Hannaford Bros: 10-K for Year Ended 01/03/98 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.75 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 in the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock, $.75 par value, held by non-affiliates as of March 3, 1998, was $1,333,787,645. This calculation assumes that all shares of Common Stock beneficially held by directors and executive officers of the Registrant are owned by "affiliates". As of March 3, 1998, there were 42,289,827 outstanding shares of Common Stock, $.75 par value, the only authorized class of common stock of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE PART III: Proxy Statement for Annual Meeting of Shareholders to be held on May 19, 1998. Exhibit Index on Page: 55 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE BUSINESS Hannaford Bros. Co. (the "Registrant" or the "Company") was incorporated in Maine in 1902 as the successor to a business established by the Hannaford family in 1883. Its principal executive offices are located at 145 Pleasant Hill Road, Scarborough, Maine 04074. Its telephone number is (207) 883-2911. Approximately 25.6% of the outstanding shares of the Registrant's common stock, par value $.75 per share, is owned by certain members of the Sobey family of Stellarton, Nova Scotia, and certain companies and trusts controlled by them (the "Sobey Parties"). Fiscal year 1997 consisted of 53 weeks of operations as compared to 52 weeks in both 1996 and 1995. This anomaly occurs periodically since the Company closes its fiscal year on the Saturday closest to December 31. Consolidated sales and other revenues for 1997 were $3,226 million, an increase of 9.1% over last year's sales and other revenues of $2,958 million. Identical store sales were up 0.4% for fiscal year 1997 as compared to an increase of 3.2% in 1996. Comparable store sales were up 2.3% for fiscal year 1997. A pre-tax, non-cash accounting charge of $40 million was recorded in the fourth quarter. Most of this charge relates to a write-down in the value of assets, including goodwill, in certain southeastern stores. The write-down was prompted by SFAS No. 121 (Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of), which results in goodwill being allocated on a store-by-store basis. SFAS No. 121 did not exist when the Company entered the Southeast in 1994 (see Note 4 of Notes to Consolidated Financial Statements). The Registrant ships food and food-related products from its distribution centers to an additional 21 independent retail food stores. Sales to these wholesale accounts amounted to 2.1% of total sales in 1997. Other revenues from such activities as home shopping, trucking, real estate and retail services amounted to about 1.5% of total sales. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Registrant, through its operations and those of its subsidiaries, is principally involved in the retail food business. The Registrant considers its business a single segment under the applicable reporting rules. See Item 8, Financial Statements and Supplementary Data. NARRATIVE DESCRIPTION OF THE BUSINESS The Registrant is a multi-regional food retailer, with 148 supermarkets located throughout Maine, New Hampshire and Vermont, and in parts of New York, Massachusetts, Virginia, North Carolina and South Carolina. Its stores are operated primarily under the names Shop 'n Save(R), Hannaford(R) and Wilson's(SM). The Registrant offers consumers comprehensive product variety and outstanding freshness and quality in perishables, at competitive prices, from modern and convenient facilities. The Registrant also operates 100 pharmacies within the Registrant's supermarkets and combination stores. Of the Registrant's 101 supermarkets in the northeastern region of the United States, more than 75% are either new or have been expanded or relocated in the past 10 years. During this period, a number of smaller outdated facilities have been closed or sold. The Registrant operates 47 supermarkets located in Virginia, North Carolina and South Carolina. Eighteen of these stores were acquired by the Registrant in July 1994, six were acquired in September 1995 and twenty-three were newly constructed during 1995, 1996 and 1997. These stores range in size from 16,300 to 48,700 square feet of selling area. The Registrant operates 113 combination stores with selling areas ranging from 22,300 to 61,700 square feet. These combination stores offer under one roof the traditional all-department supermarket, together with other services and expanded lines of general merchandise. On January 16, 1998, the Registrant announced that it would close seven non-core stores, two in South Carolina, four in North Carolina and one in Virginia. These closings have occurred as of this filing. In 1998, the Registrant expects to open several new stores in New York, New Hampshire, North Carolina and Virginia and will expand or relocate a number of others. The following tables set forth certain statistical information regarding the Registrant's operations at the dates indicated: FISCAL YEAR NUMBER OF STORES 1993 1994 1995 1996 1997 Beginning 93 93 118 134 139 Opened 4 10 13 13 15 Closed (4) (5) (3) (7) (6) Sold 0 0 0 (1) 0 Acquired 0 20 6 0 0 Ending 93 118 134 139 148 AVERAGE SQUARE FEET OF SELLING AREA PER STORE 29,800 30,100 31,100 32,300 33,400 TOTAL SQUARE FEET OF SELLING AREA 2,771,000 3,547,000 4,166,000 4,490,000 4,947,130 As illustrated by the foregoing tables, the Registrant has continued to expand its food store operations. During 1997, net selling square footage increased 10.2%. The Registrant opened ten new food stores with selling areas ranging from 32,600 square feet to 40,800 square feet, relocated five existing stores to larger, new facilities and closed one store temporarily while it is being expanded. During 1998, the Registrant expects to open eight new food stores, three of which will be located in the northeastern market area and five in the Southeast. The new stores will range from 32,000 square feet to 39,000 square feet of selling area. Also in the Southeast, the Registrant will relocate two of its existing stores to new facilities and close seven stores that have limited opportunity for profitable growth. It is expected that net retail selling area will increase approximately 4.2% in 1998. As part of its ongoing expansion program, the Registrant will also consider the acquisition of additional supermarkets, if attractive opportunities become available. The Registrant's distribution facilities which support its retail operations include: 1. An owned distribution facility in South Portland, Maine, which primarily services certain store locations in Maine, New Hampshire and Massachusetts. This facility warehouses grocery, fresh fruits and vegetables, frozen foods, meat, and dairy products in approximately 521,000 square feet of floor area, and has dock facilities for 89 highway trailers. This distribution center, as well as the others, has a dedicated on-line computerized warehouse management system, which efficiently controls the movement of product through the facility and schedules labor for greater efficiency and productivity. Productivity in the distribution facilities also has been enhanced through the use of employee incentive payment programs. 2. An owned distribution center and office facility in Schodack, New York, which primarily services certain store locations in New York, Vermont, New Hampshire and Massachusetts. This facility warehouses grocery, fresh fruits and vegetables, meat, dairy and frozen food products in approximately 489,000 square feet of floor area and has dock facilities for 129 highway trailers. Although approvals have been received to expand this facility to approximately 1,200,000 square feet, the Registrant has no current plans to do so. This distribution center operates under a team management system which the Registrant calls Socio-Technical Systems. 3. An owned 200,000 square foot distribution facility in Winthrop, Maine. This facility distributes health and beauty care products, specialty foods, pharmaceuticals and some general merchandise to all of the Registrant's retail outlets. This facility has converted from a conventional management system to a team-based one similar to that used in the Schodack, New York, distribution center. 4. An owned distribution center in Butner, North Carolina, which services all of the Registrant's store locations in North Carolina, South Carolina and Virginia. This facility warehouses grocery, fresh fruits and vegetables, frozen foods, meat and dairy products in approximately 431,000 square feet of floor area and has dock facilities for 112 highway trailers. This facility was opened in November 1996 and incorporates increased staging areas for crossdocking, a mezzanine for slower moving items and other modern distribution techniques. The site on which this distribution center is located includes land for additional expansion of the distribution center to approximately 750,000 square feet. Hannaford Trucking Company, a wholly-owned subsidiary, transports merchandise to and from the Registrant's distribution facilities and is licensed as an irregular route common carrier with 48 state authority. Hannaford Trucking Company also hauls products for third-party customers, thereby reducing the number of miles that its trucks travel empty. In the Boston, Massachusetts, market the Registrant is evaluating a home shopping service called Hannaford's HomeRuns(R). Consumers shop from a catalog, placing their order via phone, fax or the Internet. Orders are selected at a dedicated fulfillment center and delivered the next day. Prices are competitive with those in local supermarkets, and there is no delivery charge on orders over $60. Innovation in operating systems for competitive advantage is an important component of the Registrant's strategy, and the Registrant is committed to investing in new technology and the development of new systems. The Registrant seeks to be an industry leader in the application of new technology and systems to improve customer service, productivity and financial information. Raw materials, as such, are not essential to the business of the Registrant. During 1997, the Registrant completed the conversion of its primary private brand from "Shop 'n Save(R)" to "Hannaford(R)". Seasonal business affects the Registrant's operations in that sales are generally greater in the second half of the year than in the first. (See Note 9 of Notes to Consolidated Financial Statements.) Inventory levels are maintained at distribution centers and all retail locations in amounts adequate to minimize "out of stock" conditions. Backlog is not material to the Registrant's business. No material portion of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. At the retail level, the Registrant's supermarkets are in direct competition with regional, national and local food and drug chains, as well as "supercenters", some of which have greater resources than the Registrant, and with other independent operators. In addition, certain of the independent stores served by the Registrant as wholesale customers are located in the same trade areas as the Registrant's own stores. In its wholesale operations, the Registrant directly competes with other regional wholesalers, some of which supply franchised retail outlets. The loss of any one or a few of the wholesale customers would not have a materially adverse effect on the Registrant. Wholesale sales are not material. No material expenditures were made during fiscal 1995, 1996 or 1997 on research activities relating to new or improved products, services or techniques. The Registrant does not foresee that material capital outlays will be needed nor that material increases in operating expenses will be incurred for the purpose of compliance with any statutory requirement respecting environmental quality. As of January 3, 1998, the Registrant had approximately 7,500 full-time and 14,900 part-time employees. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Neither the Registrant nor any of its subsidiaries engages in any operations in foreign countries, nor is a material portion of sales and revenues derived from retail customers in foreign countries. ITEM 2. PROPERTIES The Registrant owns 59 of its 148 food stores and leases the remaining 89 locations. It owns all 4 of its distribution facilities and leases its general office facility in Scarborough, Maine. The Registrant's properties are located in Maine, New Hampshire, Vermont, northern Massachusetts, eastern upstate New York, southern Virginia, North Carolina and northeastern South Carolina. The Registrant believes that its properties are well maintained and are appropriate for its business needs. The number of stores and facilities operated and the square feet of space at January 3, 1998, consisted of: SQUARE SQUARE FOOTAGE FOOTAGE SELLING UNITS GROSS AREA AREA (in thousands) Stores 148 6,915 4,947 Distribution and administrative facilities 5 1,860 -- Total 153 8,775 4,947 The following table sets forth expiration dates of leased facilities, assuming exercise of all renewal options: LEASE ADMINISTRATIVE EXPIRATION FOOD STORES FACILITIES 1998-2007 4 2008-2017 4 2018-thereafter 81 1 89 1 Further information concerning the Registrant's distribution facilities appears under Item 1 at pages 5-6 above, which information is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings, including ordinary routine litigation incidental to the business, to which the Registrant is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the Executive Officers of the Registrant is set forth below. Under the by-laws of the Registrant, all Executive Officers hold office, at the pleasure of the Board of Directors, until the Annual Meeting of the Directors next following their election or until others are elected and qualified in their stead. There are no family relationships between any of the Executive Officers of the Registrant nor were there any special arrangements or understandings regarding the selection of any officer. SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE: HUGH G. FARRINGTON 53 President 09/30/77 Chief Executive Officer Mr. Farrington was elected President in 1984 and designated Chief Executive Officer in 1992. He had held the position of Chief Operating Officer from 1984 to 1992. He had been Executive Vice President from 1981 until his election as President. He has been employed by the Registrant in various operating, supervisory and executive capacities since 1968. RICHARD A. ANICETTI 40 Senior Vice President & 08/10/94 General Manager, Southeast Operations Mr. Anicetti was elected Senior Vice President and General Manager, Southeast Operations in December 1995. He had been Senior Vice President, Retail Operations for the southeast since 1994 and Vice President - Retail Operations/General Manager, New Hampshire and Massachusetts from 1989 to 1994. He has been employed by the Registrant since 1980 in various retail management capacities. SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE: PAUL A. FRITZSON 44 Senior Vice President, 01/02/92 Marketing, Merchandising & Distribution Mr. Fritzson was elected Senior Vice President, Marketing, Merchandising and Distribution in December 1995. He had been Senior Vice President, Marketing since 1994, Vice President - Marketing from 1992 to 1994 and Vice President, General Merchandise from 1990 to 1992. He had served previously in various staff and merchandising capacities since 1978. THOMAS B. FURBER 36 Vice President 05/12/97 Mr. Furber was elected Vice President in December 1995. He has been employed by the Registrant in various management capacities since June 1990. ANDREW P. GEOGHEGAN, ESQ. 47 Senior Vice President, 09/14/87 Secretary & General Counsel Mr. Geoghegan was elected Senior Vice President, Secretary and General Counsel in May 1996. He joined the Registrant as Vice President, General Counsel in September 1987. He was elected Secretary in 1992. From 1979 to 1987 he was in private law practice with the firm of Kassoy, Lopez & Geoghegan Law Corporation, Beverly Hills, California, specializing in corporate, tax and real estate law. RONALD C. HODGE 50 Senior Vice President, 08/10/94 Northeast Operations Mr. Hodge was elected Senior Vice President, Northeast Operations in December 1995. He had been Senior Vice President, Retail Operations since 1994 and Vice President - Retail Operations/General Manager, New York and Vermont from 1989 to 1994. He has been employed by the Registrant in various retail management capacities since 1980. SERVED AS AN EXECU- NAME AGE POSITION TIVE OFFICER SINCE: BLYTHE J. MCGARVIE 41 Senior Vice President, 11/14/94 Chief Financial Officer Ms. McGarvie was elected Senior Vice President and designated Chief Financial Officer in May 1995. She joined the Registrant as Senior Vice President - Finance in November 1994. From 1991 to 1994 she was Chief Administrative Officer for the Pacific Rim Group of Sara Lee Corporation. From 1985 to 1991 she was employed by Kraft General Foods in various finance positions. LARRY A. PLOTKIN 47 Senior Vice President, 10/06/81 Corporate Development Mr. Plotkin was elected Senior Vice President, Corporate Development in May 1995. He had been Senior Vice President, Development & Planning from 1992 to 1995, Senior Vice President, Development and Finance from 1990 to 1992, Vice President from 1989 to 1990, Vice President Wellby Super Drug Stores from 1987 to 1989 and Vice President Corporate Development from 1981 to 1987. He has been employed by the Registrant since 1972 in various real estate capacities. MICHAEL J. STROUT 43 Senior Vice President, 12/19/94 Human Resources Mr. Strout rejoined the Registrant as Senior Vice President, Human Resources in December 1994. From 1990 through 1994 he was Vice President - Human Resources and later Senior Vice President - Human Resources at Tops Markets, Inc., Buffalo, New York. From 1985 to 1990 Mr. Strout had been employed by the Registrant in various Human Resource management positions. ANDREW N. WESTLUND 45 Vice President, 10/04/92 Distribution Mr. Westlund was elected Vice President, Distribution in 1992. He served as Vice President - Warehousing in 1992 after holding the position of Director, Warehouse Operations-New York since his employment in 1989. He was previously employed by Super Valu, Minneapolis, Minnesota as Warehouse Manager. Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Registrant has been listed on the New York Stock Exchange since July 18, 1986. The following table sets forth the dividends per share and the high and low sales prices of the Common Stock on the New York Stock Exchange composite tapes during each quarter of 1996 and 1997. QUARTERLY SALE PRICE DIVIDENDS HIGH LOW PER SHARE 1st Quarter, 1996 $29.375 $23.000 .120 2nd Quarter, 1996 33.125 27.000 .120 3rd Quarter, 1996 34.250 30.000 .120 4th Quarter, 1996 34.000 29.875 .120 1st Quarter, 1997 $36.000 $33.125 .135 2nd Quarter, 1997 36.250 30.500 .135 3rd Quarter, 1997 37.000 32.750 .135 4th Quarter, 1997 44.125 34.563 .135 There are approximately 17,000 record holders of the Common Stock. Fiscal 1997 was the forty-ninth consecutive year that dividends were paid on the Common Stock and the thirty-fifth consecutive year that the aggregate dividend paid per share (after adjusting for stock splits) has increased. On February 13, 1998, the Board of Directors voted to increase the quarterly dividend to $.15 per share for the dividend due to be paid on March 26, 1998. Future dividends will depend on the Registrant's earnings and financial condition. Item 6. Selected Financial Data (In thousands except per share amounts) EARNINGS STATEMENT DATA: Sales and other revenues................................. $3,226,433 $2,957,559 $2,568,061 $2,291,755 $2,054,889 Cost of sales............................................ 2,427,287 2,242,784 1,951,248 1,728,499 1,543,932 Gross margin............................................. 799,146 714,775 616,813 563,256 510,957 Selling, general and administrative expense.............. 635,355 568,033 481,017 437,548 399,437 Impairment loss.......................................... 39,950 - - - - Operating profit......................................... 123,841 146,742 135,796 125,708 111,520 Interest expense, net.................................... 26,425 22,204 19,368 21,360 19,337 Earnings before income taxes............................. 97,416 124,538 116,428 104,348 92,183 Income taxes............................................. 37,769 49,333 46,227 42,060 37,578 Earnings before cumulative effect of change in accounting principle...................... 59,647 75,205 70,201 62,288 54,605 Cumulative effect of accounting change................. - - - - 2,100 Net earnings............................................. $ 59,647 $ 75,205 $ 70,201 $ 62,288 $ 56,705 Per common share: Earnings before cumulative effect of accounting change $ 1.41 $ 1.78 $ 1.67 $ 1.50 $ 1.33 Cumulative effect of accounting change................ - - - - .05 Basic earnings per share.............................. $ 1.41 $ 1.78 $ 1.67 $ 1.50 $ 1.38 Diluted earnings per share............................ $ 1.40 $ 1.76 $ 1.66 $ 1.49 $ 1.37 Cash dividends........................................ $ .54 $ .48 $ .42 $ .38 $ .34 January December December December January 3, 1998 28, 1996 30, 1995 31, 1994 1, 1994 BALANCE SHEET DATA: (Dollar amounts in thousands except per share data) Working capital.......................................... $ 20,873 $ 21,796 $ 23,512 $ 42,707 $ 118,830 Total assets............................................. 1,227,190 1,183,727 961,830 877,605 795,355 Current maturities: Long-term debt........................................ 18,155 14,213 11,246 14,409 7,180 Obligations under capital leases...................... 1,873 1,775 1,467 1,382 1,412 Long-term debt, excluding current maturities............. 235,850 227,525 150,648 153,687 156,716 Obligations under capital leases, excluding current maturities............................................. 75,687 75,198 69,747 69,552 58,835 Redeemable preferred stock of a subsidiary............... - - - - 1,883 Shareholders' equity..................................... 601,029 569,156 518,677 454,475 396,715 Book value per share..................................... $ 14.22 $ 13.46 $ 12.26 $ 10.88 $ 9.63 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This analysis of the Company's results of operations and financial condition should be read in conjunction with the accompanying consolidated financial statements, including the notes thereto, and the information presented in the summary of selected financial data. All footnote references are to Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Overview In 1997, the Company achieved increased sales of 9.1%. The increased sales were achieved by expanding supermarket selling area by 10.2%, a 2.3% increase in comparable store sales and an extra week of operations in the current year. Fiscal year 1997 contained 53 weeks of operations as compared to 52 weeks in 1996. A pre-tax, non-cash accounting charge of $40 million was recorded in the fourth quarter of 1997. Most of this charge related to a write-down in the value of assets, including goodwill, in certain southeastern stores (Note 4). Consolidated net earnings for fiscal 1997 amounted to $60 million, down 20.7% from last year's $75 million. Before the accounting charge, consolidated earnings for 1997 were $84 million or an increase of 12.2% over 1996 earnings. The following table sets forth for the years indicated the percentages which selected items in the consolidated statements of earnings are to sales and other revenues and the percentage change in the dollar values of such items as compared to the indicated prior year: PERCENTAGE OF SALES YEAR-TO-YEAR PERCENTAGE AND OTHER REVENUES CHANGE IN DOLLAR VALUES EXCEPT PER SHARE AMOUNTS FISCAL 1997 FISCAL 1996 FISCAL YEAR COMPARED TO COMPARED TO 1997 1996 1995 FISCAL 1996 FISCAL 1995 100.0% 100.0% 100.0% Sales and other revenues 9.1% 15.2% 24.8 24.2 24.0 Gross margin 11.8 15.9 Selling, general and 19.7 19.2 18.7 administrative expenses 11.9 18.1 1.3 - - Impairment loss - - 3.8 5.0 5.3 Operating profit (15.6) 8.1 0.8 0.8 0.8 Interest expense, net 19.0 14.6 3.0 4.2 4.5 Earnings before income taxes (21.8) 7.0 1.2 1.7 1.8 Income taxes (23.4) 6.7 1.8% 2.5% 2.7% Net earnings (20.7) 7.1 $1.41 $1.78 $1.67 Basic earnings per share (20.8) 6.6 $1.40 $1.76 $1.66 Diluted earnings per share (20.5) 6.0 $ .54 $ .48 $ .42 Cash dividends 12.5 14.3 Sales Sales and other revenues rose 9.1% in 1997, to $3,226 million, an increase of $269 million over 1996 results. Sales from supermarkets that were open in both periods presented, adjusted to exclude the 53rd week ("identical store sales"), increased $11 million or 0.4%. Additional supermarket sales of $248 million resulted from the net impact of new, expanded, relocated and closed stores coupled with the 53rd week of operations in 1997. Fiscal year 1997 contained 53 weeks of operations as compared to 52 weeks in 1996. This additional week accounted for approximately $58 million of the 1997 sales increase. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $10 million. Comparable store sales, which include results from expanded and relocated stores on a 52-week basis in both years presented, increased 2.3% in 1997. Identical store sales, adjusted to exclude the 53rd week, were down 0.2% in the fourth quarter of 1997, while comparable store sales were up 1.6% in the quarter. The Company attributes a portion of the identical store sales decline in the last quarter to a very low inflation rate in food prices, the current competitive environment and a decrease in the availability of food stamps. In 1996, sales and other revenues were $2,958 million, an increase of $390 million or 15.2% over 1995 results. Retail sales increased $372 million or 15.0%. Identical store sales reflected an increase of 2.5%. Other sales and revenues, which include trucking, wholesale, real estate and miscellaneous retail operations, increased $18 million in 1996. Gross Margin Gross margins increased in 1997 to 24.8% of sales and other revenues in comparison to 24.2% in 1996. The 1997 increase is the result of improved selling margins in certain of the Company's marketing territories coupled with better operations in the Southeast, including the Company's new distribution facility which began product delivery in November 1996. The Company continues to focus on maintaining a competitive pricing strategy. Gross margins increased in 1996 to 24.2% of sales and other revenues in comparison to 24.0% in 1995. Selling, General and Administrative Expenses Selling, general and administrative expenses increased to 19.7% of sales and other revenues in 1997 as compared to 19.2% in 1996. Payroll and payroll related expenses, which exceeded 50% of selling, general and administrative expenses in both years, increased as a percentage of sales in the current year. In addition to rising payroll costs, the 1997 increase reflects higher advertising costs and depreciation charges. The increases in these components of selling, general and administrative expenses reflect the high level of store openings in 1997 coupled with the continuing costs of establishing the Company's position in the Southeast. Selling, general and administrative expenses increased to 19.2% of sales and other revenues in 1996 as compared to 18.7% in 1995. This increase is principally the result of additional costs of establishing the Company's position in its southeastern markets. Impairment Loss The Company recorded a non-cash charge of $40 million in the fourth quarter of fiscal 1997 (Note 4). Expressed as a percentage of sales the impairment loss was 1.3% of sales and other revenues. Approximately $24 million of the impairment loss relates to supermarket assets and related costs for seven southeastern stores in non-core markets that were closed in January 1998. The remaining $16 million relates to supermarket assets which will continue to be used in the operations of the Company. Interest Expense, Net Net interest expense expressed as a percentage of sales and other revenues was 0.8% in all years presented. Net interest expense in 1997 was $26 million, an increase of 19.0% from 1996 net interest expense of $22 million. This increase is primarily the result of an increase of average debt levels coupled with a decrease in invested cash which is reflected as a decrease in interest income. Net interest expense in 1996 was $22 million, an increase of 14.6% from 1995 net interest expense of $19 million. This increase is primarily the result of an increase in average debt levels coupled with a decrease in invested cash. Income Taxes The provision for income taxes includes both federal and state income taxes. The effective tax rate decreased in 1997 to 38.8% from 39.6% in 1996 and 39.7% in 1995. These lower effective tax rates are the result of reductions in the Company's overall state income tax rate. Assuming there are no federal or state income tax rate changes, the Company expects the effective tax rate for 1998 and thereafter to be in the 37.8% to 38.2% range. Net Earnings and Earnings Per Common Share Net earnings decreased 20.7% in 1997 to $60 million or 1.8% of sales and other revenues, a decrease of $15 million from 1996 net earnings of $75 million or 2.5% of sales and other revenues. This decrease is primarily the result of the impairment loss that was booked in the fourth quarter of 1997. Before the impairment loss, net earnings for 1997 would have been $84 million, an increase of 12.3% over the $75 million reported in 1996. This increase is the result of increased sales and gross margin, partially offset by an increase in selling, general and administrative expenses. Net earnings for the fourth quarter of 1997 were $1 million, a decrease of 93.5% over 1996 fourth quarter net earnings of $21 million. Basic earnings per common share exhibited a similar percentage decrease to $.03 for the fourth quarter of 1997 versus $.50 for the fourth quarter of 1996. This decrease is the result of the impairment loss. Before the impairment loss, net earnings were $26 million, an increase of 23.8% over the $21 million reported in 1996 and basic earnings per share were $.62, an increase of 24.0% over the $.50 reported in 1996. Net earnings increased 7.1% in 1996 to $75 million or 2.5% of sales and other revenues, an increase of $5 million from 1995 net earnings of $70 million or 2.7% of sales and other revenues. This increase is the result of increased sales and gross margin, partially offset by an increase in selling, general and administrative expenses. Basic earnings per common share in 1997 were $1.41 as compared to $1.78 in 1996, a decrease of 20.8%. Diluted earnings per common share (Note 1J) were $1.40 in 1997, a decrease of 20.5% from $1.76 reported for 1996. Before the impairment charge, basic earnings per common share would have been $2.00 as compared to $1.78 in 1996, an increase of 12.4%. Management estimates that the extra week of operations in the fourth quarter of 1997 increased net earnings by approximately $.04 per share. The Company is evaluating a home shopping service in the Boston, Massachusetts market called Hannaford's HomeRuns(R). This service generated a net loss of approximately $.11 per share in 1997 and $.05 per share in 1996. Management will continue to evaluate this business venture in 1998. Basic earnings per common share in 1996 were $1.78 as compared to $1.67 in 1995, an increase of 6.6%. Diluted earnings per common share were $1.76 in 1996 as compared to $1.66 in 1995, an increase of 6.0%. Other Items and Impact of Inflation Seasonal business affects the Company's operations in that sales are generally greater in the second half of the year (Note 9). In recent years, the impact of inflation on the Company's operating results has been minimal, reflecting generally lower rates of inflation in the economy. The Company's business is characterized by large purchases and high sales volumes extended across diverse product lines, rapid inventory turns and low profit margins. In this environment, vendor price changes are typically passed on to the customer. The Company does not believe inflation or deflation has significantly affected its competitive position in the industry. However, since price changes do cause sales dollars to fluctuate, the use of the LIFO method of accounting for inventories reduces the impact of price changes on earnings by matching current costs with current revenues. During 1997, the Company accelerated its task of addressing the Year 2000 technology application issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failure or miscalculations, causing disruptions of operations. Management has developed a comprehensive Year 2000 compliance plan and initiated its implementation. The Company currently anticipates that this comprehensive program will be successfully completed in order to minimize any business interruptions resulting from this issue. The Company currently expects that its cost to complete this work will not be material to the Company's financial results. CAPITAL RESOURCES AND LIQUIDITY Overview Measures of liquidity for each of the last three fiscal years are as follows: (Dollars in millions) January 3, December 28, December 30, 1998 1996 1995 Cash and cash items $58 $43 $ 7 Working capital (FIFO inventory) $39 $39 $39 Unused lines of revolving credit $54 $48 $64 Unused lines of short-term credit $30 $35 $44 Current ratio (FIFO inventory) 1.15 1.16 1.23 The Company continued to maintain a strong capital position at the end of fiscal 1997. Cash and cash items increased $15 million to $58 million at the end of the year. Lines of credit represent a continuing source of capital and are available for purposes of short-term financing. At January 3, 1998, the Company had $38 million outstanding on its revolving lines of credit. The Company is in a solid financial position to carry out its current expansion and growth plans in 1998. In February 1996, the Company authorized a program to repurchase up to $75 million in shares of Hannaford common stock over three years. The program authorizes purchases on the open market and through privately negotiated transactions. Shares repurchased by the Company are held as treasury shares and are available to the Company for use in funding its stock based benefit plans, and when authorized, for other corporate purposes. In 1997, the Company reacquired approximately 400,000 shares at a cost of $14 million, all of which were used to fund issuances under stock-based benefit plans. Cash Flows from Operating Activities Cash provided by operating activities was $190 million in 1997, a decrease of $11 million from the $201 million provided in 1996. This decrease is primarily attributable to a reduction in cash flows provided by net working capital items partially offset by an increase in depreciation and amortization. The impairment loss was a non-cash charge. Although it impacted certain components of cash flows from operating activities, it has no net impact on cash provided by operating activities. Cash provided by operating activities was $201 million in 1996, an increase of $63 million over the $138 million provided in 1995. This increase is primarily attributable to an overall decrease in net working capital items coupled with improved results of operations and higher depreciation and amortization. Inventories increased $34 million when comparing December 28, 1996 with December 30, 1995. This increase is attributable to additional retail inventory in new stores coupled with higher warehouse inventory due to the opening of the Company's new distribution facility in the Southeast. Accounts payable, accrued expenses and other liabilities increased $78 million over the same period reflecting the overall growth of the Company's operations. Cash Flows from Investing Activities Cash used in investing activities decreased $60 million during 1997 to $157 million from $217 million in 1996. This decrease is primarily the result of the Company's reduced capital investment in 1997 as evidenced by the construction of a new distribution facility in the Southeast in 1996. Capital investments totaled $168 million in 1997 and were composed of $153 million in additions to property, plant and equipment, $10 million in deferred charges and computer software costs and $5 million in non-cash capital lease additions. These 1997 capital investments were primarily composed of costs incurred in building and equipping new and expanded supermarkets and in improvements necessary to maintain current facilities and systems. Net retail selling space for supermarkets increased 10.2% in 1997 to 4,947,000 square feet at year-end, an increase of 457,000 square feet over 1996 year-end sales area. The Company opened seventeen supermarkets including ten new stores, five relocations and two expansions, and temporarily closed one supermarket as it undergoes a substantial expansion. A number of 1997 supermarket construction starts will not be completed until 1998. The number of supermarkets and square footage of selling area at year-ends 1997, 1996 and 1995 are summarized below: SUPERMARKETS Number of Square Footage Units Selling Area 1997 148 4,947,000 1996 139 4,490,000 1995 134 4,166,000 Newly constructed supermarkets in 1997, together with their square footage of selling area, are listed below: SQUARE FOOTAGE LOCATION SELLING AREA Northeast Chelmsford, MA 35,000 Dracut, MA 30,000 Guilderland, NY 33,000 Rutland, VT 34,000 Southeast Shallotte, NC 35,000 Danville, VA 41,000 Wilmington, NC (Murrayville Rd.) 35,000 Wilmington, NC (Carolina Beach) 41,000 Richmond, VA (Rt. 1 and Parham) 44,000 Charlotte, NC (Independence Blvd.) 41,000 Virginia Beach, VA (Shore Drive) 35,000 Virginia Beach, VA (Princess Anne) 40,000 Newport News, VA 37,000 Rock Hill, SC 40,000 Charlotte, NC (Eastland Mall) 41,000 Richmond, VA (Willow Lawn) 34,000 Virginia Beach, VA (Republic Drive) 40,000 During January 1998, the Company closed seven southeastern stores in non-core markets with limited opportunity for profitable growth. These closures will allow the Company to focus on its key southeastern market regions in 1998. The Company plans to invest approximately $50 million in new and remodeled stores in its key southeastern markets in 1998. Cash used in investing activities increased $59 million during 1996 to $217 million from $158 million in 1995. This increase is primarily the result of the Company's increased capital investment in 1996. Total capital investments totaled $231 million in 1996 and were composed of $215 million in additions to property, plant and equipment, $8 million in deferred charges and computer software costs and $8 million in non-cash capital lease additions. These 1996 capital investments were primarily composed of costs incurred in building and equipping new and expanded supermarkets and in the construction of a new distribution facility in the Southeast. The distribution facility, located in Butner, North Carolina, began shipping product in November 1996. Cash Flows from Financing Activities Cash used in financing activities was $17 million in 1997 as compared to $51 million of cash provided by financing activities in 1996. This decrease in cash flows of $68 million is principally the result of reduced proceeds from the issuance of long-term debt. During 1997, the Company received $20 million of proceeds from a senior uncollateralized debt financing and $7 million of proceeds from borrowings on its revolving lines of credit. During 1996, the Company received $75 million of proceeds from a senior uncollateralized debt financing and $31 million of proceeds from borrowings on its revolving line of credit. In 1997, the Company made payments of $14 million on its long-term debt as compared to $29 million in 1996. This decrease of $15 million is the result of the Company, during 1996, utilizing a portion of its long-term debt proceeds to repay $11 million on its revolving lines of credit. In 1997, the Company purchased 400,000 shares of common stock at a cost of $14 million. The majority of this repurchased stock was used to fund the Company's stock based benefit plans with the balance being held in treasury. These amounts were offset by proceeds of $10 million received during 1997 from the issuance of approximately 399,000 shares of treasury stock. The Company paid $23 million in dividends to common shareholders in 1997. Quarterly cash dividends declared during 1997 totaled $.54 per common share, an increase of 12.5% over the $.48 per share declared during 1996. This was the thirty-fifth consecutive year that the aggregate dividend paid per common share, after adjustment for stock splits and stock dividends, has increased. Common stock dividend payments in 1997 represented 27.3% of net earnings available to common shareholders before the impact of the non-cash impairment loss. In February 1998, the Company declared an increased quarterly dividend on its common stock of $.15 per share, payable March 26, 1998. The new quarterly dividend of $.15 per share represents an increase of 11.1% over the $.135 per share paid in each quarter of 1997. Cash provided by financing activities was $51 million in 1996, an increase of $66 million from the $15 million of cash used in financing activities in 1995. This increase is the result of proceeds from the issuance of long-term debt partially offset by payments of long-term debt and purchases of treasury stock. 1998 Capital Program Total capital expenditure commitments are projected to be in excess of $140 million in 1998, primarily for new store constructions, store relocations and expansions, equipment, vehicles and other asset expenditures. During 1998, this program will be subject to continuing change and review as conditions warrant. Net square footage of retail selling space is expected to increase by approximately 4% during 1998. Excluding the impact of the seven closed supermarkets, the Company's expansion program would yield an increase in retail square footage of approximately 8% during 1998. A number of projects scheduled to start in 1998 will not be completed until 1999. The 1998 capital program is expected to be financed by internally generated funds, long-term debt and leases. FORWARD-LOOKING STATEMENTS From time to time, information provided by the Company or statements made by its associates may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Examples of such statements in this report include those concerning the Company's expected future tax rates, Year 2000 technology application issue, construction schedules and capital expenditures. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors and risks including, but not limited to the following: (1) Hannaford's future operating results are dependent on its ability to achieve increased sales and to control expenses. Factors such as lower than expected inflation, product cost fluctuations particularly in perishable categories, changes in product mix or the use of promotional items, both of which may affect pricing strategy, continued or increased competitive pressures from existing competitors and new entrants, including price cutting strategies, and deterioration in general or regional economic conditions are all factors which could adversely affect sales projections. Other components of operating results could be adversely affected by state or federal legislation or regulation that increases costs, increases in interest rates or the Company's cost of borrowing, increases in labor rates due to low unemployment or other factors, unanticipated costs related to the opening and closing of stores or the inability to control various expense categories. (2) Hannaford's future growth is dependent on its ability to expand its retail square footage. Increases in interest rates or the Company's cost of capital, the unavailability of funds for capital expenditures and the inability to develop new stores or convert existing stores as rapidly as planned are all risks to the Company's projected future expansion. (3) Adverse determinations with respect to pending or future litigation or other material claims against Hannaford could affect actual results. (4) The costs of the Year 2000 issue and its action plan are management's best estimates, which were derived using assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. Furthermore, the market price of Hannaford common stock could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the retail sector, especially in the supermarket industry, as well as general economic conditions and other factors external to Hannaford. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presented below are the Registrant's Consolidated Balance Sheets, Consolidated Statements of Earnings, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flows and accompanying Notes to Consolidated Financial Statements. REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders of Hannaford Bros. Co.: We have audited the consolidated financial statements of Hannaford Bros. Co. and Subsidiaries listed in Item 8 of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hannaford Bros. Co. and Subsidiaries as of January 3, 1998 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. s/Coopers & Lybrand Portland, Maine January 21, 1998 HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) January 3, December 28, 1998 1996 Current assets: Cash and cash items $ 57,663 $ 42,505 Accounts receivable, net 14,918 17,384 Inventories (note 1C) 188,767 191,658 Prepaid expenses 7,801 5,834 Deferred income taxes (note 8) 6,912 4,589 Total current assets 276,061 261,970 Property, plant and equipment, net (notes 1D, 2 and 4) 777,909 723,176 Leased property under capital leases, net (note 3) 58,516 59,918 Other assets: Goodwill, net (notes 1F and 4) 67,552 95,654 Deferred charges, net (note 1G) 28,724 26,332 Computer software costs, net (note 1H) 16,551 13,658 Miscellaneous assets 1,877 3,019 Total other assets 114,704 138,663 $1,227,190 $1,183,727 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands except share amounts) January 3, December 28, 1998 1996 Current liabilities: Current maturities of long-term debt (note 2) $ 18,155 $ 14,213 Obligations under capital leases (note 3) 1,873 1,775 Accounts payable 182,252 177,895 Accrued payroll 25,526 22,554 Other accrued expenses 24,553 21,205 Income taxes 2,829 2,532 Total current liabilities 255,188 240,174 Deferred income tax liabilities (note 8) 18,265 23,757 Other liabilities 41,171 47,917 Long-term debt (note 2) 235,850 227,525 Obligations under capital leases (note 3) 75,687 75,198 Shareholders' equity (notes 5 and 7): Class A Serial Preferred stock, no par, authorized 2,000,000 shares - - Class B Serial Preferred stock, par value $.01 per share, authorized 28,000,000 shares - - Common stock, par value $.75 per share: Authorized 110,000,000 shares; January 3, 1998: Issued 42,338,316 shares, outstanding 42,279,483 shares. December 28, 1996: Issued, 42,338,316 shares, outstanding 42,280,695 shares. 31,754 31,754 Additional paid-in capital 115,130 119,399 Preferred stock purchase rights 423 423 Retained earnings 456,063 419,459 603,370 571,035 Less common stock in treasury (January 3, 1998: 58,833 shares at cost, December 28, 1996: 57,621 shares at cost) 2,341 1,879 Total shareholders' equity 601,029 569,156 $1,227,190 $1,183,727 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except per share amounts) FISCAL YEAR 1997 1996 1995 Sales and other revenues $3,226,433 $2,957,559 $2,568,061 Cost of sales 2,427,287 2,242,784 1,951,248 Gross margin 799,146 714,775 616,813 Selling, general and administrative expenses 635,355 568,033 481,017 Impairment loss (note 4) 39,950 - - Operating profit 123,841 146,742 135,796 Interest expense, net (notes 1I and 2) 26,425 22,204 19,368 Earnings before income taxes 97,416 124,538 116,428 Income taxes (note 8) 37,769 49,333 46,227 Net earnings $ 59,647 $ 75,205 $ 70,201 Per share of common stock (note 1J): Basic earnings per share $ 1.41 $ 1.78 $ 1.67 Diluted earnings per share $ 1.40 $ 1.76 $ 1.66 Cash dividends $ .54 $ .48 $ .42 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) ADDITIONAL COMMON STOCK PAID-IN PREFERRED STOCK RETAINED TREASURY STOCK SHARES AMOUNT CAPITAL PURCHASE RIGHTS EARNINGS SHARES AMOUNT Balance, December 31, 1994 41,779 $31,335 $110,669 $418 $312,053 Net earnings 70,201 Cash dividends: Common stock (17,693) Preferred stock purchase rights 5 (5) Shares issued to certain shareholders per agreement 132 99 3,376 Shares issued under employee benefit plans 387 290 7,929 Balance, December 30, 1995 42,298 31,724 121,974 423 364,556 Net earnings 75,205 Cash dividends: Common stock (20,302) Shares issued to certain shareholders per agreement 20 15 484 Shares issued under employee benefit plans 20 15 (3,059) 410 $12,250 Treasury stock purchases (468) (14,129) Balance, December 28, 1996 42,338 31,754 119,399 423 419,459 ( 58) (1,879) Net earnings 59,647 Cash dividends: Common stock (23,043) Shares issued under employee benefit plans (4,269) 399 13,917 Treasury stock purchases (400) (14,379) Balance, January 3, 1998 42,338 $31,754 $115,130 $423 $456,063 (59) ($2,341) See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 1997 1996 1995 Cash flows from operating activities: Net income $ 59,647 $ 75,205 $ 70,201 Adjustments to reconcile net income to net cash provided by operating activities: Impairment loss 39,950 - - Depreciation and amortization 93,953 77,420 69,016 Decrease (increase) in inventories 2,891 (33,689) (25,545) Decrease (increase) in receivables and prepayments 599 (805) (1,196) Increase in accounts payable, accrued expenses and other liabilities 440 77,889 27,821 Increase (decrease) in income taxes payable 297 2,532 (5,409) Increase (decrease) in deferred taxes (7,815) 2,523 2,279 Other operating activities (446) 96 1,059 Net cash provided by operating activities 189,516 201,171 138,226 Cash flows from investing activities: Acquisition of property, plant and equipment (152,862) (215,067) (133,587) Sale of property, plant and equipment, net 6,143 5,958 2,607 Increase in goodwill and deferred charges (4,054) (1,930) (22,599) Increase in computer software costs (6,205) (5,933) (4,130) Net cash used in investing activities (156,978) (216,972) (157,709) Cash flows from financing activities: Principal payments under capital lease obligations (1,788) (1,493) (1,404) Proceeds from issuance of long-term debt 26,600 106,500 11,400 Payments of long-term debt (14,418) (28,994) (18,452) Issuance of common stock 9,648 9,707 11,694 Purchase of treasury stock (14,379) (14,129) - Dividends paid (23,043) (20,302) (17,693) Net cash provided by (used in) financing activities (17,380) 51,289 (14,455) Net increase (decrease) in cash and cash items 15,158 35,488 (33,938) Cash and cash items at beginning of year 42,505 7,017 40,955 Cash and cash items at end of year $ 57,663 $ 42,505 $ 7,017 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information Cash paid during the year for: (In thousands) 1997 1996 1995 Interest (net of amount capitalized, $3,463 in 1997, $3,357 in 1996 and $2,529 in 1995) $26,396 $22,765 $21,986 Income taxes 41,202 42,577 49,254 Supplemental disclosure of noncash investing and financing activities Capital lease obligations totalling $4,550,000, $7,652,000 and $1,997,000 were incurred during 1997, 1996 and 1995, respectively, when the Company entered into real estate leases. Disclosure of accounting policy For the purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments with maturities of three months or less when purchased, to be cash items. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. NATURE OF BUSINESS The Company and its subsidiaries are principally involved in the distribution and retail sale of food, prescription drugs and related products through supermarkets and combination stores. The Company's stores are located in Maine, New Hampshire, Vermont, Massachusetts, upstate New York, Virginia, North Carolina and South Carolina. B. PRINCIPLES OF CONSOLIDATION The Company's fiscal year ends on the Saturday closest to December 31. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of January 3, 1998, for fiscal year 1997 (53 weeks), December 28, 1996, for fiscal year 1996 (52 weeks) and December 30, 1995, for fiscal year 1995 (52 weeks). All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. C. INVENTORIES Inventories consist primarily of groceries, meat, produce, general merchandise and pharmaceuticals. The majority of grocery, pharmaceutical and general merchandise inventories are valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. Approximately 84% of inventories were valued using the LIFO method in 1997 as compared to 71% in 1996. The LIFO method was elected in 1997 for the majority of inventories in the Company's southeastern operations. Other inventories are stated at the lower of cost (first-in, first-out) or market. The current cost of groceries, general merchandise and pharmaceuticals exceeded the LIFO valuation by $18,037,000 at January 3, 1998 and $17,076,000 at December 28, 1996. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) D. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold interests and improvements are amortized on the straight-line method over the shorter of estimated useful life or lease term. The costs of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in the results of operations. Property, plant and equipment consists of the following: AVERAGE DEPRECIATION (In thousands) RATE 1997 1996 3% Land and improvements $ 129,752 $ 117,218 3% Buildings 279,310 252,228 13% Furniture, fixtures and equipment 454,564 404,725 4% Leasehold interests and improvements 277,560 245,490 Construction in progress 29,124 31,850 1,170,310 1,051,511 Less accumulated depreciation and amortization 392,401 328,335 $ 777,909 $ 723,176 E. STORE OPENING COSTS The noncapital expenditures incurred in opening new stores or remodelling existing stores are expensed in the year in which they are incurred. F. GOODWILL Goodwill, which represents the excess of costs of assets acquired over the fair value of their net assets at dates of acquisition, is being amortized on the straight-line method over various periods not exceeding 20 years. The Company evaluates, on an ongoing basis, the carrying value of goodwill and will make a specific provision when impairment is identified (Note 4). Goodwill amortization expense charged to operations was $5,534,000 in 1997, $5,140,000 in 1996 and $4,448,000 in 1995. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) G. DEFERRED CHARGES Deferred charges consist primarily of costs of obtaining new store sites, covenants-not-to-compete, tradenames and initial direct lease costs. Costs of obtaining new store sites, if ultimately developed, are capitalized and depreciated over the estimated useful lives of the related assets. Other intangible assets acquired in connection with acquisitions are amortized on the straight-line method over periods ranging from five to ten years. Lease costs are amortized on the straight-line method over the base lease term. Amortization expense related to these deferred charges was $3,599,000 in 1997, $3,246,000 in 1996 and $5,609,000 in 1995. H. CAPITALIZED COMPUTER SOFTWARE COSTS Capitalized computer software costs consist of costs to purchase and develop software. The Company capitalizes internally developed software costs based on a project-by-project analysis of each project's significance to the Company and its estimated useful life. All capitalized software costs are amortized on a straight-line method over a period of five years. Amortization expense charged to operations was $3,312,000 in 1997, $2,338,000 in 1996 and $2,448,000 in 1995. I. CAPITALIZED INTEREST The Company capitalizes interest as a part of the cost of acquiring and constructing certain assets. Capitalized interest was $3,463,000 in 1997, $3,357,000 in 1996 and $2,529,000 in 1995. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) J. EARNINGS PER COMMON SHARE Effective for the 1997 fiscal year, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128 - EARNINGS PER SHARE. The Statement requires dual presentation of basic and diluted earnings per share of common stock on the consolidated statements of earnings. Basic earnings per share of common stock have been determined by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that would occur if existing stock options were exercised. Following is a reconciliation of the dual presentations of earnings per share for the fiscal years presented. (Amounts in 000's) NET COMMON EARNINGS INCOME SHARES PER (NUMERATOR) (DENOMINATOR) SHARE FISCAL 1997 Basic earnings per share $59,647 42,287 $1.41 Dilutive potential shares 445 Diluted earnings per share $59,647 42,732 $1.40 FISCAL 1996 Basic earnings per share $75,205 42,298 $1.78 Dilutive potential shares 323 Diluted earnings per share $75,205 42,621 $1.76 FISCAL 1995 Basic earnings per share $70,201 42,092 $1.67 Dilutive potential shares 260 Diluted earnings per share $70,201 42,352 $1.66 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) K. FAIR VALUE DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash items, accounts receivable and notes receivable: The carrying amounts reported in the balance sheet for these items approximate their fair value. Long-term debt: The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of the Company's long-term debt, including current maturities, was approximately $254,005,000 at January 3, 1998. The fair value of the long-term debt is estimated to be $259,519,000 at January 3, 1998. L. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 - REPORTING COMPREHENSIVE INCOME, which requires the separate reporting of all changes to shareholders' equity, and SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which revises existing guidelines about the level of financial disclosure of a Company's operations. Both Statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has determined that the new standards will not have a material impact to existing financial reporting. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. EXTERNAL FINANCING At January 3, 1998, the Company had revolving credit lines with several banks totalling $92,000,000 with interest rates determined by different borrowing options including prime, quoted money market or LIBOR plus a premium. At January 3, 1998, there were $38,100,000 of outstanding borrowings under these credit lines with a weighted-average interest rate of 7.0%. The agreements provide for conversion of revolving credit loans to term loans with principal payments due in quarterly installments over a period of four years. The loan agreements contain certain restrictive covenants, which among other provisions, require maintenance of certain levels of working capital, debt and tangible net worth. The lines require a commitment fee of 0.21% on the unused portion of the line. There are no compensating balances required during the commitment period. In addition, the Company had unused, uncommitted short-term lines of credit with three banks totalling $36,000,000 at January 3, 1998. Of this amount, approximately $6,100,000 is reserved to support outstanding standby letters of credit which guarantee payment of certain insurance claims and premiums. In February 1997, the Company received the proceeds of a $20,000,000 senior uncollateralized debt financing. The term of the debt is 12 years, with an average life of 10 years and an interest rate of 7.41%. At January 3, 1998, real estate and equipment with a net book value of approximately $84,082,000 served as collateral for debt of approximately $73,648,000. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Net interest expense was as follows: (In thousands) 1997 1996 1995 Interest on debt $20,108 $17,460 $15,302 Capital lease interest 9,902 9,351 9,105 Capitalized interest (3,463) (3,357) (2,529) Interest income (122) (1,250) (2,510) $26,425 $22,204 $19,368 Long-term debt consists of the following: (In thousands) 1997 1996 Uncollateralized senior notes due in varying annual installments through 2016 with interest from 6.16% to 8.97%. $136,250 $123,500 Collateralized by real estate, due in varying installments through 2011 with interest from 7.55% to 10.35% 70,665 75,255 Uncollateralized revolving credit loans with interest from 6.34% to 7.44% 38,100 31,500 Collateralized by equipment, due in varying installments through 1999 with interest from 6.30% to 7.72%. 2,983 4,417 Other 6,007 7,066 254,005 241,738 Less current portion 18,155 14,213 $235,850 $227,525 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The uncollateralized senior note agreements contain certain restrictive covenants, which among other provisions, limit total debt and require minimum levels of tangible net worth. Maturities of long-term debt at January 3, 1998, are as follows: (In thousands) 1998 $ 18,155 1999 20,918 2000 30,215 2001 33,404 2002 25,733 2003 and thereafter 125,580 $254,005 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. LEASED ASSETS AND LEASE COMMITMENTS The Company's financial structure includes leases of certain stores, office facilities, transportation vehicles and equipment. Initial lease terms range from 3 to 45 years with the majority of lease terms between 20 and 25 years. Substantially all leases contain renewal options. Certain leases contain a provision for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. Most of the real estate leases provide that the Company pay taxes, insurance and maintenance applicable to the leased premises. The Company's investment in real property under capital leases was as follows: (In thousands) 1997 1996 Real property $84,494 $83,047 Less accumulated amortization 25,978 23,129 Net real property under capital leases $58,516 $59,918 Amortization of property under capital leases was $4,322,000 in 1997, $4,004,000 in 1996 and $3,866,000 in 1995. Future minimum rental payments under capital lease obligations and operating leases at January 3, 1998, are as follows: (In thousands) CAPITAL OPERATING LEASES LEASES 1998 $ 11,730 $ 20,881 1999 11,934 20,148 2000 12,050 18,442 2001 11,919 17,176 2002 12,147 16,668 2003 and thereafter 118,996 176,593 Total minimum lease payments 178,776 $269,908 Less: Imputed interest (at rates from 6.50% to 21.13%) 101,216 Present value of net mini- mum lease payments 77,560 Less current obligations 1,873 Long-term obligations $ 75,687 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Minimum payments for capital and operating leases have not been reduced by minimum sublease rentals of $2,406,000 and $7,506,000, respectively, due in the future under noncancellable subleases. They also do not include contingent rentals that may be payable under certain leases. Total rent expense, net of executory costs, was as follows: (In thousands) 1997 1996 1995 Capital leases: Contingent rentals $ 194 $ 169 $ 166 Operating leases: Minimum rentals 20,584 19,019 13,847 Contingent rentals 714 491 517 Rentals from subleases (1,492) (690) (222) 19,806 18,820 14,142 $20,000 $18,989 $14,308 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. IMPAIRMENT LOSS In December 1997, the Company determined that certain of its supermarket assets and identifiable intangibles, including goodwill, were impaired based upon STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 121 - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. Based on a review of certain Company locations, in considering the expected operating cash flows along with the estimated market value of the assets as if they were to be sold or disposed of, an impairment loss of $39,950,000 was recognized. Approximately $24,000,000 of the asset impairment loss relates to supermarket assets and related costs for stores that were closed in January 1998 and are being held for sale or disposal, and $15,950,000 relates to supermarket assets which will continue to be used in the operations of the Company. Management expects to complete the sale or disposal of the assets relative to the closed supermarkets, whose estimated fair values are approximately $8,987,000, within one year from the dates of closure. In 1997 the operating losses of these closed supermarkets were not material. Management's estimated future discounted cash flows from these supermarket locations indicated that such cash flows were insufficient to recover the asset carrying values. Therefore, such carrying values were written down to estimated fair value less costs to sell. Under SFAS NO. 121, the potential impairment evaluation is made on an individual supermarket basis and involves considerable management judgment as to the expected future sales and profitability of each individual supermarket. Actual results of these supermarkets may differ from management's estimates. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. CAPITAL STOCK In December 1997, the Company adopted a Shareholder Rights Plan which will become effective upon the expiration of the Company's existing rights plan on February 4, 1998. The replacement plan is substantially identical to the existing plan, except for modification to the exercise and redemption prices of the new rights, and the term of the rights plan. The terms of the plan provide for a dividend distribution of one right for each share of Hannaford common stock to holders of record at the close of business on February 4, 1998. The rights will become exercisable only in the event an acquiring party (excluding the Sobey Parties under certain circumstances and certain other persons) accumulates 20% or more of Hannaford voting stock, or if a party announces an offer which would result in it owning 30% or more of Hannaford voting stock. The rights will expire on February 4, 2001. Each right will entitle the holder to buy one one-hundredth of a share of a series of junior participating preferred stock of Hannaford at a price of $60. In addition, upon the occurrence of a merger or other business combination, certain self-dealing transactions with an owner of 20% or more of Hannaford voting stock or the acquisition by a person or group of 30% or more of Hannaford voting stock, holders of the rights will be entitled to purchase either participating preferred stock of Hannaford or shares in an "acquiring entity" at half of market value. Hannaford will be entitled to redeem the rights at 1 cent per right any time until the tenth day following the acquisition by an acquiring person or group of a 20% position in its voting stock. In May 1997, the shareholders of the Company approved an amendment to the Hannaford Bros. Co. Employee Stock Purchase Plan. This amendment increased the total authorized shares for this Plan by an additional 750,000 shares thereby permitting continued use of the Plan during 1997 and future years. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In May 1996, the Company amended and extended its existing standstill agreement with certain shareholders ("the Sobey Parties"). The amendment extends the term of the standstill agreement to December 31, 1998, subject to automatic renewal for successive one-year periods (but not beyond December 31, 2000) unless by July 31 of a given year either the Company or any of the Sobey Parties gives written notice of an intention not to further extend the term of the standstill agreement. The amendment also made technical changes to the agreement which will allow the Company greater flexibility in the use of common stock to compensate employees and directors and permitted adoption of a new Shareholder Rights Plan through February 4, 2001, on substantially the same terms as the prior Rights Plan. The amendment maintains the Sobey Parties' ownership limit at approximately 25.6% of the Company's voting stock, except in certain circumstances specified by the agreement. Under the agreement, whenever the Company issues shares of voting stock to third parties, the Sobey Parties generally have the right to purchase sufficient shares from the Company to maintain a 25.6% level of ownership. Since 1995 the Company has issued to the Sobey Parties the following shares of common stock pursuant to their purchase rights under the agreement: 1996, 19,600 shares and 1995, 132,000 shares. All sales to the Sobey Parties pursuant to the standstill agreement have been made at market prices. Due to the Company's share repurchase program to fund stock-based benefit plans and the resulting slowdown in the growth of Company shares outstanding, the Sobey Parties purchased no additional shares in 1997. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. EMPLOYEE BENEFIT PLANS The Company has a non-contributory, defined benefit pension plan covering approximately 50% of its employees. The plan provides for payment of retirement benefits on the basis of employees' length of service and earnings. The Company's policy is to fund the plan based upon legal requirements and tax regulations. Plan assets consist of common stocks, cash and cash equivalents and fixed income investments. At September 30, 1997 and 1996, the plan's measurement dates, the discount rates used in determining the actuarial present values of the projected benefit obligations were 7.50% and 8.25%, respectively; the long-term rate of increase in compensation levels was assumed to be 4.5% in both years. The expected long-term rate of return on plan assets used in determining net pension expense was 10.5% for 1997, 9.5% for 1996, and 9.0% for 1995. In October 1996, the Board of Directors approved an amendment to the plan which converts it to a cash balance plan. This amendment was effective January 1, 1998, and has resulted in the remeasurement of the plan's projected benefit obligation. The accrued pensions costs as of January 3, 1998 and the net pension expense for the year then ended, reflect the plan's remeasurement. The components of net pension expense were as follows: (In thousands) 1997 1996 1995 Service cost $ 3,117 $ 4,709 $ 4,248 Interest expense 5,613 5,155 4,916 Actual return on plan assets (20,074) (7,194) (8,566) Net amortization and deferral 13,252 1,662 3,769 Net pension expense $ 1,908 $ 4,332 $ 4,367 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following summarizes the funded status of the plan at January 3, 1998 and December 28, 1996: (In thousands) 1997 1996 Actuarial present value of benefit obligations: Vested benefit obligation $71,707 $59,828 Accumulated benefit obligation $76,474 $63,849 Projected benefit obligation $81,942 $68,864 Plan assets at fair value 88,385 70,391 Plan assets greater than projected benefit obligation (6,443) (1,527) Unrecognized net asset at transition 308 352 Unrecognized net gain 13,141 7,359 Unrecognized prior service cost (2,611) (2,895) Accrued pension cost $ 4,395 $ 3,289 The Company also provides certain health care and life insurance benefits for retired employees. The discount rates used to determine the accumulated benefit obligation at September 30, 1997 and 1996, the plan's measurement date, were 7.50% and 8.25%, respectively. A 6.0% annual rate of increase in the per capita costs of covered health care was assumed for 1998, gradually decreasing to 5% by the year 2000. A 1% increase in the assumed rate of increase would not have a material effect on the benefit obligation or expense. The Company does not separately fund this plan. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The components of postretirement benefit expense were as follows: (In thousands) 1997 1996 1995 Service cost $ 35 $ 70 $ 65 Interest expense 248 438 530 Net amortization and deferral (60) 167 231 Net periodic postretirement benefit expense $ 223 $ 675 $ 826 The following summarizes the status of the plan at January 3, 1998 and December 28, 1996: (In thousands) 1997 1996 Accumulated benefit obligation: Retirees $ 2,138 $ 3,836 Actives - eligible to retire 361 559 Actives - not eligible to retire 619 985 Total obligation 3,118 5,380 Unrecognized transition obligation (8,283) (8,847) Unrecognized net gain 6,273 5,003 Accrued postretirement benefit liability $ 1,108 $ 1,536 The Company also provides a defined contribution 401(k) plan to substantially all employees. Amounts charged to expense for this plan were $2,916,000 in 1997, $3,076,000 in 1996 and $2,744,000 in 1995. The Company also administers a supplemental executive retirement plan for which the cost was not significant. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. EMPLOYEE STOCK PLANS The 1985 Incentive Stock Option Plan (the final grants under which expired on May 4, 1996) and the 1988 Stock Plan provide for the granting to officers and other key employees options to purchase common stock at 100% of the market price on the date of grant. The 1988 Stock Plan allows the granting of both incentive stock options and non-qualified stock options. Under the 1988 Stock Plan, both incentive stock options and non-qualified stock options may have various vesting schedules, but generally none are exercisable until at least one year following the grant. All options may be exercised for cash or by exchanging currently owned shares, or both. Under the 1988 Plan, exchanged shares may trigger the granting of non-qualified "reload" options for the balance of the original option term. Original option grants expire ten years from the date of grant (seven years in the case of the 1985 Incentive Stock Option Plan). Incentive stock option activity for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, was as follows: (Share Amounts in Thousands) 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 1,422 $24.91 1,362 $22.37 1,185 $20.43 Granted 367 34.63 359 30.39 336 26.75 Exercised (261) 22.85 (287) 19.63 (137) 16.08 Cancelled (16) 30.89 (12) 26.74 (22) 23.66 Outstanding at end of year 1,512 27.57 1,422 24.91 1,362 22.37 Exercisable at end of year 912 24.02 902 22.42 860 20.85 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Non-qualified stock option activity for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, was as follows: (Share Amounts in Thousands) 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 366 $28.18 218 $24.60 103 $22.09 Granted 127 36.15 189 31.30 116 26.85 Exercised (13) 27.89 (35) 19.96 - - Cancelled - - (6) 29.01 (1) 25.04 Outstanding at end of year 480 30.29 366 28.18 218 24.60 Exercisable at end of year 252 26.68 151 24.60 80 22.19 Available for future grants (all plans) 92 - 569 - 1,089 - Exercise prices for options outstanding as of January 3, 1998 ranged from $18.81 to $43.44. The weighted-average remaining contractual life of these options is approximately 7.6 years. The Employee Stock Purchase Plan enables participating employees to purchase common stock through payroll deduction of up to 5% of eligible compensation. The Company pays interest on the accumulated withholdings. These amounts may be used to purchase shares of company stock at the option price (lesser of: (a) 85% of the fair market value at the date of grant or (b) the greater of the market price at the close of business on the exercise date or $10.00 per share). During 1997, employees purchased 116,849 shares, for which $2,595,828 was paid to the Company. On May 12, 1997, shareholders approved an additional 750,000 shares of common stock to be allocated to this plan. As of January 3, 1998, grants had been exercised by employees for the purchase of 111,509 shares and 834,915 shares remained available for issuance under the Plan. As of February 1998, $2,926,442 had been received by the Company upon issuance of these shares and the balance of shares available for future issuance was reduced to 723,711. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) In 1995, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards (SFAS) No. 123 - Accounting for Stock Based Compensation". This statement requires a fair value based method of accounting for employee stock options and would result in expense recognition for the Company's employee stock plans. It also permits a Company to continue to measure compensation expense for such plans using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". The Company has elected to follow APB 25 in accounting for its employee stock plans, and accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock plans been determined based on the fair value requirements of SFAS No. 123, the Company's net income and basic earnings per share would have been reduced to the proforma amounts indicated below: (In thousands except earnings per share) 1997 1996 1995 Net earnings As reported $59,647 $75,205 $70,201 Proforma 56,436 72,567 68,814 Basic earnings per share As reported $1.41 $1.78 $1.67 Proforma 1.33 1.71 1.63 During the phase-in period of SFAS No. 123, the fair value of stock options included in the proforma accounts for fiscal 1997, 1996 and 1995 is not necessarily indicative of the future effects on net income and earnings per share. The fair value of each stock option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1997 1996 1995 Risk-free interest rate 6.85% 7.03% 6.61% Dividend yield 1.55% 1.54% 1.60% Expected volatility 19.42% 19.44% 18.77% Expected life 4.5 yrs. 4.9 yrs. 4.6 yrs. The weighted-average grant date fair values of options granted during 1997, 1996 and 1995 were $8.84, $8.28 and $6.76, respectively. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES The components of the provision for income taxes were as follows: (In thousands) 1997 1996 1995 Current Federal $37,028 $38,842 $35,689 State 4,790 7,969 8,259 41,818 46,811 43,948 Deferred Federal (2,801) 2,276 2,024 State (1,248) 246 255 (4,049) 2,522 2,279 Total income tax expense $37,769 $49,333 $46,227 The reconciliation of income tax computed at the United States Federal statutory tax rates to income tax expense is: (In thousands) 1997 1996 1995 Amount Percent Amount Percent Amount Percent Tax at U.S. statutory rate $34,096 35.00% $43,588 35.00% $40,750 35.00% State income taxes, net of federal tax benefit 3,487 3.58 5,280 4.24 5,530 4.75 Other - net 186 .19 465 .37 (53) (.05) $37,769 38.77% $49,333 39.61% $46,227 39.70% HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Deferred income taxes arise because of differences in the treatment of income and expense items for financial reporting and income tax purposes. Significant components of the Company's deferred tax assets and liabilities for the fiscal years ended January 3, 1998 and December 28, 1996 were as follows: (In thousands) 1997 1996 Deferred Tax Liabilities: Depreciation and amortization $33,238 $38,729 Other 3,427 4,398 36,665 43,127 Deferred Tax Assets: Capital leases (7,588) (6,870) Insurance reserves (10,380) (9,412) Associate benefit plans (4,736) (5,400) Other (2,608) (2,277) (25,312) (23,959) 11,353 19,168 Net current deferred tax assets 6,912 4,589 Net non-current deferred tax liabilities $18,265 $23,757 The Company expects to realize the deferred tax assets in the ordinary course of business operations in subsequent years, and, accordingly, has not established a valuation reserve relative to these amounts. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a presentation of selected financial data for each of the four quarters of fiscal years 1997, 1996 and 1995. (In thousands except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter 1997 Sales and other revenues.......... $759,923 $775,687 $820,115 $870,708 Gross margin...................... 185,650 194,615 203,060 215,821 Net earnings...................... 15,590 19,878 22,797 1,382 Per common share, Basic...... $ .37 $ .47 $ .54 $ .03 Per common share, Diluted.... $ .37 $ .47 $ .53 $ .03 1996 Sales and other revenues.......... $690,525 $729,081 $773,271 $764,682 Gross margin...................... 167,836 176,345 184,093 186,501 Net earnings...................... 14,674 19,509 19,898 21,124 Per common share, Basic...... $ .35 $ .46 $ .47 $ .50 Per common share, Diluted.... $ .35 $ .46 $ .46 $ .49 1995 Sales and other revenues.......... $598,796 $634,798 $653,879 $680,588 Gross margin...................... 145,954 153,055 155,410 162,394 Net earnings...................... 14,564 19,025 19,714 16,898 Per common share, Basic...... $ .35 $ .45 $ .47 $ .40 Per common share, Diluted.... $ .35 $ .45 $ .46 $ .40 ITEM 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item, except for certain information relating to Executive Officers included in Part I, is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1998. ITEM 11. EXECUTIVE COMPENSATION This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is incorporated by reference to the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1998. Part IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a) 1., 2. Consolidated Financial Statements and Related Schedules PAGES Report of Independent Accountants............................. 26 Consolidated Balance Sheets - January 3, 1998 and December 28, 1996.......................................... 27-28 Consolidated Statements of Earnings - Fiscal Years Ended, Janaury 3, 1998, December 28, 1996 and December 30, 1995... 29 Consolidated Statements of Changes in Shareholders' Equity - Fiscal Years Ended, January 3, 1998, December 28, 1996 and December 30, 1995.................... 30 Consolidated Statements of Cash Flows - Fiscal Years Ended, January 3, 1998, December 28, 1996 and December 30, 1995.................... 31-32 Notes to Consolidated Financial Statements.................... 33-54 Schedules I, II, III and IV are not included as they are not applicable. 3. Exhibits Required by Item 601 of Regulation S-K SEQUENTIAL PAGE NUMBER IN ORIGINAL 10-K 3.1 - Articles of Incorporation Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603). 3.2 - By-Laws of the Registrant Incorporated by reference to Exhibit 3.2 to the PAGES Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603). 4.1 - Instruments Defining the Rights of Included in Security Holders Exhibit 3 4.2 - There are incorporated herein by reference (i) a Rights Agreement dated as of February 4, 1988 between the Registrant and The First National Bank of Boston, as Rights Agent, a copy of which was filed as Exhibit 2 to the Registrant's Current Report on Form 8-K, dated February 16, 1988 (SEC File No. 1-7603) and (ii) an Appointment and Amendment Agreement dated September 22, 1992 to said Rights Agreement, substituting Continental Stock Transfer & Trust Company as Rights Agent, a copy of which was filed as Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603). 4.3 - There are incorporated herein by reference a (i) Rights Agreement dated as of February 4, 1998 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent, a copy of which was filed as Exhibit 4.1 to the Registrant's Registration Statement on Form 8-A, dated January 23, 1998 (SEC File No. 1-7603). 10.1 - There are incorporated herein by reference (i) an Amended and Restated Agreement, dated as of February 4, 1988, among the Registrant and various Sobey Parties, a copy of which was filed as Exhibit 1 to the Registrant's Current Report on Form 8-K, dated February 16, 1988 (SEC File No. 1-7603); (ii) an Amendment Agreement dated as of January 1, 1992 to said Agreement with the Sobey Parties, substituting certain Sobeys Inc. employee benefit plans as parties thereto, a copy of which was filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603) and (iii) a Second Amendment Agreement dated as of May 14, 1996, which extends the term of the agreement and makes other technical changes, a copy of which was filed as Exhibit 1 to the Registrant's current report on Form 8-K, dated May 14, 1996 (SEC File No. 1-7603). NOTE: Compensatory plans and arrangements and management contracts are filed as Exhibits 10.2 through 10.25 below. PAGES 10.2 - There are incorporated herein by reference (i) the amended and restated Hannaford Bros. Co. Employees' Retirement Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603). 10.3 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Employees' Retirement Plan, effective January 1, 1998, a copy of which was filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603). 10.4 - There are incorporated herein by reference (i) the amended and restated Supplemental Executive Retirement Plan, a copy of which was filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603) and (iii) the Second Amendment to said Plan, which was filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603). 10.5 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Supplemental Executive Retirement Plan, effective January 1, 1998, a copy of which was filed PAGES as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603). 10.6 - There are incorporated herein by reference (i) the Amended and Restated Hannaford Bros. Co. Employee Stock Purchase Plan, a copy of which was filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 1996 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603). 10.7 - There are incorporated herein by reference (i) the Registrant's 1993 Long Term Incentive Plan, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603) and (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603). 10.8 - The Third Amendment to the Registrant's 1993 Long Term 66 Incentive Plan, effective December 15, 1997. 10.9 - The Amended and Restated Hannaford Bros. Co. 1993 Long 67-71 Term Incentive Plan, effective January 4, 1998, subject to approval by the Shareholders of the Registrant. PAGES 10.10 - There are incorporated herein by reference (i) the Registrant's 1980 Long Term Incentive Plan, a copy of which was filed as Exhibit 10B to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1981 (SEC File No. 1-7603); (ii) an Amendment to said Plan, a copy of which was filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1987 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1988 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1988 (SEC File No. 1-7603); (v) the Fourth Amendment to said Plan, a copy of which was filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603) and (vi) the Fifth Amendment to said Plan, a copy of which was filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (SEC File No. 1-7603). 10.11 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Annual Incentive Plan, effective December 7, 1995, a copy of which was filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K For the fiscal year ended December 30, 1995 (SEC File No. 1-7603). 10.12 - There are incorporated herein by reference (i) an Employment Continuity Agreement between the Registrant and Hugh G. Farrington, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603); (ii) the First Amendment to said Agreement, a copy of which was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603) and (iii) the Second Amendment to said Agreement, a copy of which was filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603). PAGES 10.13 - Amended and Restated Employment Continuity Agreement 72-79 between the Registrant and Hugh G. Farrington, effective January 1, 1998. 10.14 - There are incorporated herein by reference (i) a standard form of Employment Continuity Agreement between the Registrant and various of its executive officers, a copy of which was filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603); (ii) the First Amendment to Form of said Agreement, a copy of which was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603) and (iii) the Second Amendment to form of said Agreement, a copy of which was filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603). 10.15 - Amended and Restated Standard Form of Employment 80-87 Continuity Agreement between the Registrant and various of its executive offices, effective January 1, 1998. 10.16 - There is incorporated herein by reference a standard form Deferred Compensation Agreement available to outside directors of the Registrant, a copy of which was filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1984 (SEC File No. 1-7603). 10.17 - There are incorporated herein by reference (i) the Amended and Restated Hannaford Bros. Co. Savings and Investment Plan, a copy of which was filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603); (ii) the First Amendment to said Plan, which was filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (SEC File No. 1-7603); (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter PAGES ended July 1, 1995 (SEC File No. 1-7603); (iv) the Third Amendment to said Plan, a copy of which was filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603) and (v) the Fourth Amendment to said Plan (renamed the Hannaford Northeast Savings and Investment Plan), a copy of which was filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (SEC File No. 1-7603). 10.18 - There is incorporated herein by reference (i) the Hannaford Southeast Savings and Investment Plan, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 8, 1995 (SEC Registration No. 33-60119), (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1997 (SEC File No. 1-7603); and (iii) the Second Amendment to said Plan, a copy of which was filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603). 10.19 - There is incorporated herein by reference the Hannaford Savings and Investment Plan (Merging and Amending the Hannaford Northeast Savings and Investment Plan and the Hannaford Southeast Savings and Investment Plan), effective January 1, 1998, a copy of which was filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603). 10.20 - There is incorporated herein by reference the Hannaford Bros. Co. Nonqualified Savings and Investment Plan, effective January 1, 1998, a copy of which was filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1997 (SEC File No. 1-7603). 10.21 - There are incorporated herein by reference (i) the Registrant's Amended and Restated Deferred Compensation Plan available to certain management employees of the Registrant, a copy of which was filed as Exhibit 10.24 PAGES to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1988 (SEC File No. 1-7603) and (ii) the First Amendment said Plan, a copy of which was filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 (SEC File No. 1-7603). 10.22 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. Deferred Compensation Plan for Officers, effective January 1, 1998, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1997 (SEC File No. 1-7603). 10.23 - There is incorporated herein by reference a standard form of Deferred Compensation Agreement available to certain management employees pursuant to the Registrant's Amended and Restated Deferred Compensation Plan, a copy of which was filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603). 10.24 - There is incorporated herein by reference the Amended and Restated Hannaford Bros. Co. 1988 Stock Plan, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 27, 1995 (SEC Registration No. 33-60655). 10.25 - Hannaford Bros. Co. 1998 Stock Option Plan, effective upon 88-99 approval by the Shareholders of the Registrant. 10.26 - Hannaford Bros. Co. 1998 Restricted Stock Plan, effective 100-107 February 13, 1998. 10.27 - There is incorporated herein by reference (i) the Hannaford Bros. Co. Stock Ownership Plan for Outside Directors, approved by shareholders May 24, 1995 and effective January 1, 1996, a copy of which was filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8, dated June 27, 1995 (SEC Registration No. 33-60691) and PAGES (ii) the First Amendment to said Plan, a copy of which was filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 (SEC File No. 1-7603). 10.28 - There are incorporated herein by reference (i) an Agreement, dated February 11, 1991, between the Registrant and James L. Moody, Jr., a copy of which was filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (SEC File No. 1-7603) and (ii) an Amendment to said Agreement, dated May 14, 1992, a copy of which was filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 (SEC File No. 1-7603). 10.29 - There are incorporated herein by reference (i) a Letter Agreement between the Registrant and Norman E. Brackett, dated June 30, 1995, a copy of which was filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603) and (ii) a Consulting Agreement between the Registrant and Norman E. Brackett, dated June 30, 1995, a copy of which was filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1995 (SEC File No. 1-7603). 10.30 - There is incorporated herein by reference a Letter Agreement between the Registrant and James J. Jermann, dated July 8, 1996, a copy of which was filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996 (SEC File No. 1-7603). 21 - Subsidiaries of the Registrant............................ 108 23 - Consents of Accountants................................... 109 27 - Financial Data Schedule (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANNAFORD BROS. CO. s/Blythe J. McGarvie Blythe J. McGarvie Sr. Vice President, Chief Financial Officer (Principal Financial Officer) March 9, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. s/Walter J. Salmon s/Bruce G. Allbright s/Robert D. Bolinder Walter J. Salmon Bruce G. Allbright Robert D. Bolinder Chairman of the Board Director Director Director March 9, 1998 March 9, 1998 March 9, 1998 s/William T. End s/James W. Gogan s/Blythe J. McGarvie William T. End James W. Gogan Blythe J. McGarvie Director Director Sr. Vice President, March 9, 1998 March 9, 1998 Chief Financial Officer (Principal Accounting Officer) March 9, 1998 s/Richard K. Lochridge s/Renee M. Love Richard K. Lochridge Renee M. Love s/Hugh G. Farrington Director Director Hugh G. Farrington March 9, 1998 March 9, 1998 President Chief Executive Officer Director s/Claudine B. Malone s/Robert J. Murray March 9, 1998 Claudine B. Malone Robert J. Murray Director Director March 9, 1998 March 9, 1998 s/David F. Sobey s/Robert L. Strickland David F. Sobey Robert L. Strickland Director Director March 9, 1998 March 9, 1998 Exhibit 10.8 THIRD AMENDMENT TO THE HANNAFORD BROS. CO. 1993 LONG TERM INCENTIVE PLAN The Hannaford Bros. Co. 1993 Long Term Incentive Plan (the "Plan") was adopted by the Board of Directors, subject to shareholder approval, February 9, 1993, and approved by shareholders on May 19, 1993. The Plan was thereafter amended on two occasions and is hereby further amended in the following respects. 1. The terms used in this Amendment shall have the meanings set forth in the Plan unless the context indicates otherwise. 2. Section 5 is hereby amended to read: 5. "Actual Awards." The amount of the Actual Award, if any, that is earned by a Participant during an Award Period shall be determined initially as follows: (a) if the Corporation's actual performance equals the Low Goal, the Actual Award shall be the percentage of the Basic Award established by the Compensation Committee at the beginning of the Award Period; and (b) if the Corporation's actual performance equals the High Goal, then the Actual Award shall equal 100% of the Basic Award. If actual performance exceeds the High Goal, in no event shall a Participant's Actual Award exceed 150% of the Basic Award. Further, no Actual Award shall be paid if the Corporation's actual performance is less than the Low Goal. If the Corporation's actual performance exceeds the Low Goal but does not equal the High Goal, then the Actual Award shall equal a percentage (not less than the percentage established for attainment of the Low Goal and not more than 100%) of the Basic Award as determined by the Compensation Committee at the beginning of the Award Period. The Compensation Committee shall have the right to adjust the Actual Award if it finds such adjustment necessary to provide fair and equitable treatment of the interests of both the Participants and the Corporation's shareholders. The Board shall have the right to adjust the Actual Award of any Participant, either increasing or decreasing the same, if in its sole judgment the Actual Award is inconsistent with the Participant's performance during the relevant Award Period, measured individually or as a member of a group. In exercising this discretion, the Board may rely on reports or other information furnished to it, either directly or through the Compensation Committee, by the Chief Executive Officer of the Corporation." 3. This Amendment shall be effective December 15, 1997. Exhibit 10.9 HANNAFORD BROS. CO. 1993 LONG TERM INCENTIVE PLAN (as amended and restated, effective January 4, 1998) 1. PURPOSE. The purpose of this Plan is to provide additional compensation as an incentive to selected key employees upon whose efforts the continued successful and profitable operations of Hannaford Bros. Co. are largely dependent, and to ensure the continued availability of the services of selected key employees to Hannaford Bros. Co. 2. DEFINITIONS. As used in this Plan, unless the context clearly indicates otherwise: (a) "Actual Award" means the amount payable to a Participant pursuant to Section 5. (b) "Award Period" means a period of at least 3 fiscal years, as designated by the Committee. (c) "Basic Award" means the percentage of a Participant's Compensation, not exceeding 25 percent, determined by the Committee pursuant to Section 3. (d) "Board" means the Board of Directors of Hannaford Bros. Co.; provided, however, that in all instances in which the Board exercises any discretion under the Plan with respect to the amount of an Actual Award, "Board" means only those members of the Board of Directors of Hannaford Bros. Co. who have not been employees of the Corporation or one of its Subsidiaries. (e) "Committee" means the Human Resources Committee of the Board. (f) "Compensation" means, effective with respect to Award Periods commencing after December 2, 1996, the aggregate base salary and annual incentive compensation earned by a Participant during an Award Period (or during the portion of an Award Period for which he or she is a Participant) for services rendered to the Corporation or one of its Subsidiaries, without regard to any deferral of such amounts. (g) "Corporation" means Hannaford Bros. Co. (h) "Earnings Per Share" means earnings per share as reported in the Consolidated Statement of Earnings in the Corporation's Annual Report, but before any extraordinary items that the Board, in its sole discretion, disregards for purposes of the Plan. (i) "Participant" means an employee of the Corporation or one of its Subsidiaries to whom a Basic Award has been made under the Plan. (j) "Performance Goal" means a growth objective established by the Committee pursuant to Section 4. (k) "Plan" means the Hannaford Bros. Co. 1993 Long Term Incentive Plan, as it may be amended from time to time. (l) "Subsidiary" means a corporation of which Hannaford owns directly or indirectly at least 50 percent of the total combined voting power of all classes of stock entitled to vote. 3. PARTICIPATION. The Committee shall: (a) designate which, if any, employees of the Corporation or a Subsidiary shall be Participants for an Award Period; (b) determine the duration of such Award Period; and (c) award a Basic Award for each such Participant. The Basic Award of a Participant who is promoted during an Award Period to a position with respect to which a higher Basic Award is in effect shall adjust automatically to reflect for the remainder of the Award Period the higher Basic Award. The Committee may designate that a newly hired or newly promoted employee of the Corporation or a Subsidiary shall be a Participant for an Award Period that commenced prior to the date of such designation. 4. PERFORMANCE GOALS. The Committee shall establish both a low and a high Performance Goal for each Award Period. The Performance Goals for any Award Period need not be the same with respect to all Participants. The Performance Goals for an Award Period shall be expressed in terms of cumulative Earnings Per Share, stock price, a combination thereof or a similar quantifiable measure. The low Performance Goal ("Low Goal") shall represent, in the sole judgment of the Committee, at least minimally acceptable performance. The high Performance Goal ("High Goal") shall represent, in the sole judgment of the Committee, a challenging but attainable goal. 5. ACTUAL AWARDS. The amount of the Actual Award, if any, that is earned by a Participant during an Award Period shall be determined initially as follows: (a) if the Corporation's actual performance equals the Low Goal, the Actual Award shall be the percentage of the Basic Award established by the Committee at the beginning of the Award Period; and (b) if the Corporation's actual performance equals the High Goal, then the Actual Award shall equal 100% of the Basic Award. If actual performance exceeds the High Goal, in no event shall a Participant's Actual Award exceed 150% of the Basic Award. Further, no Actual Award shall be paid if the Corporation's actual performance is less than the Low Goal. If the Corporation's actual performance exceeds the Low Goal but does not equal the High Goal, then the Actual Award shall equal a percentage (not less than the percentage established for attainment of the Low Goal and not more than 100%) of the Basic Award as determined by the Committee at the beginning of the Award Period. The Committee shall have the right to adjust the Actual Award if it finds such adjustment necessary to provide fair and equitable treatment of the interests of both the Participants and the Corporation's shareholders. The Board shall have the right to adjust the Actual Award of any Participant, either increasing or decreasing the same, if in its sole judgment the Actual Award is inconsistent with the Participant's performance during the relevant Award Period, measured individually or as a member of a group. In exercising this discretion, the Board may rely on reports or other information furnished to it, either directly or through the Committee, by the Chief Executive Officer of the Corporation. 6. PAYMENT OF ACTUAL AWARDS. The Actual Award earned by a Participant shall be paid after the close of the final fiscal year of the relevant Award Period. In the sole discretion of the Committee, an Actual Award may be paid in cash, common stock of the Corporation at fair market value at the time of payment, or any combination of cash and common stock. Payment in the form of common stock may be subject to restrictions on transfer and vesting and to such other terms, conditions and restrictions as the Committee may determine in a separate written instrument. Prior to the payment of any Actual Award, the Board shall review the aggregate amount of all such Awards then payable to determine whether the consolidated earnings and return on assets of the Corporation are adequate to justify such payments. If in its sole judgment the Board determines that such earnings or return are inadequate, it shall have the right to disallow, in whole or in part, any Award, and the Corporation shall not have any obligation to any Participant for any portion of an Award so disallowed. 7. TERMINATION OF EMPLOYMENT. If a Participant terminates employment with the Corporation and its Subsidiaries during an Award Period because he or she retires under the Hannaford Cash Balance Plan, becomes disabled or dies, such Participant shall be entitled to an Actual Award based on his or her during the portion of the Award Period that he or she was actively employed. Any Actual Awards payable to a deceased Participant shall be paid to his or her estate. Upon a Participant's termination of employment for any reason other than retirement or disability, the dates on which the Participant's Basic Awards become Actual Awards under the Plan shall be accelerated to the last day of the fiscal year in which the termination occurs. For purposes of calculating the Participant's Actual Award for any Award Period curtailed by reason of such acceleration, the Committee shall reestablish the High and Low Performance Goals to reflect only the number of years in the curtailed Award Period. If a Participant's employment terminates during an Award Period for any reason other than retirement, disability, or death, the Participant shall forfeit any Actual Award otherwise payable, unless the Committee determines that such Award shall be paid, in whole or in part, in accordance with this Section. 8. ADMINISTRATION. This Plan shall be administered by the Committee. The Committee shall have sole and complete discretion with respect to the exercise of all permissive powers and authority granted to the Committee by this Plan, and shall have sole and complete authority to construe and interpret the Plan. All actions, determinations, and decisions of the Committee shall be final, conclusive, and binding on all parties, unless otherwise determined by the Board. 9. GOVERNING LAW. This Plan shall be governed and construed in accordance with the laws of the State of Maine. 10. AMENDMENT OR TERMINATION OF PLAN. The Committee may amend or terminate this Plan at any time; provided, however, that no such action shall affect the rights of a Participant with respect to any Award to which the Participant became entitled prior to the effective date of such action. 11. ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Upon the occurrence of a Change in Control Event, the dates on which Basic Awards become Actual Awards under the Plan shall be accelerated to the date of such Event. For purposes of calculating Actual Awards for any curtailed Award Period, the Committee shall reestablish the High and Low Performance Goals to reflect only the number of years and full calendar months in the curtailed Award Period. Payment of an Actual Award determined pursuant to this Section shall be made in a lump sum cash payment on or before the earlier of the following dates: (i) 90 days after the Participant's employment with the Corporation terminates; or (ii) 90 days after the close of the final fiscal year of the relevant Award Period, without regard to any curtailment pursuant to this Section. If any acceleration or payment pursuant to this Section is, in the sole judgment of the Committee as constituted prior to the occurrence of the Change in Control Event, unnecessary to protect Participants' rights under the Plan, the Committee may make such other adjustments (or make no adjustments) as it deems appropriate to protect Participants' rights, in lieu of the protections provided in this Section. The term "Change in Control Event" shall have the meaning given such term in the Hannaford Supplemental Executive Retirement Plan. 12. NONALIENATION OF BENEFITS. Awards under this Plan shall not be subject to alienation, assignment, garnishment, attachment or levy of any kind, and any attempt to cause an award to be so subjected shall not be recognized. 13. EFFECTIVE DATE. This Plan was originally effective January 3, 1993. The effective date of this amendment and restatement of the Plan shall be January 4, 1998. 14. TRANSITION RULES. If in any fiscal year a Participant is entitled to payment of an Actual Award under this Plan and payment of an actual award under the Company's 1980 Long Term Incentive Plan ("Prior Plan"), the amount payable under this Plan for such year shall be reduced by the amount paid under the Prior Plan for such year. The Committee may designate that a newly hired or newly promoted employee of the Corporation or a Subsidiary shall be a Participant for an award period that commenced under the Prior Plan after 1988 and prior to the original effective date of this Plan. In such event, the Participant's Actual Award shall be determined based on the low and high performance goals established by the Human Resources Committee under the Prior Plan for such award period. Exhibit 10.13 EMPLOYMENT CONTINUITY AGREEMENT This Agreement made as of this day of , 199 , but effective January 1,1998, by and between HANNAFORD BROS. CO., a Maine corporation with its principal place of business in Scarborough, Maine (the "Company") and HUGH G. FARRINGTON ("Farrington"), of Cape Elizabeth, Maine. WHEREAS, Farrington has been employed by the Company since August of 1968, serving since 1981 as a director, since 1984 as its President and since 1992 as its Chief Executive Officer; and WHEREAS, Farrington's creativity, ability to work with people, experience, knowledge and business skills are extremely valuable to the Company and its stockholders; and WHEREAS, in the current business climate an attempted acquisition of the Company is always a possibility; and WHEREAS, the Company desires to assure itself of the continued employment of Farrington and the benefit of his independent judgment in the operation of the Company in the event that any such attempted acquisition were made, in light of the disruption resulting from any such attempt; and WHEREAS, the Company and Farrington entered into an Employment Continuity Agreement, dated March 15, 1991 ("Agreement"); and WHEREAS, Section 11 of the Agreement provides that the Agreement may be amended in writing by the parties, and the Agreement was amended on two occasions thereafter; and WHEREAS, the parties desire to amend and restate the Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained and for other good and valuable consideration, the receipt and adequacy of which is acknowledged by each of the parties, Farrington and the Company agree as follows: 1. TERM OF THE AGREEMENT AND RENEWAL. The term of this Agreement shall be for a period beginning January 1, 1998, and ending December 31, 2000. On January 1, 2001, and on January 1 of each period of three (3) years thereafter (in each case such date to be a "Renewal Date") this Agreement automatically shall be renewed for an additional three (3) year term, unless at least one (1) year prior to any such Renewal Date, either party shall have given written notice to the other that such renewal shall not take place. Such notice may be given by the Company only upon the affirmative vote of the Human Resources Committee of the Board of Directors. 2. "Change in Control Event." Each of the following events shall constitute a "Change in Control Event" for purposes of this Agreement: (a) Any person acquires beneficial ownership of Company securities and is or thereby becomes a beneficial owner of securities entitling such person to exercise twenty-seven percent (27%) or more of the combined voting power of the Company's then outstanding stock. For purposes of this Agreement, "beneficial ownership" shall be determined in accordance with Regulation 13D under the Securities Exchange Act of 1934, or any similar successor regulation or rule; and the term "person" shall include any natural person, corporation, partnership, trust or association, or any group or combination thereof whose ownership of Company securities would be required to be reported under such Regulation 13D, or any similar successor regulation or rule. (b) Within any twenty-five (25) month period, individuals who were Outside Directors at the beginning of such period, together with any other Outside Directors first elected as directors of the Company pursuant to nominations approved or ratified by at least two-thirds (2/3) of the Outside Directors in office immediately prior to such respective elections, cease to constitute a majority of the board of directors of the Company. For purposes of this Agreement an "Outside Director" as of a given date shall mean a member of the Company's board of directors who has been a director of the Company throughout the six (6) months prior to such date and who has not been an employee of the Company at any time during such six (6) month period. (c) The Company ceases to be a reporting company pursuant to Section 13(a) of the Securities Exchange Act of 1934 or any similar successor provision. (d) The Company's stockholders approve: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company common stock would be converted into cash, securities or other property, other than a merger or consolidation of the Company in which the holders of the Company's common stock immediately prior to the merger or consolidation have substantially the same proportionate ownership and voting control of the surviving corporation immediately after the merger or consolidation; or (ii) any sale, lease, exchange, liquidation or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. Notwithstanding subparagraphs (i) and (ii) above, the term "Change in Control Event" shall not include a consolidation, merger, or other reorganization if upon consummation of such transaction all of the outstanding voting stock of the Company is owned, directly or indirectly, by a holding company, and the holders of the Company's common stock immediately prior to the transaction have substantially the same proportionate ownership and voting control of the holding company. 3. Rights Upon Involuntary Termination of Employment. If, within twelve (12) months after the occurrence of a Change in Control Event, the Company terminates Farrington's employment for any reason other than Good Cause as defined in Paragraph 5, or if Farrington voluntarily terminates employment for Good Reason as defined in Paragraph 4, the Company shall provide Farrington with the following: (a) Within thirty (30) days of such termination, a lump sum cash payment in an amount equal to the sum of: (i) three hundred percent (300%) of Farrington's annual base salary in effect upon the date of the Change in Control Event, and (ii) three Hundred Percent (300%) of the award Farrington would have received for the year in which such termination occurs, pursuant to the Hannaford Bros. Co. Annual Incentive Plan, assuming that his employment had not terminated and that for such year "actual profit" will equal "budgeted profit" (as those terms are defined in the plan). (b) The continuation of Farrington's participation and the participation of his dependents (to the extent they were participating prior to his termination of employment) in the Company's health, life, disability and other employee benefit plans, programs and arrangements (excluding the Hannaford Bros. Co. Employees' Retirement Plan and Hannaford Bros. Co. Savings and Investment Plan) for a period of thirty-six (36) months after such termination as if he were still employed during such period; provided, however, if such participation in any such plan, program or arrangement is specifically prohibited by the terms thereof, the Company shall provide Farrington (and his dependents) with benefits substantially similar to those which he was entitled to receive under such plan, program or arrangement immediately prior to his termination of employment. Additionally, at the end of any period of such coverage, Farrington shall have the right to have assigned to him, for the cash surrender value thereof, any assignable insurance owned by the Company on the life of Farrington. For purposes of this Paragraph 3(b), any employee benefit determined with reference to Farrington's compensation or earnings shall be based on his annual base salary unless otherwise provided under the terms of the applicable employee benefit plan, program or arrangement. Notwithstanding the foregoing provisions of this Paragraph 3(b) to the contrary, to the extent continuation of Farrington's participation and the participation of his dependents (to the extent they were participating prior to his termination of employment) in an employee benefit plan, program, or arrangement described in this Paragraph 3(b) is specifically provided for under the terms of such plan, program or arrangement relating to retirement from the Company, this Paragraph 3(b) shall not apply. (c) Immediately upon such termination Farrington shall be entitled to acceleration of any payments to be made to him under the Hannaford Bros. Co. Deferred Compensation Plan for Officers, the Hannaford Bros. Co. Nonqualified Savings and Investment Plan or any other deferred compensation arrangement for his benefit. Payment under any such plan or arrangement pursuant to this Paragraph 3(c) shall be made in a lump sum within ninety (90) days after Farrington's employment terminates. (d) The Company shall pay Farrington an amount equal to the award he would have been entitled to receive under the Company's Annual Incentive Plan, if his employment had not terminated, based on the base salary he had earned as of his termination date, and assuming that "actual profit" will equal "budgeted profit" (as those terms are defined in the plan). Such payment shall be made within ninety (90) days after his employment terminates. (e) Farrington shall also be entitled to such benefits and rights as are provided upon the occurrence of a Change in Control Event under the terms of the Company's 1988 Stock Plan, 1993 Long Term Incentive Plan, 1998 Stock Option Plan and Supplemental Executive Retirement Plan ("SERP"). FOR PURPOSES OF CALCULATING ANY BENEFIT PAYABLE WITH RESPECT TO FARRINGTON UNDER THE SERP, HIS CASH BALANCE ACCOUNT SHALL BE INCREASED BY THE PRODUCT OF (I) THE CONTRIBUTION CREDIT FOR HIS LAST FULL MONTH OF EMPLOYMENT OR, IF GREATER, HIS LAST FULL MONTH OF EMPLOYMENT PRIOR TO THE CHANGE IN CONTROL EVENT, AND (II) THIRTY-SIX (36). 4. Termination for Good Reason. For purposes of this Agreement, termination by Farrington of his employment for "Good Reason," except upon Farrington's express written consent otherwise, shall mean: (a) the assignment of duties to Farrington which: (i) are materially different from his duties immediately prior to the Change in Control Event, or (ii) result in his having significantly less authority or responsibility than he had prior to the Change in Control Event; or (b) Farrington's removal from, or any failure to re-elect him to, any position he held immediately prior to the Change in Control Event with either the Company or any majority-owned subsidiary; or (c) a reduction of Farrington's annual base salary in effect on the date of the Change in Control Event or as the same may be increased from time to time thereafter; or (d) the relocation of the Company's principal executive offices to a place outside of the greater Portland, Maine, area, or the Company's transferring or assigning Farrington to a place of employment other than its principal executive offices, except for required business travel to an extent substantially consistent with his business travel obligations immediately prior to the Change in Control Event; or (e) the Company's failure to provide Farrington with substantially the same health, life and other employee benefit plans, programs and arrangements (specifically including the Company's stock plans and compensation and incentive plans, as the same may be amended in the future), and substantially the same perquisites of employment, as provided to him immediately prior to the Change in Control Event or as the same may be increased thereafter; or (f) the Company's failure to provide Farrington with substantially the same support staff as provided to him immediately prior to the Change in Control Event; or (g) the Company's failure to increase Farrington's salary, employee benefits or perquisites of employment in a manner or an amount commensurate with the increases provided to the Company's Senior Vice Presidents; or (h) the Company's failure to obtain from any successor a satisfactory agreement to assume and perform the terms of this Agreement. 5. TERMINATION FOR GOOD CAUSE. The Company retains the right to terminate Farrington for "Good Cause," in which event he shall not be entitled to receive any payment or benefits pursuant to this Agreement. "Good Cause" shall mean: (a) Farrington's conviction, by a court of competent jurisdiction, of a crime adversely reflecting on his honesty, trustworthiness or fitness to carry out the responsibilities of his position with the Company in other respects; or (b) a willful breach by him of any material duty or obligation imposed upon him under the terms of his employment, as those terms existed immediately prior to any Change in Control Event, and his failure to cure such breach within thirty (30) days after receiving notice thereof from the Company. 6. NOTICES. Any and all notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given when deposited in the United States mails, certified or registered mail postage prepaid and addressed as follows: To Farrington: Hugh G. Farrington Lighthouse Point Road Cape Elizabeth, Maine 04107 To the Company: Hannaford Bros. Co. P. 0. Box 1000 Portland, Maine 04104 Attention: Senior Vice President-Human Resources Either party may change by notice to the other the address to which notices to it are to be addressed. 7. APPLICABLE LAW, TAXES, BINDING AGREEMENT, SEVERABILITY, CONSTRUCTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Maine, except as to any matter which is preempted by federal law. Notwithstanding anything to the contrary herein contained, the Company may withhold from any amounts payable under this Agreement all federal, state or other taxes or assessments which may be required by applicable statute or regulation to be withheld. This Agreement shall be binding upon and inure to the benefit of Farrington, his heirs, assigns, executors and legal representatives; and the Company, its successors and assigns. If any provision of this Agreement shall be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected thereby. The Outside Directors shall have the authority to construe and interpret this Agreement on behalf of the Company, and any such determination by the Outside Directors shall be conclusive on the Company. 8. EXECUTION OF FURTHER DOCUMENTS. In the event Farrington receives payments or benefits pursuant to the terms hereof and the Company's independent counsel deems it necessary for the Company to receive a release or other acknowledgment, Farrington agrees to execute any such document, as may be reasonably required as a condition of his receipt of such payment or benefits. 9. AMENDMENT AND WAIVER. The Agreement may be amended only in writing, by the Parties hereto, and no condition or provision of the Agreement may be waived except in writing. Waiver by either party at any time of the other party's breach of, or failure to comply with, any condition or provision of this Agreement to be performed by such other party shall not be deemed a waiver of any other provision or condition at the same time or of any provision or condition at any prior or subsequent time, unless specifically stated therein. 10. FUNDING. This Agreement shall not be construed to create or require the Company to create a trust or to otherwise act to fund the amounts payable hereunder. 11. ASSIGNMENT. Except as required by law, the right to receive payments hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind and any attempt to cause such payments to be so subject shall not be recognized by the Company. 12. ARBITRATION. In recognition of the mutual benefits of arbitration, the parties hereby agree that arbitration as provided for herein shall be the exclusive remedy for resolving any claim or dispute arising under this Agreement, and hereby mutually waive any and all other remedies at law or in equity for determining any such claim or dispute. (a) Any arbitration under this Agreement, and any related judicial proceeding, shall be initiated and shall proceed pursuant to the provision's of the Maine Uniform Arbitration Act (the "Act") and, to the extent consistent with the Act, the then prevailing rules of the American Arbitration Association (the "Association") for labor and employment contracts. To initiate arbitration hereunder demand shall be given in writing to the Association and the other party no later than one year after the claim arises. Any claim for which such demand is not made within one year after the claim arises shall be barred and discharged absolutely. (b) Any arbitration under this Agreement shall be before a single arbitrator, and an award in such arbitration may include only damages which the arbitrator determines to be due under express provisions of this Agreement. The arbitrator shall have no authority to award any other damages, including without limitation, consequential and exemplary damages. Any award in arbitration shall be subject to enforcement and appeal pursuant to the Act. (c) The parties shall share equally all costs and fees charged by the Association or the arbitrator. 13. LIMITATION ON AMOUNT TO BE PAID. If payment of any amount under this Agreement would cause Farrington to be subject to an excise tax pursuant to Section 4999 of the Internal Revenue Code (as amended from time to time) or the regulations thereunder, then such amount shall not be paid to the extent necessary to avoid the imposition of such tax. The preceding sentence shall apply only if the aggregate amount payable to Farrington or for his benefit under the Agreement, after payment of such excise tax, would be less than the aggregate amount payable in accordance with the preceding sentence. 14. NO ADDITIONAL EFFECT. Except as expressly provided herein, nothing contained herein shall confer upon Farrington any specific period of employment, right to be retained in the service of the Company or other rights, nor shall this Agreement be construed to otherwise limit the rights of the Company to discharge or take other action with respect to Farrington. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Witness: HANNAFORD BROS. CO. By Its Hugh G. Farrington Exhibit 10.15 EMPLOYMENT CONTINUITY AGREEMENT This Agreement made as of this day of , 199 , but effective January 1, 1998, by and between HANNAFORD BROS. CO., a Maine corporation with its principal place of business in Scarborough, Maine (the "Company") and ______________________ of ________________________ , ("Officer"). WHEREAS, the Officer has been employed by the Company since ________________ and is presently serving in the capacity of _____________________; and WHEREAS, in the current business climate an attempted acquisition of the Company is always a possibility; and WHEREAS, the Company desires to assure itself of the continued employment and sound judgment of the Officer in the event that any such attempted acquisition were made, in light of the disruption resulting from any such attempt; WHEREAS, the Company and the Officer entered into an Employment Continuity Agreement, dated ______________________; and WHEREAS, Section 11 of the Agreement provides that the Agreement may be amended in writing by the parties; and WHEREAS, the parties desire to amend and restate the Agreement as set forth herein; NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained and for other good and valuable consideration, the receipt and adequacy of which is acknowledged by each of the parties, the Officer and the Company agree as follows: 1. TERM OF THE AGREEMENT AND RENEWAL. The term of this Agreement shall be for a period beginning January 1, 1998, and ending December 31, 2000. On January 1, 2001, and on January 1 of each period of three (3) years thereafter (in each case such date to be a "Renewal Date") this Agreement automatically shall be renewed for an additional three (3) year term, unless at least one (1) year prior to any such Renewal Date, either party shall have given written notice to the other that such renewal shall not take place. Such notice may be given by the Company only upon the affirmative vote of the Human Resources Committee of the Board of Directors. 2. "CHANGE IN CONTROL EVENT." Each of the following events shall constitute a "Change in Control Event" for purposes of this Agreement: (a) Any person acquires beneficial ownership of Company securities and is or thereby becomes a beneficial owner of securities entitling such person to exercise twenty-seven percent (27%) or more of the combined voting power of the Company's then outstanding stock. For purposes of this Agreement, "beneficial ownership" shall be determined in accordance with Regulation 13D under the Securities Exchange Act of 1934, or any similar successor regulation or rule; and the term "person" shall include any natural person, corporation, partnership, trust or association, or any group or combination thereof, whose ownership of Company securities would be required to be reported under such Regulation 13D, or any similar successor regulation or rule. (b) Within any twenty-five (25) month period, individuals who were Outside Directors at the beginning of such period, together with any other Outside Directors first elected as directors of the Company pursuant to nominations approved or ratified by at least two-thirds (2/3) of the Outside Directors in office immediately prior to such respective elections, cease to constitute a majority of the board of directors of the Company. For purposes of this Agreement, an "Outside Director" as of a given date shall mean a member of the Company's board of directors who has been a director of the Company throughout the six (6) months prior to such date and who has not been an employee of the Company at any time during such six (6) month period. (c) The Company ceases to be a reporting company pursuant to Section 13(a) of the Securities Exchange Act of 1934 or any similar successor provision. (d) The Company's stockholders approve: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company common stock would be converted into cash, securities or other property, other than a merger or consolidation of the Company in which the holders of the Company's common stock immediately prior to the merger or consolidation have substantially the same proportionate ownership and voting control of the surviving corporation immediately after the merger or consolidation; or (ii) any sale, lease, exchange, liquidation or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. Notwithstanding subparagraphs (i) and (ii) above, the term "Change in Control Event" shall not include a consolidation, merger, or other reorganization if upon consummation of such transaction all of the outstanding voting stock of the Company is owned, directly or indirectly, by a holding company, and the holders of the Company's common stock immediately prior to the transaction have substantially the same proportionate ownership and voting control of the holding company. 3. RIGHTS UPON INVOLUNTARY TERMINATION OF EMPLOYMENT. If, within twelve (12) months after the occurrence of a Change in Control Event, the Company terminates the Officer's employment for any reason other than Good Cause as defined in Paragraph 5, or if the Officer voluntarily terminates employment for Good Reason as defined in Paragraph 4, the Company shall provide the Officer with the following: (a) Within thirty (30) days of such termination, a lump sum cash payment in an amount equal to the sum of: (i) two hundred percent (200%) of the Officer's annual base salary in effect upon the date of the Change in Control Event, and (ii) two hundred percent (200%) of the award the Officer would have received for the year in which such termination occurs pursuant to the Hannaford Bros. Co. Annual Incentive Plan, assuming that his employment had not terminated and that for such year "actual profit" will equal "budgeted profit" (as those terms are defined in the plan). (b) The continuation of the Officer's participation and the participation of his dependents (to the extent they were participating prior to his termination of employment) in the Company's health, life, disability and other employee benefit plans, programs and arrangements (excluding the Hannaford Cash Balance Plan and the Hannaford Bros. Co. Savings and Investment Plan) for a period of twenty-four (24) months after such termination as if he were still employed during such period; provided, however, if such participation in any such plan, program or arrangement is specifically prohibited by the terms thereof, the Company shall provide the Officer (and his dependents) with benefits substantially similar to those which he was entitled to receive under such plan, program or arrangement immediately prior to his termination of employment. Additionally, at the end of any period of such coverage, the Officer shall have the right to have assigned to him, for the cash surrender value thereof, any assignable insurance owned by the Company on the life of the Officer. For purposes of this Paragraph 3(b), any employee benefit determined with reference to the Officer's compensation or earnings shall be based on his annual base salary unless otherwise provided under the terms of the applicable employee benefit plan, program or arrangement. Notwithstanding the foregoing provisions of this Paragraph 3(b) to the contrary, to the extent continuation of the Officer's participation and the participation of his dependents (to the extent they were participating prior to his termination of employment) in an employee benefit plan, program, or arrangement described in this Paragraph 3(b) is specifically provided for under the terms of such plan, program or arrangement relating to retirement from the Company, this Paragraph 3(b) shall not apply. (c) Immediately upon such termination, the Officer shall be entitled to acceleration of any payments to be made to him under the Hannaford Bros. Co. Deferred Compensation Plan for Officers, the Hannaford Bros. Co. Nonqualified Savings and Investment Plan or any other deferred compensation arrangement for his benefit. Payment under any such plan or arrangement pursuant to this Paragraph 3(c) shall be made in a lump sum within ninety (90) days after the Officer's employment terminates. (d) The Company shall pay the Officer an amount equal to the award he would have been entitled to receive under the Company's Annual Incentive Plan, if his employment had not terminated, based on the base salary he had earned as of his termination date, and assuming that "actual profit" will equal "budgeted profit" (as those terms are defined in the plan). Such payment shall be made within ninety (90) days after his employment terminates. (e) The Officer shall also be entitled to such benefits and rights as are provided upon the occurrence of a Change in Control Event under the terms of the Company's 1988 Stock Plan, 1993 Long Term Incentive Plan, 1998 Stock Option Plan and Supplemental Executive Retirement Plan ("SERP"). For purposes of calculating any benefit payable with respect to the Officer under the SERP, his cash balance account shall be increased by the product of (i) THE COMBINED CONTRIBUTION CREDIT UNDER THE SERP AND THE HANNAFORD CASH BALANCE PLAN for his last full month of employment or, if greater, his last full month of employment prior to the change in Control Event, and (ii) twenty-four (24). 4. TERMINATION FOR GOOD REASON. For purposes of this Agreement, termination by the Officer of his employment for "Good Reason," except upon the Officer's express written consent otherwise, shall mean: (a) the assignment of duties to the Officer which: (i) are materially different from his duties immediately prior to the Change in Control Event, or (ii) result in his having significantly less authority or responsibility than he had prior to the Change in Control Event; or (b) the Officer's removal from, or any failure to re-elect him to, any position he held immediately prior to the Change in Control Event with either the Company or any majority-owned subsidiary; or (c) a reduction of the Officer's annual base salary in effect on the date of the Change in Control Event or as the same may be increased from time to time thereafter; or (d) the relocation of the Company's principal executive offices to a place outside of the greater Portland, Maine, area, or the Company's transferring or assigning the Officer to a place of employment other than its principal executive offices, except for required business travel to an extent substantially consistent with his business travel obligations immediately prior to the Change in Control Event; or (e) the Company's failure to provide the Officer with substantially the same health, life and other employee benefit plans, programs and arrangements (specifically including the Company's stock plans and compensation and incentive plans, as the same may be amended in the future), and substantially the same perquisites of employment, as provided to him immediately prior to the Change in Control Event or as the same may be increased thereafter; or (f) the Company's failure to provide the Officer with substantially the same support staff as provided to him immediately prior to the Change in Control Event; or (g) the Company's failure to increase the Officer's salary, employee benefits or perquisites of employment in a manner or amount commensurate with increases provided to the Company's other executive officers; or (h) the Company's failure to obtain from any successor a satisfactory agreement to assume and perform the terms of this Agreement. 5. TERMINATION FOR GOOD CAUSE. The Company retains the right to terminate the Officer for "Good Cause," in which event he shall not be entitled to receive any payment or benefits pursuant to this Agreement. "Good Cause" shall mean: (a) the Officer's conviction, by a court of competent jurisdiction, of a crime adversely reflecting on his honesty, trustworthiness or fitness to carry out the responsibilities of his position with the Company in other respects; or (b) a willful breach by him of any material duty or obligation imposed upon him under the terms of his employment, as those terms existed immediately prior to any Change in Control Event, and his failure to cure such breach within thirty (30) days after receiving notice thereof from the Company. 6. NOTICES. Any and all notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given when deposited in the United States mails, certified or registered mail, postage prepaid and addressed as follows: To the Officer: To the Company: Hannaford Bros. Co. P. 0. Box 1000 Portland, Maine 04104 Attention: Senior Vice President-Human Resources Either party may change by notice to the other the address to which notices to it are to be addressed. 7. APPLICABLE LAW, TAXES, BINDING AGREEMENT, SEVERABILITY, CONSTRUCTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Maine, except as to any matter which is preempted by federal law. Notwithstanding anything to the contrary herein contained, the Company may withhold from any amounts payable under this Agreement all federal, state or other taxes or assessments which may be required by applicable statute or regulation to be withheld. This Agreement shall be binding upon and inure to the benefit of the Officer, his heirs, assigns, executors and legal representatives; and the Company, its successors and assigns. If any provision of this Agreement shall be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected thereby. The Outside Directors shall have the authority to construe and interpret this Agreement on behalf of the Company, and any such determination by the Outside Directors shall be conclusive on the Company. 8. EXECUTION OF FURTHER DOCUMENTS. In the event the Officer receives payments or benefits pursuant to the terms hereof and the Company's independent counsel deems it necessary for the Company to receive a release or other acknowledgment, the Officer agrees to execute any such document, as may be reasonably required as a condition of his receipt of such payment or benefits. 9. AMENDMENT AND WAIVER. The Agreement may be amended only in writing, by the parties hereto, and no condition or provision of the Agreement may be waived except in writing. Waiver by either party at any time of the other party's breach of, or failure to comply with, any condition or provision of this Agreement to be performed by such other party shall not be deemed a waiver of any other provision or condition at the same time or of any provision or condition at any prior or subsequent time, unless specifically stated therein. 10. FUNDING. This Agreement shall not be construed to create or require the Company to create a trust or to otherwise act to fund the amounts payable hereunder. 11. ASSIGNMENT. Except as required by law, the right to receive payments hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such payments to be so subject shall not be recognized by the Company. 12. ARBITRATION. In recognition of the mutual benefits of arbitration, the parties hereby agree that arbitration as provided for herein shall be the exclusive remedy for resolving any claim or dispute arising under this Agreement, and hereby mutually waive any and all other remedies at law or in equity for determining any such claim or dispute. (a) Any arbitration under this Agreement, and any related judicial proceeding, shall be initiated and shall proceed pursuant to the provisions of the Maine Uniform Arbitration Act (the "Act") and, to the extent consistent with the Act, the then prevailing rules of the American Arbitration Association (the "Association") for labor and employment contracts. To initiate arbitration hereunder, demand shall be given in writing to the Association and the other party no later than one year after the claim arises. Any claim for which such demand is not made within one year after the claim arises shall be barred and discharged absolutely. (b) Any arbitration under this Agreement shall be before a single arbitrator, and an award in such arbitration may include only damages which the arbitrator determines to be due under express provisions of this Agreement. The arbitrator shall have no authority to award any other damages, including without limitation, consequential and exemplary damages. Any award in arbitration shall be subject to enforcement and appeal pursuant to the Act. (c) The parties shall share equally all costs and fees charged by the Association or the arbitrator. 13. LIMITATION ON AMOUNT TO BE PAID. If payment of any amount under this Agreement would cause the Officer to be subject to an excise tax pursuant to Section 4999 of the Internal Revenue Code (as amended from time to time) or the regulations thereunder, then such amount shall not be paid to the extent necessary to avoid the imposition of such tax. The preceding sentence shall apply only if the aggregate amount payable to the Officer or for his benefit under the Agreement, after payment of such excise tax, would be less than the aggregate amount payable in accordance with the preceding sentence. 14. NO ADDITIONAL EFFECT. Except as expressly provided herein, nothing contained herein shall be construed to provide the Officer with any specific period of employment, right to be retained in the service of the Company or other rights, nor shall this Agreement be construed to otherwise limit the rights of the Company to discharge or take other action with respect to the Officer. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Witness: HANNAFORD BROS. CO. By____________________________ Its ______________________________ Officer Exhibit 10.25 HANNAFORD BROS. CO. 1998 STOCK OPTION PLAN 1. PURPOSE. The purpose of the Plan is to provide Employees of Hannaford Bros. Co. and its Subsidiaries with additional incentives to contribute to the success of the Company and to attract, reward and retain Employees of outstanding ability. 2. DEFINITIONS. As used in this Plan, the following words and phrases wherever capitalized shall have the following meanings unless the context clearly indicates that a different meaning is intended: (a) "Award" shall mean any Option or Stock Appreciation Right granted pursuant to the Plan. (b) "Award Agreement" shall mean a written instrument that specifies the terms, conditions and restrictions of an Award and incorporates the applicable provisions of the Plan and such additional provisions not inconsistent therewith as the Committee shall determine. (c) "Board" shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. (e) "Committee" shall mean the committee described in Section 3, which shall have the authority to control and manage the administration of the Plan. (f) "Common Stock" shall mean common stock, par value, $.75 per share, of the Company. (g) "Company" shall mean Hannaford Bros. Co. (h) "Disability" shall mean an Employee's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. An Employee shall not be considered disabled unless he or she furnishes proof of the existence of such Disability in such form and manner, and at such times, as the Committee may require. (i) "Employee" shall mean any person who is employed by the Company or any Parent or Subsidiary. (j) "Fair Market Value" shall mean, with respect to Shares, the closing price of Shares as reported on the New York Stock Exchange; provided, however, that the Fair Market Value of the Shares to be issued under any Incentive Stock Option shall be determined by the Committee in accordance with the applicable requirements of subsections 422(b)(4) and (c)(7) of the Code and the regulations issued thereunder. (k) "Incentive Stock Option" shall mean an option granted to an individual for any reason connected with his or her employment by a corporation, if granted by the employer corporation or its Parent or Subsidiary corporation, to purchase stock of any of such corporations, but only if such option meets the requirements of Section 422 of the Code. (l) "Nonqualified Stock Option" shall mean an Option granted under the Plan that is not an Incentive Stock Option. (m) "Option" shall mean a right granted under the Plan to purchase Shares. (n) "Optionee" shall mean an Employee who is granted an Option. (o) "Parent" shall mean, for purposes of the Incentive Stock Option provisions of the Plan, a parent Company within the meaning of subsections 424(e) and (g) of the Code. (p) "Plan" shall mean the Hannaford Bros. Co. 1998 Stock Option Plan. (q) "Share" shall mean a share of Common Stock of the Company, as adjusted in accordance with subsection 4(b). (r) "Stock Appreciation Right" shall mean a right granted under Section 8 to receive a payment, the amount of which shall be determined by reference to the value of a Share. (s) "Subsidiary" shall mean, for purposes of the Incentive Stock Option provisions of the Plan, a subsidiary Company within the meaning of subsections 424(f) and (g) of the Code, and for all other purposes of the Plan, a Company of which Hannaford Bros. Co. owns directly or indirectly at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote. (t) "Treasury Shares" shall mean Shares that have been issued and subsequently acquired by the Company, but have not been canceled or retired. 3. ADMINISTRATION. (a) COMMITTEE MEMBERS. The Plan shall be administered by the members of the Human Resources Committee of the Board who are not employees of the Company or any Parent or Subsidiary and who otherwise qualify as "non- employee directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and as "outside directors" within the meaning of Code Section 162(m), as amended, and the regulations thereunder. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. Any member may participate in a meeting of the Committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Further, any action of the Committee may be taken without a meeting if all of the members of the Committee sign written consents, setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. (b) POWERS. The Committee shall have the complete authority and discretion to administer the Plan, including the following powers which shall be exercised in accordance with the terms of the Plan: (i) to determine the Employees to whom Awards shall be granted; (ii) to determine the time or times at which Awards shall be granted; (iii) to determine the type or types of Awards to be granted; (iv) to determine the terms, conditions and restrictions of each Award; (v) to make adjustments in accordance with subsection 4(b); (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to interpret the Plan and make all other determinations deemed necessary or advisable for the administration of the Plan; and (viii) to delegate to any officer of the Company the authority to act for the Committee in such matters as the Committee may specify. Each determination, interpretation or other action taken pursuant to the Plan by the Committee (or an officer of the Company acting under a delegation of authority by the Committee) shall be final and conclusive for all purposes and binding upon all persons, including the Company, its Subsidiaries, the Board, the Committee, the Employees and their respective successors in interest. (c) SIGNATURES. The Committee may authorize any member thereof to execute all instruments required in the administration of the Plan, and such instruments may be executed by facsimile signature. 4. STOCK SUBJECT TO THE PLAN. (a) LIMITATIONS. Subject to the provisions of subsection (b), the maximum number of Shares available for grant under the Plan in each calendar year shall be one and one-half percent (1.5%) of the total outstanding Shares as of the first day of such year, provided that the maximum aggregate number of Shares which may be issued under the Plan pursuant to Incentive Stock Options shall be six million (6,000,000) Shares. Any unused portion of the percentage limit for any calendar year shall be carried forward and be made available for grants in succeeding calendar years. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or Treasury Shares. In the event that any Shares subject to an Award are forfeited, such Shares shall, unless the Plan has been terminated, become available again for grant and shall not be counted again for purposes of the foregoing share limitation. In the event that any Option granted under the Plan expires or terminates without the issuance of Shares or payment of other consideration in lieu of such Shares, the unissued Shares subject to such Option shall, unless the Plan has been terminated, become available for other Awards, including other Options. In the event that an Employee transfers stock issued by the Company in full or partial payment of the option price of an Option granted under the Plan, only the difference between (i) the number of Shares issued upon exercise of the Option and (ii) the number of Shares transferred in payment of the option price shall be counted for purposes of the foregoing limitation on the maximum number of Shares available for grant under the Plan. Notwithstanding the foregoing, the total number of Shares issued pursuant to the exercise of an Incentive Stock Option shall be counted for purposes of the foregoing special limitation on Shares issued pursuant to Incentive Stock Options. (b) ADJUSTMENTS. If the number of Shares outstanding changes as a result of a stock split or stock dividend, the Committee shall proportionately adjust: (i) the maximum number of Shares available for grant and the maximum aggregate number of Shares which may be issued under Incentive Stock Options; (ii) the number of Shares to be issued under Awards; (iii) the option price with respect to Shares subject to Options; and (iv) the grant price with respect to Stock Appreciation Rights. In the event of a merger or consolidation in which the Company is the surviving Company, or the acquisition by the Company of property or stock of another Company, or any reorganization, the Committee shall appropriately adjust: (i) the number and class of Shares to be issued under Awards; (ii) the option price of Shares subject to Options; and the grant price with respect to Stock Appreciation Rights. Any adjustments under this subsection (b) affecting Incentive Stock Options shall be made so as to comply with the applicable provisions of Sections 422 and 424 of the Code. 5. ELIGIBILITY. The Committee may, from time to time, designate Employees to whom Options or Stock Appreciation Rights may be granted in accordance with the terms of the Plan. 6. GRANTING OF AWARDS. The Committee may grant more than one Award and more than one type of Award to any Employee; provided that no Incentive Stock Option shall be granted to any Employee who, at the time the Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary. For purposes of applying the percentage limitation of the preceding sentence, the ownership principles of subsection 424(d) of the Code shall apply. The terms and conditions of Awards need not be the same with respect to each Employee. An Employee who has been granted an Award may, if he or she is otherwise eligible, be granted additional Awards before the exercising of such prior Award. In no event may an Employee during any five (5) year period be granted Awards with respect to more than five hundred thousand (500,000) Shares, subject to adjustment as provided in Section 4. The Committee may condition the grant of an Award and the exercise of an Option or Stock Appreciation Right on the attainment of performance goals. Performance goals may be expressed in terms of earnings per Share, stock price, total shareholder return, return on equity, or any similar quantifiable measures. 7. OPTIONS. (a) OPTION AGREEMENT. Each Option granted by the Committee shall be evidenced by an Award Agreement ("Option Agreement"), specifying the Option price, the number of Shares subject to the Option and such other terms, conditions and restrictions as the Committee shall determine. In addition, each Option shall be clearly identified as either an Incentive Stock Option or a Nonqualified Stock Option. (b) TERM OF OPTION. The term of each Option shall be set forth in the Option Agreement, but in no event shall an Option be exercisable after the expiration of ten (10) years from the date such Option is granted. (c) OPTION PRICE. The option price for Shares to be issued under any Option shall not be less than one hundred percent (100%) of the Fair Market Value of such Shares on the date the Option is granted. (d) NONTRANSFERABILITY OF OPTIONS. Options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner, other than by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. Notwithstanding the preceding sentence to the contrary, the Committee may permit the transfer of Nonqualified Stock Options to family members or family trusts (and exercise by the transferee) to the extent Rule 16b-3 under the Securities Exchange Act of 1934 permits such transfers. (e) MANNER OF EXERCISE. An Option granted under the Plan shall be exercisable at such times and under such circumstances as shall be permissible under the terms of the Plan and of the Option Agreement. An Option shall be deemed to be exercised when the Optionee gives written notice of such exercise to the Company in accordance with the terms of the Option Agreement and the Company receives full payment for the Shares with respect to which the Option is exercised. Payment shall be made by check payable to the Company, delivery of stock issued by the Company or a combination thereof, subject to the terms of the Option Agreement. Stock transferred to the Company in full or partial payment for Shares shall be valued at Fair Market Value on the date that such transfer is recorded upon the books of the Company, following actual or constructive delivery of such stock to the Company in a form suitable for transfer. (f) TERMINATION OF EMPLOYMENT. In the event an Optionee ceases to be employed by the Company or any Parent or Subsidiary, and is no longer employed by any of them, for any reason other than death or Disability, such Optionee may, subject to the terms of the Option Agreement, exercise an Option at any time prior to the expiration date of such Option (or, in the case of an Incentive Stock Option, within three (3) months after the date the Optionee's employment ceases, whichever is earlier), but only to the extent the Optionee had the right to exercise such Option at the date his or her employment ceased. An Optionee's employment shall be deemed terminated on the date such Optionee's employer ceases to be a Parent or Subsidiary. (g) DISABLED OPTIONEE. In the event an Optionee who is disabled ceases to be employed by the Company or any Parent or Subsidiary by reason of such Disability, and is no longer employed by any of them, such Optionee may, subject to the terms of the Option Agreement, exercise an Option at any time prior to the expiration date of such Option (or, in the case of an Incentive Stock Option, within one (1) year after the date such Optionee's employment ceases, whichever is earlier), but only to the extent the Optionee had the right to exercise such Option at the date his or her employment ceased. (h) DEATH OF OPTIONEE. In the event an Optionee dies while in the employ of the Company or any Parent or Subsidiary, then to the extent that the Optionee would have been entitled to exercise an Option immediately prior to his or her death, such Option may be exercised by the estate of such Optionee or by such person or persons to whom such Optionee's rights pass by will or by the laws of descent and distribution at any time prior to the expiration date of such Option or within one (1) year after the death of the Optionee, whichever is earlier. 8. STOCK APPRECIATION RIGHTS. (a) SAR AGREEMENT. Any Stock Appreciation Rights granted by the Committee shall be evidenced by an Award Agreement ("SAR Agreement"), specifying the grant price, the number of such rights, and such other terms, conditions and restrictions as the Committee shall determine. (b) TERM. The term of each Stock Appreciation Right shall be set forth in the SAR Agreement, but in no event shall a Stock Appreciation Right be exercisable after the expiration of ten (10) years from the date such right is granted. (c) AMOUNT OF PAYMENT. An Employee to whom a Stock Appreciation Right has been granted shall be entitled to receive payment of an amount equal to the excess of (i) the Fair Market Value of one (1) Share on the date of exercise of such right over (ii) the grant price of the right; provided that the Fair Market Value of one (1) share with respect to a Stock Appreciation Right that is not related to an Incentive Stock Option may be determined at any time during a period before the date of exercise as specified in the SAR Agreement. (d) GRANT PRICE. The grant price of a Stock Appreciation Right shall not be less than one hundred percent (100%) of the Fair Market Value of one (1) Share on the date that the Stock Appreciation Right is granted. (e) NONTRANSFERABILITY OF RIGHTS. Stock Appreciation Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner, other than by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Employee only by such Employee. (f) MANNER OF EXERCISE. A Stock Appreciation Right granted under the Plan shall be exercisable at such times and under such circumstances as shall be permissible under the terms of the Plan and of the SAR Agreement. A Stock Appreciation Right shall be deemed exercised when an Employee gives written notice of such exercise to the Company in accordance with the terms of the SAR Agreement. (g) FORM OF PAYMENT. Payment with respect to the exercise of a Stock Appreciation Right may be made in cash, Shares or a combination thereof, as the Committee shall determine. To the extent that such payment is made in Shares, the Shares shall be valued at Fair Market Value on the date of payment. (h) RELATED OPTIONS. A Stock Appreciation Right may, but need not, relate to an Option granted under Section 7. A Stock Appreciation Right related to a Nonqualified Stock Option may be granted simultaneously with the granting of such Option or at any time thereafter before the exercise or termination of such Option. A Stock Appreciation Right related to an Incentive Stock Option shall be granted at the same time such Option is granted. A Stock Appreciation Right related to the full number of Shares subject to an Option shall terminate upon exercise or termination of the Option to the extent such Option is exercised or terminated. A Stock Appreciation Right related to less than the full number of Shares subject to an Option shall not be affected by the exercise or termination of the Option until such exercise or termination exceeds the number of Shares not related to the Stock Appreciation Right; thereafter such right shall terminate to the extent such Option is further exercised or terminated. To the extent that a Stock Appreciation Right related to an Option has been exercised, such Option shall no longer be exercisable. 9. DEFERRED SHARES. An Employee may elect, in such manner and subject to such terms and conditions as the Committee may prescribe, to defer the receipt of profit Shares purchased by transferring previously acquired Shares upon the exercise of a Nonqualified Stock Option. For purposes of the Plan, "profit Shares" shall mean Shares representing the difference between the number of previously acquired Shares transferred and the number of Shares purchased. 10. CANCELLATION OF AWARDS. Notwithstanding any provision of the Plan to the contrary, the Committee may cancel any award, whether vested or not, if at any time an Employee is not in compliance with the applicable terms of the Award Agreement or in the event of a serious breach of conduct, including but not limited to failure to comply with the terms of an agreement not to compete with the Company or disclose confidential information. 11. CHANGE IN CONTROL. Upon the occurrence of a Change in Control Event, all then outstanding Options and Stock Appreciation Rights not previously exercisable shall immediately become fully exercisable. For purposes of this Section, each of the following events shall constitute a Change in Control Event: (a) Any person acquires beneficial ownership of securities of the Company and is or thereby becomes a beneficial owner of securities entitling such person to exercise twenty-seven percent (27%) or more of the combined voting power of the Company's then outstanding stock. For purposes of the Plan, "beneficial ownership" shall be determined in accordance with Regulation 13D under the Securities Exchange Act of 1934, or any similar successor regulation or rule; and the term "person" shall include any natural person, Company, partnership, trust or association, or any group or combination thereof, whose ownership of securities of the Company would be required to be reported under such Regulation 13D, or any similar successor regulation or rule. (b) Within any twenty-five (25) month period, individuals who were Outside Directors at the beginning of such period, together with any other Outside Directors first elected as directors of the Company pursuant to nominations approved or ratified by at least two-thirds (2/3) of the Outside Directors in office immediately prior to such respective elections, cease to constitute a majority of the Board. For purposes of the Plan, an "Outside Director" as of a given date shall mean a member of the Board who has been a director of the Company throughout the six (6) months prior to such date and who has not been an employee of the Company at any time during such six (6) month period. (c) The Company ceases to be a reporting company pursuant to Section 13(a) of the Securities Exchange Act of 1934 or any similar successor provision. (d) The Company's shareholders approve: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving Company or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger or consolidation of the Company in which the holders of the Common Stock immediately prior to the merger or consolidation have substantially the same proportionate ownership and voting control of the surviving Company immediately after the merger or consolidation; or (ii) any sale, lease, exchange, liquidation or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. Notwithstanding subparagraphs (i) and (ii) above, the term "Change in Control Event" shall not include a consolidation, merger, or other reorganization if upon consummation of such transaction all of the outstanding voting stock of the Company is owned, directly or indirectly, by a holding company, and the holders of Common Stock immediately prior to the transaction have substantially the same proportionate ownership and voting control of the holding company. 12. AMENDMENT AND TERMINATION. (a) AMENDMENT. The Committee, without further approval of the shareholders of the Company, may amend the Plan from time to time in such respects as the Committee may deem advisable, provided that no amendment shall become effective prior to ratification by the Board and approval by shareholders if such amendment: (i) increases the maximum aggregate number of shares which may be issued pursuant to Incentive Stock Options; or (ii) increases the maximum number of Shares that may be granted to an Employee. (b) TERMINATION. The Board, without further approval of the shareholders of the Company, may at any time terminate the Plan. (c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not adversely affect Awards already granted without the written consent of the affected individual, and such Awards shall remain in full force and effect as if the Plan had not been amended or terminated. 13. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon its adoption by the Board or its approval by the shareholders of the Company, whichever is later. 14. TERM OF PLAN. No Award shall be granted pursuant to the Plan after ten (10) years from the earlier of the date the Plan is adopted or the date the Plan is approved by shareholders. Awards granted prior to the end of such period may extend beyond such period, except as otherwise provided herein or in the Award Agreement. 15. ARBITRATION. Arbitration as hereinafter provided shall be the exclusive remedy for resolving any claim or dispute arising under the Plan. (a) Any arbitration under the Plan, and any related judicial proceeding, shall be initiated and shall proceed pursuant to the provisions of the Maine Uniform Arbitration Act (the "Act") and, to the extent consistent with the Act, the then prevailing rules of the American Arbitration Association (the "Association") for labor and employment contracts. To initiate arbitration, demand shall be given in writing to the Association and the other party no later than one year after the claim arises. Any claim for which such demand is not made within one year after the claim arises shall be barred and discharged absolutely. (b) Any arbitration under the Plan shall be before a single arbitrator, and an award in such arbitration may include only damages which the arbitrator determines to be due under express provisions of the Plan and applicable Award Agreement. The arbitrator shall have no authority to award any other damages, including without limitation, consequential and exemplary damages. Any award in arbitration shall be subject to enforcement and appeal pursuant to the Act. (c) The Company and the Employee shall share equally all costs and fees charged by the Association or the arbitrator. 16. MISCELLANEOUS. (a) AWARD AGREEMENT. Upon executing an Award Agreement, an Employee shall be bound by such Agreement and by the applicable provisions of the Plan. (b) EMPLOYMENT. The granting of an Award to an Employee shall not give the Employee any right to be retained in the employ of the Company or any Parent or Subsidiary, nor shall the existence of the Plan impair the right of the Company or any Parent or Subsidiary to discharge or otherwise deal with an Employee. (c) TAX WITHHOLDING. The Company shall be authorized to withhold from any Award granted, or payment due, under the Plan the amount of any taxes required by law to be withheld because of such Award or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (d) GOVERNING LAW. The Plan is established under and shall be construed according to the laws of the State of Maine. (e) HEADINGS. Paragraph headings are included solely for convenience and shall in no event affect, or be used in connection with, the interpretation of the Plan. Exhibit 10.26 HANNAFORD BROS. CO. 1998 RESTRICTED STOCK PLAN 1. PURPOSE. The purpose of this Plan is to provide certain key employees of Hannaford Bros. Co. and its Subsidiaries with additional incentives to contribute to the success of the Company and to attract, reward and retain key employees of outstanding ability. 2. DEFINITIONS. As used in this Plan, the following words and phrases wherever capitalized shall have the following meanings unless the context clearly indicates that a different meaning is intended: (a) "Award" shall mean any grant of Restricted Stock or Stock Units pursuant to the Plan. (b) "Award Agreement" shall mean a written instrument that specifies the terms, conditions and restrictions of an Award and incorporates the applicable provisions of the Plan and such additional provisions not inconsistent therewith as the Committee shall determine. (c) "Board" shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. (e) "Committee" shall mean the committee described in Section 3, which shall have the authority to control and manage the administration of the Plan. (f) "Common Stock" shall mean common stock, par value, $.75 per share, of the Company. (g) "Company" shall mean Hannaford Bros. Co. (h) "Employee" shall mean any person who is employed by the Company or any Subsidiary and who is (i) an officer of the Company or of any Subsidiary, (ii) responsible for the general management of a division or department of the Company, a Subsidiary, or a major portion of the consolidated operations of the Company, or (iii) any other key employee of the Company or any Subsidiary. (i) "Fair Market Value" shall mean, with respect to Shares, the closing price of Shares as reported on the New York Stock Exchange, or such other price as the Committee in good faith determines to be the fair market value of the Shares. (j) "Plan" shall mean the Hannaford Bros. Co. 1998 Restricted Stock Plan. (k) "Restricted Stock" shall mean any Share granted pursuant to Section 7. (l) "Share" shall mean a share of Common Stock of the Company, as adjusted in accordance with subsection 4(b). (m) "Stock Unit" shall mean a right granted under Section 8 to receive a Share or a cash amount equal to the Fair Market Value of a Share. (n) "Subsidiary" shall mean a Company of which Hannaford Bros. Co. owns directly or indirectly at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote. (o) "Treasury Shares" shall mean Shares that have been issued and subsequently acquired by the Company, but have not been canceled or retired. 3. ADMINISTRATION. (a) COMMITTEE MEMBERS. The Plan shall be administered by the members of the Human Resources Committee of the Board who are not employees of the Company or any parent or Subsidiary and who otherwise qualify as "non- employee directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. A majority of the members of the Committee shall constitute a quorum, and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. Any member may participate in a meeting of the Committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Further, any action of the Committee may be taken without a meeting if all of the members of the Committee sign written consents, setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. (b) POWERS. The Committee shall have the complete authority and discretion to administer the Plan, including the following powers which shall be exercised in accordance with the terms of the Plan: (i) to determine the Employees to whom Awards shall be granted; (ii) to determine the time or times at which Awards shall be granted; (iii) to determine the type or types of Awards to be granted; (iv) to determine the terms, conditions and restrictions of each Award; (v) to make adjustments in accordance with subsection 4(b); (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to interpret the Plan and make all other determinations deemed necessary or advisable for the administration of the Plan; and (viii) to delegate to any officer of the Company the authority to act for the Committee in such matters as the Committee may specify. Each determination, interpretation or other action taken pursuant to the Plan by the Committee (or an officer of the Company acting under a delegation of authority by the Committee) shall be final and conclusive for all purposes and binding upon all persons, including the Company, its Subsidiaries, the Board, the Committee, the Employees and their respective successors in interest. (c) SIGNATURES. The Committee may authorize any member thereof to execute all instruments required in the administration of the Plan, and such instruments may be executed by facsimile signature. 4. STOCK SUBJECT TO THE PLAN. (a) SOURCE. Any Shares issued hereunder shall consist only of Treasury Shares. (b) ADJUSTMENTS. If the number of Shares outstanding changes as a result of a stock split or stock dividend, or merger or consolidation in which the Company is the surviving Company, or the acquisition by the Company of property or stock of another Company, or any reorganization, the Committee shall appropriately adjust the number and class of Shares subject to Awards. 5. ELIGIBILITY. The Committee may, from time to time, designate Employees to whom Shares of Restricted Stock or Stock Units may be granted in accordance with the terms of the Plan. 6. GRANTING OF AWARDS. The Committee may grant more than one Award and more than one type of Award to any Employee, and the terms and conditions of Awards need not be the same with respect to each Employee. An Employee who has been granted an Award may, if he or she is otherwise eligible, be granted additional Awards before the expiration of the restriction period with respect to such prior Award. 7. RESTRICTED STOCK. (a) RESTRICTED STOCK AGREEMENT. The grant of any Shares of Restricted Stock by the Committee shall be evidenced by an Award Agreement ("Restricted Stock Agreement"), specifying restrictions on the transfer and vesting of such Shares and such other terms, conditions and restrictions as the Committee shall determine. (b) RESTRICTIONS. Shares of Restricted Stock may not be sold, transferred or otherwise disposed of and may not be pledged, hypothecated or otherwise encumbered, other than by will or by the laws of descent and distribution, during the applicable restriction period set forth in the Restricted Stock Agreement. In the event that an Employee ceases to be employed by the Company or any Subsidiary and is no longer employed by any of them prior to the last day of a restriction period, the Shares of Restricted Stock granted to such Employee that are subject to such restriction period shall be forfeited to the Company, unless otherwise provided in accordance with the provisions of subsection (c). (c) RESTRICTION PERIOD. The restriction period applicable to any Shares of Restricted Stock shall commence on the date such Shares are granted by the Committee and shall end on such date as the Committee shall determine; provided that the minimum restriction period shall be one year and the Committee may, at any time, reduce or terminate the restriction period in effect with respect to any outstanding Shares of Restricted Stock. (d) LAPSE OF RESTRICTIONS. At the expiration of the restriction period applicable to any Shares of Restricted Stock, such Shares shall be transferred free of restrictions on transfer and vesting to the Employee or, in the event of the Employee's death, to his or her estate or other successor in interest. (e) DIVIDENDS. Cash dividends payable with respect to Shares of Restricted Stock shall be paid to an Employee currently, except as the Committee may otherwise provide in the Restricted Stock Agreement. Noncash dividends payable with respect to Shares of Restricted Stock shall be limited to Treasury Shares and shall be subject to the same restrictions applicable to such Shares of Restricted Stock. (f) CERTIFICATES DEPOSITED WITH COMPANY. Each certificate issued in respect of Shares of Restricted Stock granted to an Employee shall be registered in the name of the Employee and deposited with the Company, together with a stock power endorsed in blank by the Employee. Each such certificate shall bear the following (or a similar) legend: The transferability of this certificate and the shares of stock represented hereby are subject to the applicable terms and conditions (including forfeitures) contained in the Hannaford Bros. Co. 1998 Restricted Stock Plan and an Agreement between the registered owner and Hannaford Bros. Co. Copies of the Plan and the Agreement are on file in the office of the Assistant Secretary of Hannaford Bros. Co., 145 Pleasant Hill Road, Scarborough, Maine 04074. (g) SHAREHOLDER RIGHTS. Subject to the restrictions set forth in the Restricted Stock Agreement, an Employee shall have all of the rights of a shareholder with respect to Shares of Restricted Stock, including the right to vote such Shares. 8. STOCK UNITS. (a) STOCK UNIT AGREEMENT. The grant of any Stock Units by the Committee shall be evidenced by an Award Agreement ("Stock Unit Agreement"), specifying the number of Stock Units, the payment date, and such other terms, conditions and restrictions as the Committee shall determine. (b) STOCK UNIT AWARD. An Employee to whom a Stock Unit has been granted shall be entitled to receive on the payment date set forth in the Stock Unit Agreement a Share or a cash amount equal to the Fair Market Value of a Share on such date. (c) STOCK UNIT ACCOUNT. The Company shall establish and maintain a separate account ("Stock Unit Account") for each Employee who has received a grant of Stock Units, and such account shall reflect the number of Stock Units granted to such Employee. At such times as the Company pays a cash dividend on its Shares, there shall be credited to an Employee's Stock Unit Account an amount equal to the cash dividend paid on one (1) Share for each Stock Unit credited to such account, unless the applicable Stock Unit Agreement provides otherwise. (d) NONTRANSFERABILITY. Stock Units may not be sold, transferred or otherwise disposed of and may not be pledged, hypothecated or otherwise encumbered, except by will or the laws of descent and distribution. (e) RELATED RESTRICTED STOCK. A grant of Stock Units may, but need not, relate to a grant of Restricted Stock under Section 7. Stock Units related to a grant of Restricted Stock shall be subject to the same restrictions on transferability and vesting as apply to the Shares of Restricted Stock. (f) FORM OF PAYMENT. Payment with respect to a Stock Unit may be made in cash, Shares or a combination thereof, as the Committee shall determine. 9. CANCELLATION OF AWARDS. Notwithstanding any provision of the Plan to the contrary, the Committee may cancel any award, whether vested or not, if at any time an Employee is not in compliance with the applicable terms of the Award Agreement or in the event of a serious breach of conduct, including but not limited to failure to comply with the terms of an agreement not to compete with the Company or disclose confidential information. 10. CHANGE IN CONTROL. Upon the occurrence of a Change in Control Event, all then outstanding Shares of Restricted Stock and Stock Units shall be transferred free of restrictions on transfer and vesting to the Employee. For purposes of this Section, each of the following events shall constitute a Change in Control Event: (a) Any person acquires beneficial ownership of securities of the Company and is or thereby becomes a beneficial owner of securities entitling such person to exercise twenty-seven percent (27%) or more of the combined voting power of the Company's then outstanding stock. For purposes of the Plan, "beneficial ownership" shall be determined in accordance with Regulation 13D under the Securities Exchange Act of 1934, or any similar successor regulation or rule; and the term "person" shall include any natural person, Company, partnership, trust or association, or any group or combination thereof, whose ownership of securities of the Company would be required to be reported under such Regulation 13D, or any similar successor regulation or rule. (b) Within any twenty-five (25) month period, individuals who were Outside Directors at the beginning of such period, together with any other Outside Directors first elected as directors of the Company pursuant to nominations approved or ratified by at least two-thirds (2/3) of the Outside Directors in office immediately prior to such respective elections, cease to constitute a majority of the Board. For purposes of the Plan, an "Outside Director" as of a given date shall mean a member of the Board who has been a director of the Company throughout the six (6) months prior to such date and who has not been an employee of the Company at any time during such six (6) month period. (c) The Company ceases to be a reporting company pursuant to Section 13(a) of the Securities Exchange Act of 1934 or any similar successor provision. (d) The Company's shareholders approve: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving Company or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger or consolidation of the Company in which the holders of the Common Stock immediately prior to the merger or consolidation have substantially the same proportionate ownership and voting control of the surviving Company immediately after the merger or consolidation; or (ii) any sale, lease, exchange, liquidation or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. Notwithstanding subparagraphs (i) and (ii) above, the term "Change in Control Event" shall not include a consolidation, merger, or other reorganization if upon consummation of such transaction all of the outstanding voting stock of the Company is owned, directly or indirectly, by a holding company, and the holders of Common Stock immediately prior to the transaction have substantially the same proportionate ownership and voting control of the holding company. 11. AMENDMENT AND TERMINATION. (a) AMENDMENT. The Committee may amend the Plan from time to time in such respects as the Committee may deem advisable, provided that no amendment shall become effective prior to ratification by the Board if such amendment modifies the class of employees eligible to participate in the Plan. (b)TERMINATION. The Board may at any time terminate the Plan. (c)EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not adversely affect Awards already granted without the written consent of the affected individual, and such Awards shall remain in full force and effect as if the Plan had not been amended or terminated. 12. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon its adoption by the Board. 13. ARBITRATION. Arbitration as hereinafter provided shall be the exclusive remedy for resolving any claim or dispute arising under the Plan. (a) Any arbitration under the Plan, and any related judicial proceeding, shall be initiated and shall proceed pursuant to the provisions of the Maine Uniform Arbitration Act (the "Act") and, to the extent consistent with the Act, the then prevailing rules of the American Arbitration Association (the "Association") for labor and employment contracts. To initiate arbitration, demand shall be given in writing to the Association and the other party no later than one year after the claim arises. Any claim for which such demand is not made within one year after the claim arises shall be barred and discharged absolutely. (b) Any arbitration under the Plan shall be before a single arbitrator, and an award in such arbitration may include only damages which the arbitrator determines to be due under express provisions of the Plan and applicable Award Agreement. The arbitrator shall have no authority to award any other damages, including without limitation, consequential and exemplary damages. Any award in arbitration shall be subject to enforcement and appeal pursuant to the Act. (c) The Company and the Employee shall share equally all costs and fees charged by the Association or the arbitrator. 14. MISCELLANEOUS. (a) AWARD AGREEMENT. Upon executing an Award Agreement, an Employee shall be bound by such Agreement and by the applicable provisions of the Plan. (b) EMPLOYMENT. The granting of an Award to an Employee shall not give the Employee any right to be retained in the employ of the Company or any Subsidiary, nor shall the existence of the Plan impair the right of the Company or a Subsidiary to discharge or otherwise deal with an Employee. (c) TAX WITHHOLDING. The Company shall be authorized to withhold from any Award granted, or payment due, under the Plan the amount of any taxes required by law to be withheld because of such Award or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (d) GOVERNING LAW. The Plan is established under and shall be construed according to the laws of the State of Maine. (e) HEADINGS. Paragraph headings are included solely for convenience and shall in no event affect, or be used in connection with, the interpretation of the Plan. Exhibit 21 Hannaford Bros. Co. Parents and Subsidiaries Percentage of Voting State Securities of Owned by the Registrant Incorporation Registrant Hannaford Bros. Co. Maine Subsidiaries (1) Athenian Real Estate Development, Inc. Virginia 100.00% Boney Wilson & Sons, Inc. North Carolina 100.00% Hannaford Licensing Corp. Maine 100.00% Hannaford Procurement Corp. Maine 100.00% Hannaford Trucking Company Maine 100.00% HHR, Inc. Massachusetts 100.00% Martin's Foods of South Burlington, Inc. Vermont 100.00% Plain Street Properties, Inc. Maine 100.00% Progressive Distributors, Inc. Maine 100.00% Shop 'n Save-Mass., Inc. Massachusetts 100.00% (1) Each of the subsidiaries is included in the consolidated financial statements of the Registrant. Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Hannaford Bros. Co. and Subsidiaries on Form S-8 (File Nos. 2-77902, 2-98387, 33-1281, 33-22666, 33-31624, 33-41273, 33-60119, 33-60655, 33-60691 and 333-41381) of our report dated January 21, 1998, on our audits of the consolidated financial statements of Hannaford Bros. Co. and Subsidiaries as of January 3, 1998 and December 28, 1996, and for each of the three years in the period ended January 3, 1998, which report is included in this Annual Report on Form 10-K. s/Coopers & Lybrand Portland, Maine March 3, 1998 End