ITEM 1. BUSINESS.
PRODUCTS AND SERVICES
Hewlett-Packard Company was incorporated in 1947 under the laws of the State of California as the successor to a partnership founded in 1939 by William R. Hewlett and David Packard.
On a worldwide basis, Hewlett-Packard Company, together with its consolidated subsidiaries (the "Company"), designs, manufactures and services equipment and systems for measurement, computation and communications. The Company offers a wide variety of systems and standalone products, including computer systems, personal computers ("PCs"), printers and other peripheral products, calculators and other personal information products, electronic test equipment and systems, medical electronic equipment, solid state components and instrumentation for chemical analysis. Services such as systems integration, selective-outsourcing management, consulting, education, product financing and rentals, as well as customer support and maintenance, are also an integral part of the Company's offerings. These products and services are used in industry, business, engineering, science, medicine and education. A summary of the Company's net revenue as contributed by its major groupings of similar products and services is found on page 53 of the Company's 1996 Annual Report to Shareholders, which page (excluding order data) is incorporated herein by reference.
The Company's computers, computer systems, personal information products, personal peripheral products and other peripherals are used in a variety of applications, including scientific and engineering computation and analysis, instrument control and business information management. The Company's core computing products and technologies include its PA-RISC architecture for systems and workstations, and software infrastructure for open systems. The Company's general-purpose computers and computer systems include scalable families of PCs, servers and systems for use in homes, small workgroups, larger departments and entire enterprises. Key products include the HP 9000 series, which runs HP-UX, the Company's implementation of the UNIX(R)(1) operating system, and comprises both workstations with powerful computational and graphics capabilities as well as multiuser computers for both technical and commercial applications; the HP NetServer series of PC servers; the HP Pavilion multimedia home PC; and the HP Vectra series of IBM-compatible PCs for use in business, engineering, manufacturing and chemical analysis. The Company offers software programming services, network services, distributed system services and data management services. Customers of the Company's computers, computer systems and software infrastructure products include original equipment manufacturers, dealers, value-added resellers and retailers, as well as end users for a variety of applications.
In the field of computing during fiscal 1996, the Company introduced new HP 9000 K-Class enterprise servers, which are used primarily as application, Internet, database, LAN and Network File System and compute-intensive servers; and new HP 9000 D-Class enterprise servers, which are used primarily as large- capacity Web servers and in small to medium-sized workgroups or businesses. The Company also announced its next-generation PA-RISC microprocessor, the PA-8200. This year the Company introduced new models of the HP Pavilion multimedia home PC, which has become one of the leading consumer PCs in the United States. Other key introductions included the HP Vectra 500 series PC for small businesses, the HP NetServer LX Pro system, which is the first HP NetServer system based on the Intel Pentium(R) Pro processor, and the HP OmniBook 800 notebook PC line.
In the information-storage business, the Company extended its HP SureStore family of network-backup solutions by offering tape-based storage that uses digital linear tape and Travan-based tape developed by Imation Corporation. During fiscal 1996, the Company also announced that it was exiting the disk-mechanism manufacturing business.
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(1) UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/OPEN(TM) Company Limited. X/OPEN is a trademark of X/OPEN Company Limited in the U.K. and other countries.
Key software introductions in fiscal 1996 included a distributed version of the Company's network-management platform, HP OpenView Network Node Manager; new HP OpenView solutions designed to enable customers to manage LAN environments that include Windows NT(R) and Novell NetWare; and HP Software Depot, a Web site that allows users to access public-domain software and HP beta software for the Internet.
The Company's peripheral products include a variety of system and desktop printers, such as the HP LaserJet family; the HP DeskJet family, which is based on the Company's thermal inkjet technology; large-format printers and page scanners; video display terminals; and tape drives and related autochangers. During fiscal 1996, the Company introduced the HP LaserJet 5N printer, which is a low-cost, network-optimized printer for workgroups, and the HP LaserJet 5Si printer, which combines printing and copying capabilities enabling users to create multiple original prints. Other key new products were the HP DeskJet 682C printer, which enables home users to print cards and banners cost effectively, and the HP DeskJet 690C, which is the Company's first photo-quality printer. The Company also brought out the HP ScanJet 4Si network scanner during fiscal 1996. In addition, the Company introduced the HP DeskJet 820C and 870C printers, which are designed for use by small businesses. The HP DeskJet 820C is the first printer to incorporate a new HP printing architecture that allows users of Microsoft Windows(R) to print at higher speeds with reduced costs. This year the Company also worked with several partners to develop FlashPix, an industry-standard photo imaging file format.
The Company also produces measurement systems for use in electronics, medicine and chemical analysis. Test-and-measurement instruments include voltmeters and multimeters that measure voltage, current and resistance; counters that measure the frequency of an electrical signal; oscilloscopes and logic analyzers that measure electrical changes in relation to time; signal generators that provide the electrical stimulus for the testing of systems and components; specialized communications and semiconductor test equipment; and atomic frequency standards, which are used in accurate time-interval and timekeeping applications. Instruments for medical applications include continuous monitoring systems for critical-care patients, fetal monitors, electrocardiographs, cardiac catheterization laboratory systems, blood gas measuring instruments and cardiac defibrillators. Instruments for chemical-analysis applications include gas and liquid chromatographs, mass spectrometers, laboratory data systems and spectrophotometers. Key introductions for measurement systems in fiscal 1996 included a new version of the HP Internet Advisor, which automates network trouble-shooting; the HP NetMetrix system, which helps users manage networks by extracting LAN data for use in capacity planning and to improve security; instruments to test communications devices based on Code Division Multiple Access technology; a mixed-signal oscilloscope that combines timing analysis with oscilloscope capabilities; and new software capabilities that help clinicians predict heart attack probability, display 3-D cardiac images and manage multimedia cardiology data on a PC.
In the Company's chemical-analysis business, the new LC 1100 series liquid chromatograph enables customers to integrate different modules with their customized systems to perform specialized tasks, from routine analyses by less-skilled technicians to sophisticated R&D applications by highly trained chemists.
The Company also manufactures electronic component products consisting principally of microwave semiconductor, fiber-optic and optoelectronic devices, including light-emitting diodes (LEDs). The products are sold primarily to other manufacturers for incorporation into their electronic products but also are used in many of the Company's products. In fiscal 1996, the Company introduced a fiber-optic transceiver with gigabit-per-second speed for transmitting full-motion video and multimedia. The Company also introduced a SnapLED assembly, which makes thin, automotive-rear-lighting assemblies.
In addition to services such as systems integration, selective-outsourcing management, consulting, education, product financing and rentals, the Company provides service for its equipment, systems and peripherals, including support and maintenance services, parts and supplies for design and manufacturing systems, office and information systems, general-purpose instruments, computers and computer systems, peripherals and network products. In fiscal 1996, the Company derived 14 percent of its net revenue from such services.
In all its businesses, the Company strives to promote industry standards that recognize customer preferences for open systems in which different vendors' products can work together. The Company often bases its product innovations on such standards and seeks to make its technology innovations into industry standards through licensing to other companies and standards-setting groups. For example, during fiscal 1996 the Company helped lead the development of the International Cryptography Framework, an industrywide effort to address the issue of security on the Internet.
MARKETING
Customers. The Company has approximately 600 sales and support offices and distributorships in more than 120 countries. Sales are made to industrial and commercial customers, educational and scientific institutions, healthcare providers (including individual doctors, hospitals, clinics and research laboratories), and, in the case of its calculators and other personal information products, computer peripherals and PCs, to individuals for personal use.
Sales Organization. More than half of the Company's orders are derived through reseller channels, including retailers, dealers and original equipment manufacturers. The remaining product orders result from the efforts of its own sales organization selling to end users. The Company's direct sales operations are supported by field service engineers, sales representatives, service personnel and administrative support staff. In fiscal 1996, a higher proportion of the Company's net revenue than in fiscal 1995 was generated from products such as personal peripherals, which are primarily sold through resellers. As more of the Company's products are distributed through resellers, the financial health of these resellers, and the Company's continuing relationships with them, become more important to the Company's success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. The Company's financial results could be adversely affected if the financial condition of these resellers substantially weakens or if the Company's relationships with such resellers deteriorate.
Resellers constantly adjust their ordering patterns in response to the Company's, and its competitors', supply into the channel and the timing of their new product introductions and relative feature sets, as well as seasonal fluctuations in end-user demand such as the back-to-school and holiday selling periods. Resellers may increase orders during times of shortages, cancel orders if the channel is filled with currently available products, or delay orders in anticipation of new products.
International. The Company's total orders originating outside the United States, as a percentage of total company orders, were approximately 56 percent in fiscal 1996, 55 percent in fiscal 1995 and 54 percent in fiscal 1994. The majority of these international orders were from customers other than foreign governments. Approximately two-thirds of the Company's international orders in each of the last three fiscal years were derived from Europe, with most of the balance coming from Japan, other countries in Asia Pacific, Latin America and Canada.
Most of the Company's sales in international markets are made by foreign sales subsidiaries. In countries with low sales volume, sales are made through various representative and distributorship arrangements. Certain sales in international markets, however, are made directly by the Company from the United States.
The Company's international business is subject to risks customarily encountered in foreign operations, including fluctuations in monetary exchange rates, import and export controls and the economic, political, tax and regulatory policies of foreign governments. The Company believes that its international diversification provides stability to its worldwide operations and reduces the impact on the Company of adverse economic changes in any single country. A summary of the Company's net revenue, earnings from operations and identifiable assets by geographic area is found on page 51 of the Company's 1996 Annual Report to Shareholders, which page is incorporated herein by reference.
COMPETITION
The Company encounters aggressive competition in all areas of its business activity. Its competitors are numerous, ranging from some of the world's largest corporations to many relatively small and highly
specialized firms. The Company competes primarily on the basis of technology, performance, price, quality, reliability, distribution, and customer service and support. The Company's reputation, the ease of use of its products and the ready availability of multiple software applications and customer training are also important competitive factors.
The computer market is characterized by vigorous competition among major corporations with long-established positions and a large number of new and rapidly growing firms. Product life cycles are short, and, to remain competitive, the Company will be required to develop new products, periodically enhance its existing products and compete effectively in the manner described above. In particular, the Company anticipates that it will have to continue to adjust prices to stay competitive and effectively manage growth with correspondingly reduced gross margins.
While the absence of reliable statistics makes it difficult to state the Company's relative position, the Company believes that it is the second-largest U.S.-based manufacturer of general-purpose computers, personal peripherals such as desktop printers, and calculators and other personal information products, all for industrial, scientific and business applications. The markets for test-and-measurement instruments are influenced by special manufacturers that often have great strength in narrow market segments. In general, however, the Company believes that it is one of the principal suppliers in these markets.
BACKLOG
The Company believes that backlog is not a meaningful indicator of future business prospects due to the volume of products delivered from shelf inventories, the shortening of product delivery schedules and the portion of revenue related to its service and support business. Therefore, the Company believes that backlog information is not material to an understanding of its business.
PATENTS
The Company's general policy has been to seek patent protection for those inventions and improvements likely to be incorporated into its products or to give the Company a competitive advantage. While the Company believes that its patents and applications have value, in general no single patent is in itself essential. The Company believes that its technological position depends primarily on the technical competence and creative ability of its research and development personnel.
MATERIALS
The Company's manufacturing operations employ a wide variety of semiconductors, electromechanical components and assemblies, and raw materials such as plastic resins and sheet metal. The Company believes that the materials and supplies necessary for its manufacturing operations are presently available in the quantities required. The Company purchases materials, supplies and product subassemblies from a substantial number of vendors. For many of its products, the Company has existing alternate sources of supply, or such sources are readily available. In certain instances, however, the Company enters into non-cancelable purchase commitments with, or makes advance payments to, certain suppliers to ensure supply. Portions of the Company's manufacturing operations are dependent on the ability of suppliers to deliver components, subassemblies and completed products in time to meet critical manufacturing and distribution schedules. The failure of suppliers to deliver these components, subassemblies and products in a timely manner may adversely affect the Company's operating results until alternate sourcing could be developed. In addition, the Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts. Such constraints, if persistent, may adversely affect the Company's operating results. However, the Company believes that alternate suppliers or design solutions could be arranged within a reasonable time so that material long-term adverse impacts would be minimized.
RESEARCH AND DEVELOPMENT
The process of developing new high-technology products is inherently complex and uncertain and requires innovative designs that anticipate customer needs and technological trends. Without the introduction
of new products and product enhancements, the Company's products are likely to become technologically obsolete, in which case revenues would be materially and adversely affected. There can be no assurance that such new products, if and when introduced, will achieve market acceptance. After the products are developed, the Company must quickly manufacture products in sufficient volumes at acceptable costs to meet demand.
Expenditures for research and development increased 18 percent in fiscal 1996 to $2.7 billion, compared with $2.3 billion and 14 percent growth in fiscal 1995, and $2.0 billion and 15 percent growth in fiscal 1994. In fiscal 1996, research and development expenditures were 7.1 percent of net revenue, compared with 7.3 percent in fiscal 1995 and 8.1 percent in fiscal 1994. The Company anticipates that it will continue to have significant research and development expenditures in order to maintain its competitive position with a continuing flow of innovative, high-quality products.
ENVIRONMENT
The operations of the Company involve the use of substances regulated under various federal, state and international laws governing the environment. It is the Company's policy to apply strict standards for environmental protection to sites inside and outside the U.S., even if not subject to regulations imposed by local governments. The liability for environmental remediation and related costs is accrued when it is considered probable and the costs can be reasonably estimated. Environmental costs are presently not material to the Company's operations or financial position.
EMPLOYEES
The Company had approximately 112,000 employees worldwide at October 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers of the Company is set forth in Part III below.
ITEM 2.

ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 3000 Hanover Street, Palo Alto, California 94304. As of October 31, 1996, the Company owned or leased a total of approximately 47.2 million square feet of space worldwide. The Company believes that its existing properties are in good condition and suitable for the conduct of its business.
The Company's plants are equipped with machinery, most of which is owned by the Company and is in part developed by it to meet the special requirements for manufacturing computers, peripherals, precision electronic instruments and systems. At the end of fiscal year 1996, the Company was productively utilizing the vast majority of the space in its facilities, while actively disposing of space determined to be excess.
The Company anticipates that most of the capital necessary for expansion will continue to be obtained from internally generated funds. Investment in new property, plant and equipment amounted to $2.2 billion in fiscal 1996, $1.6 billion in fiscal 1995 and $1.3 billion in fiscal 1994.
As of October 31, 1996, the Company's marketing operations occupied approximately 12.5 million square feet, of which 3.9 million square feet were located within the United States. The Company owns 53% of the space used for marketing activities and leases the remaining 47%.
The Company's manufacturing plants, research and development facilities and warehouse and administrative facilities occupied 34.7 million square feet, of which 25.6 million square feet were located within the United States. The Company owns 80% of its manufacturing, research and development, warehouse and administrative space and leases the remaining 20%. None of the property owned by the Company is held subject to any major encumbrances.
The locations of the Company's geographic operations are listed on the inside back cover of the Company's 1996 Annual Report to Shareholders, which page is incorporated herein by reference. The locations of the Company's major product development and manufacturing facilities and the Hewlett-Packard Laboratories are listed below:
PRODUCT DEVELOPMENT AND MANUFACTURING
Americas Cupertino, Folsom, Mountain View, Newark, Palo Alto, Rohnert Park, Roseville, San Diego, San Jose, Santa Clara, Santa Rosa, Sunnyvale and Westlake Village, California
Colorado Springs, Fort Collins, Greeley and Loveland, Colorado
Wilmington, Delaware
Boise, Idaho
Andover and Chelmsford, Massachusetts
Exeter, New Hampshire
Rockaway, New Jersey
Corvallis and McMinnville, Oregon
Aquadilla, Puerto Rico
Richardson, Texas
Lake Stevens, Spokane and Vancouver, Washington
Brasilia, Brazil
Edmonton, Calgary, and Waterloo, Canada
Guadalajara, Mexico
Europe Grenoble and L'Isle d'Abeau, France
Boblingen and Waldbonn, Germany
Dublin, Ireland
Bergamo, Italy
Amersfoort, The Netherlands
Barcelona, Spain
Bristol, Ipswich and South Queensferry, United Kingdom
Asia Pacific Melbourne, Australia
Beijing, Qingdao and Shanghai, China
Bangalore, India
Hachioji and Kobe, Japan
Seoul, Korea
Penang, Malaysia
Singapore
HEWLETT-PACKARD LABORATORIES
Palo Alto, California
Tokyo, Japan
Bristol, United Kingdom
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
There are presently pending no legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or to which any of its property is subject.
The Company is a party to, or otherwise involved in, proceedings brought by federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "superfund," or state laws similar to CERCLA. The Company is also conducting environmental investigations or remediations at several of its current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies. Any liability from such proceedings, in the aggregate, is not expected to be material to the operations or financial position of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Information regarding the market prices of the Company's Common Stock and the markets for that stock may be found on page 54 and the inside back cover, respectively, of the Company's 1996 Annual Report to
Shareholders. The number of shareholders and information concerning the Company's current dividend rate are set forth in the section entitled "Common Stock and Dividends" found on the inside back cover of that report. Additional information concerning dividends may be found on pages 29, 38, 39 and 54 of the Company's 1996 Annual Report to Shareholders. Such pages (excluding order data) are incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for the Company is set forth on page 29 of the Company's 1996 Annual Report to Shareholders, which page (excluding order data) is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A discussion of the Company's financial condition, changes in financial condition and results of operations appears in the "Financial Review" found on pages 31-33 and 35-37 of the Company's 1996 Annual Report to Shareholders. Such pages (excluding order data) are incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company, together with the report thereon of Price Waterhouse LLP, independent accountants, and the unaudited "Quarterly Summary" are set forth on pages 30, 34, 38-52 and 54 of the Company's 1996 Annual Report to Shareholders, which pages (excluding order data and "Statement of Management Responsibility") are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of the Company who are standing for reelection is set forth under "Election of Directors" on pages 4-8 of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement, dated January 13, 1997 (the "Notice and Proxy Statement"), which pages are incorporated herein by reference.
Information regarding a director of the Company who is retiring on February 25, 1997 is set forth below:
DIRECTOR WHO IS RETIRING:
DONALD E. PETERSEN; AGE 70; RETIRED CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, FORD MOTOR COMPANY
Mr. Petersen has served as a director of the Company since 1987. He was Chairman of the Board of Directors and Chief Executive Officer of Ford Motor Company from 1985 until his retirement in 1990. Mr. Petersen is also a member of the Board of Directors of Dow Jones & Company, Inc., The Boeing Company and four mutual fund boards of the Capital Research & Management Corp. He is a member of the National Academy of Engineering, the National Research Council Industry Advisory Board and the Science, Technology and Economic Policy Board. He is also active in education programs at Stanford University and the University of Washington in engineering and manufacturing management.
The names of the executive officers of the Company, and their ages, titles and biographies as of December 27, 1996, are set forth below. All officers are elected for one-year terms.
EXECUTIVE OFFICERS:
EDWARD W. BARNHOLT; AGE 53; EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, TEST AND MEASUREMENT ORGANIZATION.
Mr. Barnholt was elected an Executive Vice President in 1996 and a Senior Vice President in 1993. He became Vice President and General Manager, Test and Measurement Organization, with responsibility for the Company's Electronic Instrument, Automatic Test, Microwave and Communications and Communications Test Solutions Groups in 1990. Mr. Barnholt was elected a Vice President of the Company in 1988. He is a director of KLA Instruments Corporation.
RICHARD E. BELLUZZO; AGE 43; EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, COMPUTER ORGANIZATION.
Mr. Belluzzo assumed management responsibility for the newly formed Computer Organization and was elected an Executive Vice President in 1995. He was General Manager of the Computer Products Organization from 1993 to August 1995, and he served as General Manager of the InkJet Products Group from 1991 to 1993. He was elected a Vice President in 1992 and a Senior Vice President in January 1995. He is a director of Specialty Laboratories and Proxima Corporation.
JOEL S. BIRNBAUM; AGE 59; SENIOR VICE PRESIDENT, RESEARCH AND DEVELOPMENT DIRECTOR, HP LABORATORIES.
Dr. Birnbaum was elected a Senior Vice President in 1993. He became Vice President, Research and Development and Director, HP Laboratories in September 1991. Additionally, he served as General Manager, Information Architecture Group from 1988 until 1991. He was elected a Vice President in 1984. He is a director of the Corporation for National Research Initiatives.
S.T. JACK BRIGHAM III; AGE 57; SENIOR VICE PRESIDENT, CORPORATE AFFAIRS AND GENERAL COUNSEL.
Mr. Brigham was elected a Senior Vice President in 1995 and a Vice President in 1982. He became Vice President, Corporate Affairs in 1992. He has served as General Counsel since 1976.
DOUGLAS K. CARNAHAN; AGE 55; SENIOR VICE PRESIDENT AND GENERAL MANAGER, MEASUREMENT SYSTEMS ORGANIZATION.
Mr. Carnahan was elected a Senior Vice President in 1995 and has been in his current position since 1993. He was General Manager of the Printing Systems Group from 1991 to 1993, and he was elected a Vice President in 1992.
RAYMOND W. COOKINGHAM; AGE 53; VICE PRESIDENT AND CONTROLLER.
Mr. Cookingham was elected a Vice President in 1993. He has served as Controller since 1986.
F.E. (PETE) PETERSON; AGE 55; SENIOR VICE PRESIDENT, CORPORATE PERSONNEL.
Mr. Peterson has served as Director of Corporate Personnel since 1990. He was elected a Vice President in 1992 and a Senior Vice President in 1995.
LEWIS E. PLATT; AGE 55; CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE EXECUTIVE COMMITTEE.
Mr. Platt has served as a director of the Company, President and Chief Executive Officer since November 1992 and has served as Chairman since 1993. He was an Executive Vice President from 1987 to 1992. Mr. Platt held a number of management positions in the Company prior to becoming its President, including managing the Computer Systems Organization from 1990 to 1992. He is a director of Pacific Telesis. He also serves on the Wharton School Board of Overseers.
LEE S. TING; AGE 54; VICE PRESIDENT AND MANAGING DIRECTOR, GEOGRAPHIC OPERATIONS.
Mr. Ting assumed his current position as Vice President and Managing Director, Geographic Operations on November 1, 1996. He had been Managing Director of the Company's Asia Pacific region since 1993 and a Vice President since 1995. He was Managing Director of Northeast Asia Operations from 1991 to 1993.
ROBERT P. WAYMAN; AGE 51; EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER.
Mr. Wayman has served as a director of the Company since December 1993. He has been an Executive Vice President responsible for finance and administration since 1992. He has held a number of financial management positions in the Company and was elected a Vice President and Chief Financial Officer in 1984. He is a director of CNF Transportation, Inc. and Sybase Inc. He also serves as a member of the Kellogg Advisory Board, Northwestern University School of Business, and is Chairman of the Private Sector Council.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth on page 12 of the Notice and Proxy Statement, which page is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the Company's compensation of its named executive officers is set forth on pages 13-19 of the Notice and Proxy Statement, which pages are incorporated herein by reference. Information regarding the Company's compensation of its directors is set forth on pages 2-4 and 26 of the Notice and Proxy Statement, which pages are incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and management is set forth on pages 8-12 of the Notice and Proxy Statement, which pages are incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements:
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* Incorporated by reference from the indicated pages of the Company's 1996 Annual Report to Shareholders.
2. Financial Statement Schedules:
None.
3. Exhibits:
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* Indicates management contract or compensatory plan, contract or arrangement.
Exhibit numbers may not correspond in all cases to those numbers in Item 601 of Regulation S-K because of special requirements applicable to EDGAR filers.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HEWLETT-PACKARD COMPANY
Date: January 28, 1997
By: /s/ D. CRAIG NORDLUND ----------------------------------- D. Craig Nordlund Associate General Counsel and Secretary
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature appears below constitutes and appoints D. Craig Nordlund and Ann O. Baskins, or either of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
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.
- ------------ * Indicates management contract or compensatory plan, contract or arrangement.


Item 1. Business:
(a) Weis Markets, Inc. is a Pennsylvania business corporation formed in 1924. The Company is engaged principally in the retail sale of food. There was no material change in the nature of the Company's business during fiscal 1996.
(b) The principal business activity which the Company has been engaged in for the last five fiscal years is the retail sale of food.
(c)(1)(i) The Company operates 129 retail food markets in Pennsylvania, 18 in Maryland, 1 in New Jersey, 3 in New York, 3 in Virginia, and 1 in West Virginia. The stores trade under the name Weis Markets, except for 18 Pennsylvania stores which trade as Mr. Z's Food Mart, 6 Pennsylvania stores which trade as King's Supermarkets, 2 Pennsylvania stores which trade as Erb's, 4 Pennsylvania stores which trade as Scot's Lo Cost, 3 Pennsylvania stores which trade as Save A Lot, and 1 Pennsylvania store which trades as Big Top Market. During the past fiscal year, 11 new stores were opened of which 6 were replacements for older units. One store was closed for financial reasons. The Company also owns and operates Weis Food Service, a restaurant and institutional supplier. On December 26, 1993, the Company purchased an 80% interest in SuperPetz, Inc. The investment was used to acquire 2 pet supply stores located in Dayton, Ohio. On August 6, 1994, SuperPetz acquired five pet supply stores in Georgia and South Carolina from Pet Owners Warehouse, Inc. On November 24, 1995 SuperPetz acquired seven stores located in Michigan and Ohio from Pet Food Warehouse, Inc. SuperPetz opened 8 additional stores during the year and as of December 28, 1996, operated 2 store in Alabama, 1 store in Georgia, 1 store in Indiana, 1 store in Kentucky, 1 store in Maryland, 7 stores in Michigan, 9 stores in Ohio, 7 stores in Pennsylvania, 8 stores in South Carolina, and 6 stores in Tennessee. The Company supplies its retail food stores from distribution centers in Sunbury, Northumberland, and Milton, Pennsylvania. The percentage of net sales contributed by each class of similar products for each of the five fiscal years ended December 28, 1996 was:
(c)(1)(vi) The Company has its own distribution center with warehouses located within a 15 mile radius of its corporate offices in Sunbury, Pennsylvania. The Company is required to use a significant amount of working capital to provide for the required amount of inventory to meet demand for its products through efficient use of buying power and effective utilization of space in the warehouse facilities.
WEIS MARKETS, INC.
(c)(1)(x) The business of the Company is highly competitive, and, in the areas served by it, the Company competes based on price and service with national retail food chains, local chains and many independent food stores. The following list includes, but is not limited to, the competitors of the Company: A&P, Acme Markets, Aldi, BiLo, Festival Foods, Giant Eagle, Giant Foods of Carlisle, Giant Foods of Landover, Insalaco, K-Mart, Riverside Markets, Sam's, Shop Rite, Super Rite, Super Valu, and Walmart. On the basis of sales volume, the Company believes it is the leading food retailer in the majority of the areas in which it operates.
(c)(1)(xiii) The Company has approximately 18,400 employees.
Item 2.

Item 2. Properties:
	The Company owns and operates 75 of its retail food stores and leases and operates 80 stores under operating leases for varying periods of time up to the year 2022. SuperPetz, leases all 43 of it's retail store locations. The Company owns all of its trade fixtures and equipment in its stores and several parcels of vacant land which are available as locations for possible future stores or other expansion.
	The Company owns and operates one warehouse in Sunbury, Pennsylvania totaling approximately 551,000 square feet, one in Milton, Pennsylvania of approximately 1,092,000 square feet, and one in Northumberland, Pennsylvania totaling approximately 121,000 square feet. The Company also operates an ice cream plant, meat processing plant and milk processing plant at its Sunbury location.
Item 3.

Item 3. Legal Proceedings:
	Neither the Company nor any subsidiary is presently a party to, nor is any of their property subject to, any material pending legal proceedings, other than routine litigation incidental to the business.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders:
	There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters:
	"Stock Prices and Dividend Information by Quarter" on page 16 and "Stock Traded" on the inside back cover of the 1996 Weis Markets, Inc. Annual Report to Shareholders are incorporated herein by reference.
WEIS MARKETS, INC.
	The approximate number of shareholders on December 28, 1996 is determined by the Company's transfer agent..
Item 6.

Item 6. Selected Financial Data:
	"Five-Year Review of Operations" on page 16 of the 1996 Weis Markets, Inc. Annual Report to Shareholders is incorporated herein by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
	"Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 7 of the 1996 Weis Markets, Inc. Annual Report to Shareholders is incorporated herein by reference.
Item 8.

Item 8. Financial Statements and Supplementary Data:
	The following information is incorporated herein by reference from the 1996 Weis Markets, Inc. Annual Report to Shareholders: The consolidated financial statements on pages 8 to 10, the notes to consolidated financial statements on pages 11 to 15, and the independent auditors' report on page 15.
Item 9.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure:
	None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant:
	"Election of Directors" on pages 4 and 5 of the Weis Markets, Inc. definitive proxy statement dated March 5, 1997 is incorporated herein by reference.
Item 11.

Item 11. Executive Compensation:
	"Board Compensation Committee Report on Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values," "Retirement Plans," "Pension Plan Table," "Shareholder Return Performance," "Comparative Five-Year Total Returns," and "Comparative Ten- Year Income Percentages," on pages 6 to 10 of the Weis Markets, Inc. definitive proxy statement dated March 5, 1997 are incorporated herein by reference.
WEIS MARKETS, INC.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management:
	"Outstanding Voting Securities and Voting Rights" on page 3 of the Weis Markets, Inc. definitive proxy statement dated March 5, 1997 is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions:
	"Compensation of Directors", "Compensation Committee Interlocks and Insider Participation", "Board Compensation Committee Report on Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values," "Retirement Plans," "Pension Plan Table," "Shareholder Return Performance," "Comparative Five-Year Total Returns," and "Comparative Ten-Year Income Percentages," on pages 5 to 10 of the Weis Markets, Inc., definitive proxy statement dated March 5, 1997 are incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
	The following information is incorporated herein by reference from the 1996 Weis Markets, Inc. Annual Report to Shareholders: The consolidated financial statements on pages 8 to 10, the notes to consolidated financial statements on pages 11 to 15, and the independent auditors' report on page 15.
(a) The financial statement schedules are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December 28, 1996.
WEIS MARKETS, INC.
(c) A listing of exhibits filed or incorporated by reference is as follows:
Exhibit No. 3-A Articles of Incorporation 3-B By-Laws 10-A Profit Sharing Plan 10-B Stock Bonus Plan 10-C Company Appreciation Plan 10-D Stock Option Plan 10-E Supplemental Employee Retirement Plan 10-F Executive Employment Contract 13 Annual Report to Shareholders for the Fiscal Year ended December 28, 1996 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors
	Exhibits 3-A and 3-B have been filed as exhibits under Part IV, Item 14(c) in Form 10-K for the fiscal year ended December 27, 1980 and are incorporated herein by reference. Exhibits 10-A through 10-F, have been filed as exhibits under Part IV, Item 14(c) in Form 10-K for the fiscal year ended December 31, 1994 and are incorporated herein by reference.
	The foregoing exhibits are available upon request from the Secretary of the Company at a fee of $10.00 per copy.
WEIS MARKETS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
				WEIS MARKETS, INC. 				(Registrant)
Date 				Robert F. Weis 				Chairman of the Board of Directors, 				and Treasurer and Director
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.
Date 			Robert F. Weis 				(Principal Financial Officer) 				Chairman of the Board of Directors, 				and Treasurer and Director
Date 		Norman S. Rich 				(Principal Executive Officer) 				President and Director
Date 				William R. Mills 				Vice President Finance, Secretary 				and Director
	EXHIBIT 13
WEIS MARKETS, INC.
Building for the Future (NOTE: The front page of the report is a collage of the fronts of various styles of Weis Markets stores.)
Growing with our Communities
Over the past two years, Weis Markets has built 20 new superstores and remodeled twenty-two others, revitalizing 26% of our total store base. Our new state-of- the-art superstores have expanded hours and offer customers more departments, including large in-store bakeries with bagel kitchens, expanded delicatessen sections with pizza kitchens, express checkout with made-to-order and prepared meals, produce departments with fresh-cut fruit/soup and salad bars, and made-to - -order Caesar salad stations. Weis Markets is dedicated to keeping pace with the changing needs of our customers and the growing communities in which they live. (NOTE: The inside cover has three pictures of the inside of a new store.)
Building for the Future Letter to our Shareholders
We are pleased to report that our sales for the 52-week period ending December 28, 1996 increased 6.5% to $1,753,246,000, compared to $1,646,435,000 in 1995. Our earnings in 1996 totaled $78,855,000 compared to $79,420,000 the previous year. This slight, 0.7% decline in our Company's earnings is primarily the result of the greater than anticipated expenses of our SuperPetz subsidiary due to its rapid expansion and resulting operational problems.
Earnings per share increased three cents to $1.87, compared to $1.84 in 1995. In August, the Board of Directors increased the dividend for the thirty-first consecutive year to $.23 or 9.5%. Depreciation and amortization charges increased from $33,168,000 to $38,136,000 due to our expansion program. Return on equity was 9.8 % and shareholders' equity increased to $818,527,000 compared to $791,562,000 in 1995.
For Weis Markets, 1996 was another year of intensifying competition. Throughout our marketing area, many of our competitors continued to open new stores at an accelerated pace. In addition, inflation remained low. We responded forcefully to these challenges with vigorous merchandising programs, aggressive advertising and a Frequent Shopper program which we expanded to two-thirds of our stores.
Most importantly, we increased our investment in the most ambitious expansion in our Company's history. We began this expansion in 1995. In 1996, we opened eleven superstores - six replacement units and five new stores - and completed the remodel of eleven others. We have been careful to tailor our superstores to the size of the markets in which we operate. For example, we opened a 41,000 square foot unit in Wellsboro, Pennsylvania, a small town in the most rural section of the state. This smaller format allows us to better serve our customers and prosper in smaller markets. By contrast, we opened a 65,000 square foot unit in a more populous suburb of Harrisburg. This new prototype has more of what our customers want today: greater convenience, more meal solutions, increased variety especially in the perishable departments and additional service departments.
At the end of 1996, Weis Markets operated 155 stores in six states: Pennsylvania, Maryland, New Jersey, New York, Virginia and West Virginia. Our retail space, which increased by 630,000 square feet in 1996, now exceeds 6 million square feet.
To keep up with higher volume stores, a growing store base and increasing sales, we have expanded our Milton Distribution Complex. In 1996, we expanded our refrigerated warehouse by 76,000 square feet. Overall, our warehouse complex now exceeds one million square feet. In addition, we upgraded our ice cream plant by installing a new rapid hardening system and freezer at a cost of more than $2.9 million. The upgrade allows us to sell our ice cream in rounded, premium label containers and improves the quality of an already excellent product.
When we purchased SuperPetz in the beginning of 1994, it operated two pet supply superstores in Dayton Ohio. Over the past three years, we have aggressively expanded this concept by adding 41 new stores. In 1996, its opening expenses and operational difficulties affected our Company's overall earnings. We have moved forcefully to correct these problems by consolidating SuperPetz accounting and financial functions to our corporate offices in Sunbury. Also, there have been substantial changes in SuperPetz' upper- and mid-level management. It is important to note that SuperPetz' sales continue to grow and we expect 1997 will show an improvement.
Over the next 18 months, our plans call for the construction of at least 11 superstores and the remodel of at least 20 others. Construction has already begun on a replacement unit in Pottsville, Pennsylvania, and a new superstore in Lancaster. We also plan to add a trailer salvage center to our Milton Distribution Center, which will allow us to process reusable shipping containers and clean in-bound trailers more efficiently.
Weis Markets will finance all construction and new equipment purchases from internal funds and will continue to remain debt free. Capital expenditures for 1996 totaled $95,289,000, part of an eighteen- month, $107-million capital budget. Over the next eighteen months, we plan to invest $120 million for new stores, remodels and enlargements, warehouse expansions, new technologies and equipment.
We expect 1997 to be a year of continued growth with increased sales and earnings. Our investments will help make our Company stronger in the years to come. But it is our employees, the 18,400 men and women of Weis Markets, who make us successful. With their help, we look forward to a strong year.
Robert F. Weis Norman S. Rich Chairman and Treasurer President (NOTE: There is a picture of Norman S. Rich and Robert F. Weis in the to the left of the page 2.) (NOTE: There is a picture of a store front in the to the center of the page 3.)
Capitalizing on opportunities for Profitable Growth
Weis Markets continues to set the standard for quality products and service. Our meat sections now feature "Certified Angus" beef as well as custom meat cutting by our own in-house butchers.
1996 marked the second year of the most ambitious expansion in Weis Markets' history. The Company opened eleven new superstores and finished remodeling another eleven existing stores. In addition, we completed the expansion of our perishable and frozen foods warehouse in Milton as well as the upgrade of the Company's ice cream plant. This revitalization positions Weis Markets well to preserve and expand our substantial market share in an increasingly competitive and diverse marketplace.
By offering more "meal solutions," we demonstrate our commitment to the Company's central mission - to meet the changing needs of our customers.
(NOTE: There is a picture of a customer holding a child and shopping in the Deli section of a new store on right of the page, and a fresh meat case at the bottom left of the page.)
In 1996 we completed the expansion of our perishable and frozen food warehouse in Milton as well as the upgrade of the Company's ice cream plant.
The Company continues to develop aggressive marketing strategies to address changes in our customers' evolving needs. With a rise in the number of two-income families and single-parent households, for example, customers are now looking for "meal solutions" - fast, quick and fairly priced - as well as traditional groceries. As a result, our expanded deli counters, prepared food sections, and heat-and-serve entrees are generating a growing percentage of our stores revenues and profits. In response to heightened consumer sensitivity to pricing, the Company has expanded Weis Club throughout most of our chain. This preferred shopper program offers customers savings on hundreds of items in our stores each week. Weis Club is free to join and simple to use, and customer acceptance has been strong.
(NOTE: There is a picture of the perishable warehouse loading dock in the middle, left of the page. There is a picture of an ice cream packaging machine at the bottom, left of the page.)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The Company achieved a record sales level in the 52-week period ended December 28, 1996. Sales for fiscal 1996 increased 6.5% to $1,753,246,000 compared with fiscal 1995 sales of $1,646,435,000. Sales for fiscal 1995 were 5.8% higher than sales of $1,556,663,000 generated during the 53-week period ended December 31,1994. The sales increase in the current year was generated from the existing store base, five new stores, six replacement stores, the completion of six major remodels/enlargements, five minor remodel projects and the growth of SuperPetz, our 80% owned pet supply stores. The full sales impact of the Company's aggressive store construction in 1996 was not fully realized, since the majority of the retail food store construction projects were completed during the fourth quarter of the year. In the fourth quarter of 1996, the Company completed the construction of four new stores, five replacement stores and three major remodel/expansions. As it has in recent years, food price inflation remained low, and based upon current economic information published, management does not anticipate any significant changes in 1997. The same store sales increase of 3.0% in fiscal 1996 continues the postive trend that began in 1994.
Gross profit as a percentage of sales remained fairly consistent at 25.8% in 1996, as compared to 25.6% in 1995, and 25.3% in 1994. As anticipated by the Company, higher gross profits generated by the SuperPetz stores caused a .2% rise in the total Company gross profit margin in 1996. In 1996, earnings were credited $336,000 for the LIFO adjustment, compared with charges of $1,899,000 in 1995, and $2,042,000 in 1994. The Company has continued to maintain a competitive pricing strategy in its marketing areas and plans to continue to expand its frequent shopper program, directing more product savings towards our loyal customers.
Operating, general and administrative expenses as a percentage of sales increased .2% to 20.6% compared with 20.4% in 1995 and 20.2% in 1994. The dollar increase in expenses during 1996, 1995 and 1994 was primarily a result of new store openings and acquisitions during those years. As a percentage of sales, operating expenses at SuperPetz run substantially higher than in the retail grocery stores and did account for .8% of the rate increase in 1996 and .4% in 1995. As in prior years, pre-opening expenses associated with the opening of the new and remodeled stores were expensed as incurred.
Interest and dividend income of $19,617,000, at 1.1% of sales in 1996, decreased significantly as compared to $21,383,000, at 1.3% of sales in 1995, and $21,607,000, at 1.4% of sales in 1994. The decline in interest and dividend income is mainly attributable to the reduction in the Company's marketable security holdings. These reductions are primarily due to the agressive expansion plans undertaken in the last three years, coupled with the stock repurchase program, and the increased dividend payments. Management anticipates a further reduction in interest and dividend income as it continues with its aggressive expansion program. The investment portfolio consists of Pennsylvania tax-free state and municipal bonds, U.S. Treasury securities, equity securities and other short-term investments. It is management's intent to maintain a liquid portfolio to take advantage of acquisition and other investment opportunities; therefore all securities are classified as available-for-sale on the consolidated balance sheets.
Other income is primarily generated from rental income, coupon handling fees, cardboard salvage and gains on the sales of fixed assets. Other income decreased $3,671,000 in 1996 compared to 1995. As a percentage of sales, other income has decreased to .6% in 1996, compared to .9% in 1995 and 1.0% in 1994.
The effective tax rate was 34.7% in 1996, 34.8% in 1995, and 34.9% in 1994. The Commonwealth of Pennsylvania, where the majority of the Company's business is conducted, reduced its corporate income tax rate from 11.99% in 1994, to 9.99% in 1995.
Net Income in 1996 of $78,855,000 declined .7% compared to 1995 earnings of $79,420,000. The rapid expansion of SuperPetz and the resulting operational problems associated with that growth, negatively affected the Company's bottom line results. The pre-tax loss at SuperPetz in 1997 amounted to $5,349,000. Managment has moved forcefully to correct the problems at SuperPetz by making a number of key changes at both senior and mid-level management positions. The SuperPetz accounting and financial functions have been consolidated into the financial operations in Sunbury, PA. The turnaround of this subsidiary is expected in 1997. Management is pleased with the peformance of its core business operations, the retail grocery stores, and plans to continue its aggressive construction and remodeling in 1997.
During 1996, the Company opened eleven grocery superstores and remodeled eleven others. SuperPetz opened eight new units in 1996. This total includes the aquisition of one unit. As of the end of the fiscal year, Weis Markets, Inc. was operating 155 retail food stores, 43 SuperPetz pet supply stores and Weis Food Service, a restaurant and institutional supplier. The Company currently operates supermarkets in Pennsylvania, Maryland, New Jersey, New York, Virginia and West Virginia. SuperPetz operates stores in Alabama, Georgia, Indiana, Kentucky, Maryland, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina and Tennessee.
Liquidity and Capital Resources
Net cash provided by operating activities was $103,706,000, compared to $97,013,000 in 1995, and $119,457,000 in 1994. Inventories increased $27,620,000 in 1996, primarily due to the addition of new stores and the expansion of several existing stores. Working capital decreased 5.7% in 1996, 2.8% in 1995 and 1.5% in 1994.
Net cash used in investing activities was $51,848,000, compared to $37,686,000 in 1995, and $84,210,000 in 1994. Property and equipment purchases during fiscal 1996 totaled $95,289,000, compared to $72,759,000 in 1995, and $49,421,000 in 1994. During the current year, proceeds from the maturity of marketable securites totaling $126,571,000, were used to purchase $81,550,000 in new securities and towards the purchase of property and equipment. Management anticipates the continued use of its cash for acquisitions, the construction of new superstores, the expansion and remodeling of existing stores, the securing of sites for future expansion, and the upgrading of its processing and distribution facilities.
Net cash used in financing activities was $52,265,000, compared to $60,053,000 in 1995, and $40,302,000 in 1994. Treasury stock purchases amounted to $15,066,000 in 1996, compared to $25,554,000 in 1995, and $8,101,000 in 1994. The Board of Directors' 1996 resolution authorizing the purchase of treasury stock has a remaining balance of 934,434 shares. Total cash dividend payments on common stock amounted to $.88 per share in 1996, compared to $.80 in 1995, and $.74 in 1994.
The Company funded its 1996 working capital requirements through internally generated cash flows from operations, as it has done in prior years. The Company's current development plans will require an investment of approximately $120,000,000 during the next eighteen months. The Company continues to actively seek acquisitions and investment opportunities to enhance future performance. The financial and liquidity position of the Company, combined with its historical insurance loss experience rates, has allowed it to carry higher deductible and retention levels on its employee and business insurance coverages. The Company plans to maintain these higher exposure levels, thus benefiting from reduced premium expenses. In view of the Company's significant liquid assets, no existing debt financing, and its ability to generate working capital internally, it is not expected that any type of external financing will be needed.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies The following is a summary of the significant accounting policies utilized in preparing the Company's consolidated financial statements:
(a) Description of Business Weis Markets, Inc. is a Pennsylvania business corporation formed in 1924. The Company is engaged principally in the retail sale of food in Pennsylvania and surrounding states. The Company is also engaged in the sale of pet supplies through its 80% owned subsidiary, SuperPetz, Inc. There was no material change in the nature of the Company's business during fiscal 1996.
(b) Definition of Fiscal Year The Company's fiscal year ends on the last Saturday in December. As a result, fiscal 1996, 1995 and 1994 comprised 52 weeks, 52 weeks and 53 weeks, respectively.
(c) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(d) Intangible Assets Intangible assets are generally amortized over periods ranging from 3 to 40 years. A portion of the excess of cost of investments over net assets acquired prior to November 1, 1970, ($2,322,000) is not being amortized because, in the opinion of management, there has been no decrease in value.
(e) Inventories Inventories are valued at the lower of cost or market, using both the last-in, first-out (LIFO) and average cost methods.
(f) Marketable Securities Marketable securities consist of Pennsylvania tax-free state and municipal bonds, U.S. Treasury securities, equity securities, and other short-term investments. By policy, the Company invests primarily in high-grade marketable securities. The Company classifies all of its marketable securities as available-for-sale.
Available-for-sale securities are recorded at fair value as determined by quoted market price. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders' equity until realized. A decline in the market value below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities.
(g) Property and Equipment Property and equipment are carried at cost. Depreciation is provided on the cost of buildings and improvements and equipment principally using accelerated methods. Leasehold improvements are amortized over the terms of the leases or the useful lives of the assets, whichever is shorter.
Maintenance and repairs are expensed and renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the assets and accumulated depreciation are removed from the respective accounts and any profit or loss on the disposition is credited or charged to income.
(h) Insurance The Company maintains self-insurance programs for the majority of its employee health care benefits and workers compensation claims. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. The Company is liable for employee health claims up to a life-time aggregate of $1,000,000 per member and for workers compensation claims up to $1,000,000 per claim. Property and casualty insurance coverages are maintained with outside carriers at deductable or retention levels ranging from $0 to $250,000.
(i) Income Taxes Under the asset and liability method of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
(j) Earnings Per Share The earnings per share computations are based upon the weighted average number of common shares and common share equivalents (stock options) outstanding during the year.
(k) Pre-Opening Costs Pre-opening costs of retail stores are charged against earnings as incurred.
(l) New Accounting Standards Effective December 31, 1996, the Company adopted the Financial Accounting Standard Board's Statement of Financial Accounting Standards Number 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Adoption of this standard had no effect on the Company.
(m) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(n) Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the current year presentation.
(2) Income Taxes The provision for income taxes consists of:
The following is a reconciliation between the applicable income tax expense and the amount of income taxes which would have been provided at the Federal statutory rate. The statutory rate was 35% in 1996, 1995, and 1994.
Cash paid for income taxes was $41,772,000, $41,688,000 and $39,907,000 in 1996, 1995 and 1994, respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 28, 1996, and December 30, 1995, are presented below:
(3) Inventories Merchandise inventories, as of December 28, 1996 and December 30, 1995, were valued as follows:
If all inventories were valued on the average cost method, which approximates current cost, total inventories would have been $44,000,000 and $44,336,000 higher than as reported on the above methods as of December 28, 1996, and December 30, 1995, respectively.
Although management believes the use of the LIFO method for valuing certain inventories (as set forth above) represents the most appropriate matching of costs and revenues in the Company's circumstances, the following summary of net income and per share amounts based on the use of the average cost method for valuing all inventories is presented for comparative purposes.
(4) Property and Equipment Property and equipment as of December 28, 1996, and December 30, 1995, consisted of:
(5) Marketable Securities Marketable securities as of December 28, 1996, and December 30, 1995, consisted of:
Maturities of marketable securities classified as available-for-sale at December 28, 1996, were as follows:
(6) Retirement Plans The Company has a noncontributory defined benefit pension plan and a contributory retirement savings plan (401(k)) covering substantially all full-time employees, a noncontributory profit-sharing plan covering eligible employees, and a supplemental retirement plan covering certain officers of the Company. An eligible employee as defined in the Profit Sharing Plan includes salaried employees, store management, and administrative support personnel. The Company's policy is to fund pension, 401(k) and profit-sharing cost accrued, but not supplemental retirement costs. Contributions to the Defined benefit pension plan are based on guidelines of the Employee Retirement Income Security Act of 1974, whereas contributions to the profit-sharing plan and the 401(k) plan are made at the sole discretion of the Company.
The Company's supplemental retirement plan provides for the payment of specific amounts of annual retirement benefits to the officers or to their beneficiaries over an actuarially computed normal life expectancy. The actuarial present value of accumulated benefits amounted to $5,808,000 and $5,912,000 at December 28, 1996, and December 30, 1995, respectively. Plan costs are based upon the deferral of retirement rather than upon future service and all benefits are fully vested.
Retirement plan costs amounted to:
The net periodic defined benefit pension expense (credit) is computed as follows:
The funded status of the Company's pension plan at September 30, 1996, and September 30, 1995 (the measurement dates) is as follows:
On February 1, 1994, the Board of Directors of the Company voted to freeze the Pension Plan. Effective March 15, 1994, the Plan was frozen and all participants became fully vested. The Company recognized a curtailment loss of $1,794,000 in 1994 as a result of this action.
Plan assets consist primarily of common stocks, bonds, and U.S. government obligations. The assumed long-term rate of return on pension plan assets used to determine pension costs was 8.5% for fiscal 1996, 1995 and 1994. Pension benefit obligations were determined using an assumed discount rate for fiscal 1996 and 1995 of 7.0% and 7.5%, respectively.
The Company has no other post-retirement benefit plans.
(7) Incentive Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. The effect of applying Statement No. 123's fair value method to the Company's stock-based awards results in proforma net income and earnings per share that are not materially different from amounts reported.
(a) Stock Option Plan The Company has an incentive stock option plan for officers and other key employees under which 287,500 shares of common stock are reserved for issuance at December 28, 1996. Under the terms of the plan, option prices are 100% of the "fair market value" of the shares on the date granted. Options granted are immediately exercisable and expire ten years after date of grant.
Changes during the three years ended December 28, 1996, in options outstanding under the plan were as follows:
(b) Company Appreciation Plan Under a Company Appreciation Plan, officers and other employees are awarded rights equivalent to shares of Company common stock. At the maturity date, usually one year after the date of award, the value of any appreciation from the original date of issue is paid in cash to the participants. 	During 1996, 1995, and 1994, 28,200, 26,050, and 24,500 rights, respectively, were awarded under the program. In 1996, 1995, and 1994, $96,000, $64,000, and $0, respectively, were charged to earnings.
(8) Lease Commitments At December 28, 1996, the Company leased approximately 61% of its facilities under operating leases which expire at various dates up to 2022. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus contingent rentals as a percentage of annual sales, and a number of leases require the Company to pay for all or a portion of insurance, real estate taxes, water and sewer rentals and repairs, the cost of which is charged to the related expense category rather than being accounted for as rent expense. Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years.
Rent expense on all leases consisted of:
The following is a schedule by year of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 28, 1996.
As of December 28, 1996, the future minimum rentals to be received under noncancelable leases and subleases were $11,730,000.
(9) Fair Value Information The carrying amounts for cash, trade receivables, and trade payables approximate fair value because of the short maturities of these instruments. The fair values of the Company's marketable securities are based on quoted market prices (See note 5).
(10) Acquisitions On December 31, 1995, SuperPetz acquired one store located in Michigan from Pet Food Warehouse, Inc. On November 24, 1995, SuperPetz acquired seven stores located in Michigan and Ohio from Pet Food Warehouse, Inc. On August 6, 1994, SuperPetz acquired five pet supply stores located in Georgia and South Carolina from Pet Owners Warehouse, Inc. On August 3, 1994, the Company acquired King's Supermarkets, Inc., of Hamburg, Pennsylvania. King's operated six retail stores. These cash-only transactions were made from internally generated funds and were accounted for by the purchase method. Goodwill arising from these transactions, which was not material, is being amortized over a 15 year period on a straight-line basis.
(12) Contingencies The Company is involved in various legal actions arising out of the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ________________________________________________________________________________
Report of Independent Auditors
The Board of Directors Weis Markets, Inc.
We have audited the accompanying consolidated balance sheet of Weis Markets, Inc. and subsidiaries as of December 28, 1996, and the consolidated statements of income, shareholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Weis Markets, Inc. and subsidiaries for each of the two years in the period ended December 30, 1995, were audited by other auditors whose report, dated January 26, 1996, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Weis Markets, Inc. and subsidiaries at December 28, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Harrisburg, PA Ernst & Young LLP January 29, 1997
Directors Robert F. Weis Chairman and Treasurer
Norman S. Rich President
William R. Mills Vice President Finance and Secretary
Jonathan H. Weis Vice President Property Management and Development
Michael M. Apfelbaum Partner, Apfelbaum, Apfelbaum & Apfelbaum Attorneys at Law
Joseph I. Goldstein Partner, Crowell & Moring Attorneys at Law
Richard E. Shulman President, Industry Systems Development Corporation
(NOTE: There are pictures of each of the Directors above their names and titles.)
Officers
Robert F. Weis Chairman and Treasurer
Norman S. Rich President
William R. Mills Vice President Finance and Secretary
Alan L. Barrick Vice President Engineering and Manufacturing
Stephen J. Bowers Vice President Weis Food Service
Walter B. Bruce Vice President Private Label
Harold G. Graber Vice President Real Estate
Leslie H. Knox Vice President Merchandising
Richard L. Kunkle Vice President Pharmacy
Edward W. Rakoskie Vice President Store Operations
Jonathan H. Weis Vice President Property Management and Development
Annual Meeting The annual meeting of the shareholders of the Company will be held at 10 a.m. on Tuesday, April 1, 1997, at the Corporate offices, 1000 South Second Street, Sunbury, PA 17801.
Registrar and Transfer Agent American Stock Transfer & Trust Company 40 Wall Street, 46th floor New York, NY 10005 (718) 921-8210
Auditors Ernst & Young LLP 300 Locust Court 212 Locust Street Harrisburg, PA 17101
Stock Traded New York Stock Exchange
In Memoriam
In November, Micheal C. Rheam passed away. Mr. Rheam had been Special Projects Coordinator after his retirment as Vice President in 1992. During his forty-one years at Weis Markets, he served as Vice President of Operations and Secretary, and as a member of the Board of Directors. He helped in a major way to build the organization into one of the strongest and most profitable supermarket companies in the country. He will be remembered as a strong personality, wise counselor, and developer of people. We express our thanks for his many years of service and devotion to our Company. We shall miss him.
(NOTE: There is picture of Micheal C. Rheam.)
	EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report on (Form 10-K) of Weis Markets, Inc. of our report dated January 29, 1997 included in the 1996 Annual Report.to Shareholders of Weis Markets, Inc.
Ernst & Young LLP Harrisburg, Pennsylvania March 14, 1997