 million in the first three quarters of 1998. This
reduction in cash flows of $42 million is the result of reduced proceeds from
the issuance of long-term debt, increased purchases of treasury stock and
increased payments on long-term debt. During the first three quarters of 1999,
the Company made $42 million in payments on its long-term debt as compared to
$26 million in the first three quarters of 1998. This increase is the result
of the Company's repayment on its revolving lines of credit.
<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 purchased 403,000 shares of common stock during the first three
quarters of 1999 at a cost of $20 million. The increased cost in 1999 is the
result of a higher number of shares purchased coupled with a higher stock
price. The majority of these repurchased shares were used to fund the
Company's stock-based benefit plans with the balance being held in treasury.
This amount was offset by proceeds of $11 million received during the first
three quarters of 1999 from the issuance of 389,000 shares of treasury stock.
The Company paid $21 million in dividends to common shareholders in the first
three quarters of 1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company or statements made by its
associates may contain forward-looking information, as defined in the Private
Securities Litigation Reform Act of 1995. Examples of such statements in this
report include those concerning the Year 2000 issue, construction schedules and
capital expenditures. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors and risks including, but not limited to the following:
(1) Hannaford's future operating results are dependent on its ability to achieve
increased sales and to control expenses. Factors such as lower than expected
inflation, product cost fluctuations particularly in perishable categories,
changes in product mix or the use of promotional items, both of which may affect
pricing strategy, continued or increased competitive pressures from existing
competitors and new entrants, including price cutting strategies, and
deterioration in general or regional economic conditions are all factors which
could adversely affect sales projections. Other components of operating results
could be adversely affected by state or federal legislation or regulation that
increases costs, interest rates or the Company's cost of borrowing, by increases
in labor rates due to low unemployment or other factors, by unanticipated costs
related to the opening and closing of stores or by the inability to control
various expense categories.
(2) Hannaford's future growth is dependent on its ability to expand its retail
square footage either de novo or through acquisitions. Increases in interest
rates or the Company's cost of capital, the unavailability of funds for capital
expenditures and the inability to develop new stores or convert existing stores
as rapidly as planned are all risks to projected future expansion.
(3) Adverse determinations with respect to pending or future litigation or other
material claims against Hannaford could affect actual results.
Furthermore, the market price of Hannaford common stock could be subject to
fluctuations in response to quarter to quarter variations in operating results,
changes in analysts' earnings estimates, market conditions in the retail sector,
especially in the supermarket industry, as well as general economic conditions
and other factors external to Hannaford.
<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 2, 1999, by PricewaterhouseCoopers, LLP, whose report is
included in Item 6. Such report is not within the meaning of Section 7 and 11 of
the 1933 Act and the independent accountant's liability under Section 11 does
not extend to it.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation SK
15 Letter of PricewaterhouseCoopers, LLP furnished pursuant to
Regulation SX.
23 Letter of PricewaterhouseCoopers, LLP regarding incorporation by
reference to certain Forms S-8 of the Registrant.
27 Financial Data Schedule
(b) The following filings were made on Form 8-K during the quarter ended
October 2, 1999.
1. On August 19, 1999, a Form 8-K was filed reporting an agreement and
plan of merger with Food Lion, Inc.
2. On September 1, 1999, a Form 8-K was field reporting the termination
of a Standstill Agreement with Empire Company Limited.
<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 9, 1999 s/Paul A. Fritzson
------------------------ -------------------------
Paul A. Fritzson
Executive Vice President
(Chief Financial Officer)
Date November 9, 1999 s/Charles H. Crockett
------------------------ -------------------------
Charles H. Crockett
Assistant Secretary
Exhibit 15
REPORT OF INDEPENDENT ACCOUNTANTS
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 2, 1999, and the related consolidated
statements of earnings for each of the three month and nine month periods ended
October 2, 1999 and October 3, 1998, and the consolidated statements of cash
flows for the nine month periods ended October 2, 1999 and October 3, 1998.
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.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of January 2, 1999, and the related
consolidated statements of earnings and changes in shareholders' equity, and of
cash flows for the year then ended (not presented herein), and in our reported
dated January 21, 1999 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the accompanying consolidated balance
sheet information as of January 2, 1999, is fairly stated in all material
respects, in relation to the consolidated balance sheet form which it was
derived
s/PricewaterhouseCoopers LLP
Portland, Maine
October 20, 1999
Exhibit 23
November 8, 1999
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 20, 1999 on our review of interim
financial information of Hannaford Bros. Co. and Subsidiaries as of October 2,
1999 and for the three month and nine month periods ended October 2, 1999 and
October 3, 1998, 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).
s/PricewaterhouseCoopers LLP
Portland, Maine
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 52,665
<SECURITIES> 0
<RECEIVABLES> 26,060
<ALLOWANCES> 1,027
<INVENTORY> 221,469
<CURRENT-ASSETS> 313,679
<PP&E> 1,318,900
<DEPRECIATION> 484,516
<TOTAL-ASSETS> 1,312,395
<CURRENT-LIABILITIES> 290,129
<BONDS> 318,908
0
0
<COMMON> 31,754
<OTHER-SE> 671,604
<TOTAL-LIABILITY-AND-EQUITY> 1,312,395
<SALES> 881,934
<TOTAL-REVENUES> 881,934
<CGS> 646,290
<TOTAL-COSTS> 646,290
<OTHER-EXPENSES> 190,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,570
<INCOME-PRETAX> 39,386
<INCOME-TAX> 15,061
<INCOME-CONTINUING> 24,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,325
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.56
</TABLE>
