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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2002

Commission File No. 0-6080

DELHAIZE AMERICA, INC.

Registrant’s telephone number, including area code:       704-633-8250

Securities registered pursuant to Section 12(b) of the Act:    None
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 for the past 90 days. Yes [X] No [   ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes [X] No [   ]

     All of the registrant’s voting and non-voting common stock was held by affiliates on June 29, 2002.

     Outstanding shares of common stock of the Registrant as of March 27, 2003.

     This registrant meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

     Exhibit index is located on sequential page 78 hereof.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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DELHAIZE AMERICA, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 28, 2002

TABLE OF CONTENTS

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PART I

Item 1. Business.

Delhaize America, Inc., a wholly-owned subsidiary of Delhaize Group, engages in one line of business, the operation of retail food supermarkets in the eastern United States. The Company was incorporated in North Carolina in 1957 and maintains its corporate headquarters in Salisbury, North Carolina . Delhaize America is a holding company having three subsidiary operating companies that do business primarily under the banners Food Lion, Hannaford and Kash n’ Karry.

When we use the terms “Delhaize America,” the “Company,” “we,” “us” and “our,” we mean Delhaize America, Inc., a North Carolina corporation, and its consolidated subsidiaries.

Delhaize America makes available free of charge, on or through the SEC documents section of Delhaize Group’s web site (http://www.delhaizegroup.com/en/in secdocs.asp), the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

The Company’s stores sell a wide variety of groceries, produce, meats, dairy products, seafood, frozen food, deli-bakery and non-food items such as health and beauty care, prescriptions, and other household and personal products. The Company offers nationally and regionally advertised brand name merchandise as well as products manufactured and packaged for the Company under the private labels of “Food Lion,” “Hannaford” and “Kash n’ Karry.” Sales of private label products represented 17%, 19% and 16% of Food Lion’s, Hannaford’s and Kash n’ Karry’s respective sales in fiscal 2002.

The products sold by the Company are purchased through buying departments in Salisbury, North Carolina and Scarborough, Maine. The centralization of the buying function allows the management of the Company to establish long-term relationships with many vendors providing various alternatives for sources of product supply.

The business in which the Company is engaged is highly competitive and characterized by low profit margins. The Company competes with national, regional and local supermarket chains, supercenters, discount food stores, single unit stores, convenience stores, warehouse clubs and drug stores. The Company will continue to develop and evaluate new retailing strategies that will respond to its customers’ needs. Seasonal changes have no material effect on the operation of the Company’s supermarkets.

As of December 28, 2002, 1,485 supermarkets were in operation as follows:

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As of March 26, 2003, the Company had opened three supermarkets since December 28, 2002, relocated one supermarket, closed 43 supermarkets and signed leases for 20 supermarkets, which are expected to open in future years.

Warehousing and distribution facilities, including the transportation fleet, are owned and operated by the Company and are located in Plant City, Florida; South Portland and Winthrop, Maine; Salisbury, Butner and Dunn, North Carolina; Schodack, New York; Greencastle, Pennsylvania; Elloree, South Carolina; Clinton, Tennessee; and Disputanta, Virginia.

As of December 28, 2002, the Company employed 42,268 full-time and 67,554 part-time employees.

The following table shows the number of stores opened, closed and relocated, and the number of stores open at the end of each year, for the past three fiscal years.

(a)  Includes 106 stores acquired in connection with the acquisition of Hannaford Bros.

(b)  Includes 13 Save n’ Pack store closings

On April 25, 2001, the Company and Delhaize Group completed a share exchange, whereby each outstanding share of the Company’s Class A and Class B common stock not already owned by Delhaize Group or its wholly-owned subsidiary, Delhaize The Lion America, Inc. (“Detla”), was exchanged for 0.40 Delhaize Group American Depositary Shares (“ADSs”), which are listed on the New York Stock Exchange, or, at the option of a Delhaize America shareholder, 0.40 Delhaize Group ordinary shares, which are listed on Euronext Brussels. Each Delhaize Group ADS represents one ordinary share of Delhaize Group. The Delhaize Group share exchange was structured to be tax-free to our shareholders for U.S. federal income tax purposes. The Delhaize Group share exchange resulted from an agreement between Delhaize Group and a four-person special committee of independent directors of our Company. The Delhaize Group share exchange was unanimously approved by our board of directors and the board of directors of Delhaize Group, unanimously recommended to our board of directors by the special committee of independent directors, and approved by our shareholders and the shareholders of Delhaize Group. Until April 25, 2001, shares of Delhaize America common stock were listed on the New York Stock Exchange.

RECENT DEVELOPMENTS

We maintain a revolving credit facility with a syndicate of commercial banks providing $350.0 million in committed lines of credit. In December 2002, the credit facility was amended and the line of credit was reduced from $500.0 million to $350.0 million. The credit facility is secured by certain inventory of the Delhaize America operating companies. The $350.0 million facility expires in July 2005 and contains affirmative and negative covenants. Negative covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, and an asset coverage ratio as defined. We must be in compliance with these covenants in order to have access to the credit facility. As of December 28, 2002, we were in compliance with all covenants contained in the credit facility. A deteriorating economic or operating environment can subject us to a risk of continuing compliance with the covenants. We had no outstanding borrowings under this facility as of December 28, 2002. This facility is utilized to provide short-term capital to meet liquidity needs as necessary.

During the first quarter of 2003, the Company announced plans to close 42 of its stores. These under-performing Food Lion and Kash n’ Karry stores were closed in the first quarter of fiscal 2003. Food Lion is implementing additional cost saving initiatives by streamlining and optimizing the functioning of its support and management structure to provide a more productive sales base. These initiatives involve a reduction in work force affecting approximately 400 associates. Management expects the 42 store closings and additional cost savings initiatives will have a positive impact on the ongoing operational results of the Company and expects pre-tax expenses in the range of $40 to $45 million to be recorded in the first quarter of 2003 in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 146. In addition, in accordance with the provisions of SFAS No. 144, the portion of these costs associated with closing the 42 under performing stores, as well as related operating activity for these stores, will be appropriately accounted for as “discontinued operations” in the Company’s future filings.

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FORWARD-LOOKING STATEMENTS

This document includes or incorporates by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995 about Delhaize America that are subject to risks and uncertainties. All statements included in this document, other than statements of historical fact, which address activities, events or developments that Delhaize America expects or anticipates will or may occur in the future, including, without limitation, statements regarding expansion and growth of its business, anticipated store openings and renovations, future capital expenditures, projected revenue growth or synergies resulting from the share exchange transaction with Delhaize Group, and business strategy, are forward-looking statements. These forward-looking statements generally can be identified as statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or other similar words or phrases.

Item 2. Properties.

The Company operated 1,228 supermarkets primarily under the Food Lion banner at the end of fiscal 2002 in the mid-Atlantic and southeastern regions of the United States. Food Lion stores average approximately 35,200 square feet. The current Food Lion store prototypes are approximately 28,800, 33,800 and 38,000 square feet.

At the end of fiscal 2002, the Company operated 119 Hannaford Bros. Co. (“Hannaford”) supermarkets, 93 of which are combination stores. Hannaford operates under the Hannaford and Shop`n Save banners in Maine, New Hampshire, Vermont, upstate New York and Massachusetts. Combination stores consist of traditional all-department supermarkets, together with pharmacies, other services and expanded general merchandise under one roof. Hannaford stores average approximately 49,000 square feet. The current Hannaford store prototypes are approximately 35,000, 47,000 and 55,000 square feet.

At the end of fiscal 2002, the Company operated 138 Kash n’ Karry supermarkets in central Florida. Kash n’ Karry stores average approximately 40,700 square feet. The current Kash n’ Karry store prototypes are approximately 38,000 and 46,000 square feet.

All of the Company’s supermarkets are self-service stores which have off-street parking facilities. With the exception of operating 101 owned supermarkets, the Company occupies its various supermarket premises under lease agreements providing for initial terms of up to 30 years, with renewal options generally ranging from five to 20 years.

The following table identifies the location and square footage of the 11 distribution centers and office space operated by the Company as of December 28, 2002, all of which are owned by the Company.

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Item 3. Legal Proceedings.

Delhaize America is from time to time involved in legal actions in the ordinary course of its business. We are not aware of any pending or threatened litigation, arbitration or administrative proceedings involving claims or amounts that, individually or in the aggregate, we believe are likely to materially harm our business, financial condition or future results of operations. Any litigation, however, involves risk and potentially significant litigation costs, and therefore we cannot give any assurance that any litigation which may arise in the future will not materially harm our business, financial condition or future results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

Omitted pursuant to General Instruction I(2) of Form 10-K.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Delhaize Group, together with its wholly-owned subsidiary, Detla, owns all of the outstanding shares of our common stock. As a result, there is no established public market for our common stock.

Dividends Declared Per Share of Common Stock

Item 6. Selected Financial Data.

Omitted pursuant to General Instruction I(2) of Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes that appear elsewhere in this Form 10-K. All pro forma information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section is unaudited and assumes our acquisition of Hannaford was consummated at the beginning of 2000. The pro forma information is not necessarily indicative of our future consolidated results of operations and should be read in conjunction with our historical consolidated financial statements and related notes thereto appearing elsewhere in this filing.

CRITICAL ACCOUNTING POLICIES

We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial position and we apply those accounting policies in a consistent manner. The significant accounting policies are summarized in Note 1 to the consolidated financial statements.

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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants, lawyers and actuaries to assist in our evaluation. We believe the following accounting policies are the most critical because they involve the most significant judgments and estimates used in preparation of our consolidated financial statements.

Inventories - Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first out (LIFO) method comprised approximately 80% of inventories in 2002 and 2001. Meat, produce, deli-bakery inventories are valued on the first-in, first-out (FIFO) method. We evaluate inventory shrinkage throughout the year based on actual physical counts in our stores and distribution centers and record adjustments based on the results of these counts to provide for the estimated shrinkage as of the balance sheet date.

Store closing reserves - We provide for closed store liabilities relating to the estimated post-closing lease liabilities and related other exit costs associated with store closing commitments. The closed store liabilities are usually paid over the lease terms associated with the closed stores having remaining terms ranging from one to 20 years. We estimate the lease liabilities net of sublease income, using a discount rate based on the current treasury note rates to calculate the present value of the remaining rent payments on closed stores. Other exit costs include estimated real estate taxes, common area maintenance, insurance and utility costs to be incurred after the store closes over the remaining lease term. Store closings are generally completed within one year after the decision to close. Adjustments to closed store liabilities and other exit costs primarily relate to changes in subtenants and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Any excess store closing liability remaining upon settlement of the obligation is reversed to income in the period that such settlement is determined. Inventory write-downs, if any, in connection with store closings, are classified in cost of sales. Costs to transfer inventory and equipment from closed stores are expensed as incurred. Severance costs are rarely incurred in connection with store closings. Store closing liabilities are reviewed quarterly to ensure that any accrued amounts appropriately reflect the outstanding commitments and that any additional costs are accrued or amounts that are no longer needed for their originally intended purpose are reversed to income.

Asset Impairment - During 2002, we adopted Statement of Financial Accounting Standards, (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for financial statements issued for years beginning after December 15, 2001. In accordance with SFAS No. 144, we periodically evaluate the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. We monitor the carrying value of our retail stores, our lowest level asset group for which identifiable cash flows are independent of other groups of assets and liabilities for potential impairment based on projected undiscounted cash flows. If impairment is identified for retail stores, we compare the asset’s estimated fair market value to its current carrying value and record provisions for impairment as appropriate. With respect to owned property and equipment associated with closed stores, the value of the property and equipment is adjusted to reflect recoverable values based on our previous experience in disposing of similar assets and current economic conditions.

Goodwill and other intangible assets - We adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” on December 30, 2001. In fiscal 2002 as a result of our adoption of SFAS No. 142, we recorded an impairment charge of $288 million before tax as a cumulative effect of change in accounting principle. We have selected the fourth quarter of each year as the date for our annual impairment assessment date and recorded an additional $26.9 million impairment during the fourth quarter of 2002. See SFAS No. 142 discussion in the “Recently Adopted Accounting Standards” section of this Management’s Discussion and Analysis.

Self insurance - We are self-insured for workers’ compensation, general liability and vehicle accident claims. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Maximum self-insured retention, including defense costs per occurrence, ranges from $0.5 million to $1.0 million per individual claim for workers’ compensation and $5.0 million for automobile liability and general liability. We are insured for covered costs, including defense costs, in excess of these retentions. Significant assumptions used in the development of the actuarial estimates include reliance on our historical claims data including average monthly claims and average lag time between incurrence and payment.

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Overview

On April 25, 2001, the Company and Delhaize Group completed a share exchange, whereby each outstanding share of the Company’s Class A and Class B common stock not already owned by Delhaize Group or its wholly-owned subsidiary, Delhaize The Lion America, Inc. (“Detla”), was exchanged for 0.40 Delhaize Group American Depositary Shares (“ADSs”), which are listed on the New York Stock Exchange, or, at the option of a Delhaize America shareholder, 0.40 Delhaize Group ordinary shares, which are listed on Euronext Brussels. We became a wholly-owned subsidiary of Delhaize Group as a result of the Delhaize Group share exchange. The Delhaize Group share exchange was accounted for using the purchase method of accounting. Effective as of the end of our April 28, 2001 fiscal period, we recorded adjustments to reflect the accounting basis of Delhaize Group in our financial statements (see Note 2). In connection with the recording of Delhaize Group’s accounting basis, a new entity has been deemed to be created for financial reporting purposes. Accordingly, the periods prior to the date of the Delhaize Group share exchange relate to the “predecessor company” and the periods subsequent to the date of the Delhaize Group share exchange relate to the “successor company.” The results of the predecessor company and the successor company have been combined for the 2001 fiscal year ended December 29, 2001, since separate discussions of the 17 weeks ended April 28, 2001 and the 35 week period between April 29, 2001 and December 29, 2001 are not meaningful in terms of their operating results or comparisons to the prior period. The following table sets forth the consolidated statements of income (loss) for the fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000. The unaudited pro forma income statement for the 52 weeks ended December 30, 2000 includes adjustments to reflect the results of Hannaford as if Hannaford had been purchased on January 1, 2000.

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We reported net sales and other revenues of $15.0 billion in fiscal 2002, $14.9 billion in fiscal 2001 and $12.7 billion in fiscal 2000 ($14.3 billion on a pro forma basis). Net (loss) income was ($32.4) million in fiscal 2002, $160.8 million in fiscal 2001 and $155.5 million in fiscal 2000 ($80.3 million on a pro forma basis). Income before cumulative effect of change in accounting principle, merger costs, store closing and asset impairment provisions was $270.1 million in fiscal 2002, compared to $194.5 million and $222.7 million in fiscal 2001 and 2000, respectively.

On July 31, 2000, we completed our acquisition of Hannaford. The financial information discussed in the remaining discussion and analysis of our financial condition and results of operations includes the results of Hannaford’s operations for the 22 weeks beginning July 31, 2000 and ending December 30, 2000 and for the fiscal years ended December 29, 2001 and December 28, 2002.

During fiscal 2002, we opened 41 new stores, closed seven existing stores and relocated eight stores for a net increase of 26 stores. At the end of fiscal 2002, we operated 1,485 stores, compared to 1,459 stores at the end of fiscal 2001 and 1,420 stores at the end of fiscal 2000. We remodeled 127 stores in fiscal 2002, compared to 145 stores in fiscal 2001 and 173 stores in fiscal 2000.

Results of Operations

The following table sets forth, for the periods indicated, the percentage at which the listed amounts bear to net sales and other revenues:

Adjusted EBITDA was $1,197.4 million in fiscal 2002, compared to $1,248.6 million in fiscal 2001 and $956.5 million in fiscal 2000 representing an annual decrease of 4.1% in fiscal 2002 and an annual increase of 30.5% in fiscal 2001. Our management and industry analysts generally consider Adjusted EBITDA to be a measurement of the financial performance of our company that provides a relevant basis for comparison among companies. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as a substitute for net income as a measure of performance, or for cash flow as a measure of liquidity. Investors should note that our calculation of Adjusted EBITDA might differ from similarly titled measures for other companies. The following table sets forth, for the periods indicated, a calculation of our Adjusted EBITDA:

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*Successor and Predecessor periods combined

Sales

We record revenues primarily from the sales of products in over 1,480 retail stores. Net sales and other revenues were $15.0 billion for the year ended December 28, 2002 compared to $14.9 billion for the year ended December 29, 2001, an increase of 0.87%. During fiscal 2002, we had a net increase of 26 new store openings and we remodeled 127 stores. Comparable store sales decreased 1.0% during 2002 over the comparable period in 2001. While sales at Hannaford evolved favorably during 2002, Food Lion and Kash n’ Karry posted weaker sales. Sales performance during 2002 at these two banners has been negatively impacted by soft economic conditions and heightened competitive activity in the company’s major operating areas. Most of our stores are located in the Southeast region of the United States, which is currently experiencing corporate layoffs, high unemployment, and generally depressed economic conditions.

We continue to see an increase in competitive activity as a greater number of retailers battle for the consumers' dollars. During 2002, we experienced 67 net competitive openings in our operating area — increasing the amount of grocery square footage available to consumers. Most major supermarket retailers continued to engage in promotional activity offering deep discounts on selected items. We maintained our commitment to a consistent low price offering and planned promotional activity through the first three quarters of 2002; however, we increased promotional activity during the fourth quarter.

To protect our future profitability and to strengthen our competitive position through our low price offering in the current challenging retail environment, 41 under performing Food Lion stores and one Kash n’ Karry store were closed in the first quarter of fiscal 2003. Food Lion is implementing additional cost saving initiatives by streamlining and optimizing the functioning of its support and management structure. These initiatives involve a reduction in work force affecting approximately 400 associates.

Net sales and other revenues were $14.9 billion in fiscal 2001, compared to $12.7 billion in fiscal 2000 (or $14.3 billion on a pro forma basis), resulting in an annual increase of 17.7% (or 4.3% on a pro forma basis). The increase in sales relates primarily to the 106 stores added in connection with the Hannaford acquisition at July 31, 2000. During fiscal 2001, we had a net increase of 39 new store openings and we remodeled 145 stores. Comparable store sales increased 1.4% during 2001 over the comparable period in 2000.

At the end of fiscal 2002, we operated 1,485 stores, which consisted of 1,228 stores operating under the Food Lion banner, 119 stores operating under the Hannaford and Shop n’ Save banners and 138 stores operating under the Kash n’ Karry banner. During 2002 we opened 41 new

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stores, including 32 Food Lion stores, five Hannaford stores and four Kash n’ Karry stores, increasing retail square footage by approximately 2.5%. In addition, we also remodeled 127 stores in 2002 including 105 Food Lion stores, five Hannaford stores and 17 Kash n’ Karry stores. Retail store square footage totaled 54.7 million square feet at December 28, 2002. During 2002 we relocated seven Food Lion stores and one Kash n’ Karry store, and closed four Food Lion stores and three Kash n’ Karry stores, resulting in a net increase of 26 stores.

At the end of fiscal 2001, we operated 1,459 stores, which consisted of 1,207 stores operating under the Food Lion banner, 114 stores operating under the Hannaford and Shop n’ Save banners and 138 stores operating under the Kash n’ Karry banner. During 2001 we opened 47 new stores, including 37 Food Lion stores, six Hannaford stores and four Kash n’ Karry stores, increasing retail square footage by approximately 3.8%. In addition, we also remodeled 145 stores in 2001 including 124 Food Lion stores, ten Hannaford stores and 11 Kash n’ Karry stores. Retail store square footage totaled 53.3 million square feet at December 29, 2001. During 2001 we relocated four Food Lion stores and one Kash n’ Karry store, and closed two Food Lion stores and one Kash n’ Karry store.

We continue to deliver low prices through our MVP and PCC customer loyalty card programs at Food Lion and Kash n’ Karry stores. These programs provide customers with additional discounts on a selection of featured items. At the end of 2002, the MVP customer loyalty card program accounted for approximately 76% of sales dollars and 59% of all transactions at Food Lion stores. More than 8.7 million households used an MVP card within the last quarter of fiscal 2002. At the end of 2002, the PCC loyalty card program accounted for approximately 55% of sales dollars and 46% of all transactions at Kash n’ Karry stores. Kash n’ Karry has currently issued more than 1.3 million PCC cards. We have used information from transactions that are processed using the loyalty cards to confidentially offer meaningful targeted promotion and direct mail programs exclusively to MVP and PCC card customers.

In 2003, we plan to open approximately 50 new stores. During fiscal 2003, we also intend to relocate or close approximately 50 stores (includes 42 closings announced in the first quarter of 2003). In addition, corporate growth plans for 2003 include remodeling and/or expanding approximately 80 existing stores. We believe this growth plan will position us to maintain market leadership in a majority of our primary operating markets. In addition, our on-going review and evaluation of our store base may lead to decisions to close stores to take advantage of relocation opportunities or eliminate operating losses in under performing stores in an effort to maximize company performance. Most importantly, our growth strategy will remain flexible and responsive to the current, future and changing needs of our retail customers.

Gross Profit

Gross profit as a percentage of sales was 25.77% for the year ended December 28, 2002, compared to 25.44% for the same period last year. Despite lower than expected sales volume, we continue to post solid gross profit performance as a result of the continued implementation of zone pricing and improved private label product penetration primarily at the Food Lion banner. The change in basis of accounting related to the Delhaize Group share exchange discussed above (see Financial Note 2) had no material impact on the reported gross profits.

In 2002, Food Lion transitioned to an Every Day Low Cost (EDLC) program in order to more efficiently and effectively manage the business. EDLC is not a promotional strategy, but is a program that impacts the everyday cost of each item. This program factors vendor promotional dollars into the everyday cost of goods through a discount taken from the list price on the invoice, which is reflected as a reduction of inventory balances and ultimately lower cost of goods sold when the inventory is sold. EDLC encourages more effective promotional plans, which in turn, allows us to deliver the best value to our customers.

Gross profit as a percentage of sales was 25.44% in fiscal 2001, compared to 24.52% in fiscal 2000. Gross profit improvements during 2001 were primarily attributable to initiatives at Food Lion that began during the second half of fiscal 2000 which were designed to strengthen gross margin through merchandise assortment, retail pricing management and reducing inventory shrinkage. The success of these efforts helped to support gross margin for Food Lion despite an increase in promotional activity associated with customer expectations and increased competitive activity (see Sales discussion above). In addition, the strength of our private label programs continued to positively impact gross margin in 2001.

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Selling and Administrative Expenses

Selling and administrative expenses (which include depreciation and amortization) were 20.67% of sales in fiscal 2002 compared to 20.76% in fiscal year 2001. Excluding depreciation and amortization, selling and administrative expenses as a percentage of sales were 17.59% for the year ended December 28, 2002, compared to 17.08% for the year ended December 29, 2001. Excluding depreciation and amortization, the increase in selling and administrative expenses compared to last year is attributable primarily to increased store labor costs to support improved customer service at all banners, increased self insurance costs due to an adjustment of $7.8 million necessary to meet the annual actuarial estimate and charges related to the reorganization of the Company’s senior management team during the quarter ended September 28, 2002, offset by lower medical costs due to recent changes in medical plan benefit provisions.

Selling and administrative expenses (which include depreciation and amortization) as a percentage of sales were 20.76% in fiscal 2001 and 19.91% in fiscal 2000. Excluding depreciation and amortization, selling and administrative expenses as a percentage of sales were 17.08% and 16.97% for fiscal 2001 and fiscal 2000, respectively. During fiscal 2001, selling and administrative expenses were negatively impacted by rising health care costs and utility costs while remaining expense categories were well controlled across all operating banners despite changing market and economic conditions, demonstrating our continued ability to quickly react to changes in sales performance and competitive activity.

Depreciation and amortization as a percentage of sales was 3.08% in fiscal 2002 compared to 3.68% in fiscal 2001. During 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective December 31, 2001. As a result, we no longer amortize goodwill and intangible assets with indefinite lives. Depreciation and amortization was further impacted by the revaluation performed in conjunction with the Delhaize Group share exchange (see Financial Note 2). Excluding the impact of the discontinuance of goodwill and indefinite lived intangibles amortization and the effects of additional depreciation and amortization resulting from the revaluation process, depreciation and amortization would have been approximately $492.8 million or (3.28% of sales) during 2002.

Depreciation and amortization as a percentage of sales was 3.68% in fiscal 2001 compared to 2.94% in fiscal 2000 as a result of a full year of amortization and depreciation recorded for Hannaford and an additional $59.6 million amortization and depreciation expense related to the Delhaize Group share exchange.

Impairment of Assets

During 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective December 31, 2001. Under SFAS No. 142, the Company is required to cease amortizing goodwill and other intangible assets with indefinite lives, and begin an annual assessment of goodwill and other intangibles with indefinite lives by comparing the book value of these assets to their current fair value. The Company’s transitional impairment analysis (required upon adoption of the standard) resulted in an impairment charge totaling $288 million before tax ($284 million after tax) which was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle on the Company’s Statement of Income (Loss) (see Note 4). This impairment charge relates primarily to goodwill associated with the Delhaize Group share exchange and with the Company’s acquisitions of Kash n’ Karry and Hannaford. In addition, this impairment, including the fourth quarter of 2002 reduction in intangible values noted below at the Kash n’ Karry banner, is due to Kash n’ Karry’s recent operating performance. The Florida market, where Kash n’ Karry is concentrated, is one of the most competitive markets in the Southeast region. In addition, this market has experienced the impact of security concerns and economic pressures, which continue to negatively impact temporary residence and tourism in the state. The Hannaford banner carries a significant goodwill balance due to the initial acquisition in 2000 and the assignment of goodwill to this banner related to the share exchange. The Company has experienced changes in economic conditions subsequent to these events.

The Company’s policy requires that an annual impairment assessment will be conducted in the fourth quarter of each year in accordance with SFAS 142. During the fourth quarter of 2002, testing led to additional impairment loss at the Company’s Kash n’ Karry banner. As a result, the intangible values at our Kash n’ Karry banner were reduced by approximately $26.9 million during the fourth quarter of 2002.

Also during 2002, we adopted, SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” We had no impairment charge as a result of our impairment analysis review performed during 2002. In 2001 and 2000, the pre-tax charge included in our income

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statement for asset impairment was $7.0 million and $27.0 million, respectively. The fiscal 2001 and 2000 impairment losses were attributable to certain under performing store assets based on estimated fair market values associated with those store assets in accordance with SFAS No.121.

In accordance with SFAS No. 144, we periodically evaluate the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. We monitor the carrying value of our retail stores, our lowest level asset group for which identifiable cash flows are independent of other groups of assets and liabilities for potential impairment based on projected undiscounted cash flows. If impairment is identified for retail stores, we compare the asset group’s estimated fair market value to its current carrying value and record provisions for impairment as appropriate. With respect to owned property and equipment associated with closed stores, the value of the property and equipment is adjusted to reflect recoverable values based on our previous experience in disposing of similar assets and current economic conditions. The carrying value of assets to be disposed amounted to approximately $21.1 million, $42.4 million, and $36.6 million at December 28, 2002, December 29, 2001, and December 30, 2000, respectively. At December 28, 2002, under the guidance of SFAS No. 144, these assets were classified as held for use because they do not meet the probability of sale within the one year period criteria.

Store Closings

The following table shows the number of stores closed and planned to be closed at the end of fiscal years 2000, 2001, and 2002, along with the number of stores committed for closure during the year, the number of stores actually closed, the number of closed stores acquired and the number of stores sold or for which the lease was terminated.

The following table reflects closed store liabilities at the end of fiscal years 2002, 2001 and 2000, and activity during each year including additions to closed store liabilities charged to operations, additions for closed stores acquired in purchase transactions, adjustments to liabilities based on changes in facts and circumstances and payments made.

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The fiscal 2002 balance of approximately $146.6 million consisted of lease liabilities and exit cost liabilities of $115.5 million and $31.1 million, respectively. The fiscal 2001 end of year balance of $164.8 million consisted of lease liabilities and exit cost liabilities of $140.3 million and $24.5 million, respectively. The fiscal 2000 balance of $185.2 million consisted of $152.3 million of lease liabilities and $32.9 million of exit cost liabilities and the opening 2000 balance consisted of $96.9 million of lease liabilities and $9.9 million of exit cost liabilities.

We provided for closed store liabilities in each of the periods presented above to reflect the estimated post-closing lease liabilities and other exit costs associated with the related store closing commitments. These other exit costs include estimated real estate taxes, common area maintenance, insurance and utility costs to be incurred after the store closes over the remaining lease term. Store closings are generally completed within one year after the decision to close. The closed store liabilities are usually paid over the lease terms associated with the closed stores having remaining terms ranging from one to 20 years. Adjustments to closed store liabilities and other exit costs primarily relate to changes in subtenants and actual exit costs differing from original estimates. In addition during 2000, we closed a store previously operated by the Hannaford banner as part of the merger related divestitures. At that time, we established the required store closing reserves. In 2002, we made the decision to re-open the store under the Food Lion banner, and appropriately reversed the store closing reserves of $6.6 million. Adjustments are made for changes in estimates in the period in which the change becomes known. Any excess store closing liability remaining upon settlement of the obligation is reversed to income in the period that such settlement is determined. We use a discount rate based on the current treasury note rates to calculate the present value of the remaining rent payments on closed stores.

During fiscal 2002, we recorded net additions to closed store liabilities of $1.3 million primarily related to 15 store closings made in the ordinary course of our business and adjustments to estimates for stores previously closed. During the same period, we recorded cash reductions to our reserves for closed stores of approximately $19.5 million. These reductions included cash payments of approximately $15.8 million for ongoing rent payments on closed stores’ remaining lease obligations, net of sublease income, and $3.7 million paid for other exit costs, as discussed above.

During fiscal 2001, we recorded net additions to closed store liabilities of $7.6 million primarily related to 12 store closings made in the ordinary course of our business and adjustments to estimates for stores previously closed. During the same period, we recorded cash reductions to our reserves for closed stores of approximately $21.0 million. These reductions included cash payments of approximately $15.3 million for ongoing rent payments on closed stores’ remaining lease obligations, net of sublease income, $1.2 million for lease termination fees and $4.5 million paid for other exit costs, as discussed above. The non-cash adjustments of $7 million related primarily to two events 1) the revaluation of closed store liabilities of approximately $6 million as a result of the recent share exchange (see discussion above in Overview) and 2) a reduction for closed stores acquired in the Hannaford acquisition, based on final Hannaford purchase accounting allocation for approximately $13 million. During fiscal 2000, we recorded additions to closed store liabilities of $59.7 million related to 26 store

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properties acquired, or for which the lease was assumed, in the Hannaford acquisition. All but one of the 26 stores included in the reserve had been closed prior to the acquisition date. The remaining activities associated with exiting these stores are to maintain the store under the leasehold requirements, to dispose of any owned property and equipment and to settle the remaining lease obligations. The acquired Hannaford liabilities for closed stores included $39.8 million related to the present value of future unrecoverable lease liabilities with remaining non-cancelable terms ranging from three to 22 years. In addition, accrued exit cost was approximately $19.9 million for activities that were directly related to the remaining lease obligations, comprised of $10.3 million for real estate taxes, $7.9 million for property maintenance and utilities and $1.7 million for property insurance. Accrued exit costs are paid over the remaining lease term. A non-cash reduction in the amount of approximately $3.7 million was made prior to December 30, 2000, with a corresponding reduction in goodwill principally related to a lease liability that was canceled.

The revenues and operating results for stores closed and not relocated are not material to our total revenues and operating results for any of the fiscal years presented above and accordingly are not separately presented as discontinued operations. Future cash obligations for closed store liabilities are tied principally to the remaining non-cancelable lease payments less sublease payments to be received.

Merger Expenses

Merger expenses for fiscal 2001 and for fiscal 2000 consisted principally of the amortization of costs incurred in connection with the borrowings related to the Hannaford acquisition. This expense in fiscal 2001 also included costs incurred in connection with the Delhaize Group share exchange, including an $11.7 million charge to compensation expense related to the exchange of our stock options for Delhaize Group options.

Interest Expense

During fiscal 2002, we incurred interest expense of $330.2 million, compared to $342.3 million and $213.1 million in 2001 and 2000, respectively. As a percentage of sales, interest expense was 2.20% in fiscal 2002, 2.29% in fiscal 2001 and 1.68% in fiscal 2000. Interest expense decreased in fiscal year 2002 primarily due to the interest reduction from the interest rate swap agreements, the repurchase of $68.975 million in debentures and other borrowings as well as reduced short-term borrowings. Interest expense was further impacted by the purchase price allocation performed in conjunction with the Delhaize Group share exchange. Excluding the impact of the share exchange, interest expense would have been approximately $346.0 million or (2.3% of sales) for the fiscal year 2002.

Interest expense increased in fiscal 2001 over 2000 primarily due to interest expense related to the financing of the Hannaford acquisition. Interest expense was incurred until April 19, 2001 on the initial short-term financing of the acquisition. On April 19, 2001, long-term financing was secured through the issuance of bonds, which were used to pay off the short-term financing.

LIFO

Our inventories are stated at the lower of cost or market and we value approximately 80% of our inventory using the last-in, first-out, or LIFO method.

In 2002, Food Lion transitioned to an Every Day Low Cost (EDLC) program in order to more efficiently and effectively manage its business. EDLC is not a promotional strategy, but is a program that impacts the everyday cost of each item. This program factors vendor promotional dollars into the everyday cost of goods through a discount taken from the list price on the invoice, which is reflected as a reduction of inventory balances and ultimately lowers cost of goods sold when the inventory is sold. EDLC encourages more effective promotional plans, which in turn, allows us to deliver the best value to our customers. This new ELDC program and its impact on cost is the primary cause of the $32.8 million decrease in our LIFO reserve during fiscal 2002.

Our LIFO reserve decreased $32.8 million in 2002 primarily as a result of the new EDLC program discussed above and increased $1.5 million in 2001 as a result of additional LIFO expense, compared to a decrease of $1.0 million in fiscal 2000. Although inventory levels from 2000 to 2001 decreased approximately $100.0 million (excluding purchase accounting adjustments), the Company experienced slight inflation, which resulted in a charge to cost of sales of $1.5 million. Most of this inflation in 2001 occurred in tobacco and dairy products. We experienced a

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slight deflationary impact in fiscal 2000 in categories such as grocery, pet food and alcoholic beverages, which were partially offset by inflation in categories such as paper products and cigarettes.

Income Taxes

Our provision for income taxes was $159.6 million in fiscal 2002, $141.5 million in fiscal 2001, and $108.1 million in fiscal 2000. Our effective tax rate was 38.8% in fiscal 2002, 46.8% in fiscal 2001 and 41.0% in fiscal 2000. Our effective tax rate decreased in fiscal 2002 due to the discontinuance of goodwill amortization in accordance with SFAS No. 142. Our effective tax rate increased in 2001 and 2000 primarily due to additional non-deductible goodwill as a result of purchase accounting for the Hannaford acquisition in 2000 and the Delhaize Group share exchange in 2001 (see Note 2 to the financial statements).

Liquidity and Capital Resources

We have funded our operations and acquisitions from cash generated from our operations and borrowings.

At the end of fiscal 2002, we had cash and cash equivalents of $131.6 million. We have historically generated positive cash flow from operations. Cash provided by operating activities was $848.4 million in fiscal 2002, compared to $784.2 million in 2001 and $646.2 million in 2000. The increase in cash provided by operating activities in 2002 was due to net income of $251.7 million before cumulative effect of change in accounting principle, increases in accounts payable of $68.5 million, decreases in receivables of $60.4 million offset by increases in inventory of $101.4 million. Additional increase in cash flow from operating activities in 2002 was due to the one-time reinsurance payment made in 2001. In fiscal 2001, during the third quarter, we transferred our life-to-date loss reserves and premiums for workers’ compensation and general liability to the Pride Reinsurance Company, wholly owned by an affiliated company of Delhaize Group. The increase in cash flow from operating activities in 2001 was primarily due to a collection of an income tax receivable of $74.0 million, a reduction of receivables and inventory of $106.2 million (excluding purchase accounting adjustments), increased income before non-cash charges offset by a decrease in accounts payable of $68.8 million. Cash flows from operating activities increased in fiscal 2000 primarily as a result of our increased income before non-cash charges. In addition, in fiscal 2000, we were able to reduce our receivables and inventory, net of accounts payable, by $100.7 million. Offsetting this cash inflow was an increase in fiscal 2000 in income tax receivable of $53.4 million. We initiated strategies in fiscal 2000 to decrease our receivables and inventory.

Cash flows used in investing activities increased to $472.1 million in 2002, compared to $379.1 million in fiscal 2001 and $2.96 billion in fiscal 2000. The increase in investing activities from fiscal 2001 to fiscal 2002 is primarily due to an increase in capital expenditures. The decrease in investing activities from fiscal 2000 to fiscal 2001 can be primarily attributed to approximately $2.6 billion of cash paid to finance our acquisition of Hannaford in fiscal 2000.

Capital expenditures were $485.0 million in fiscal 2002 compared to $394.8 million in fiscal 2001 and $393.0 million in fiscal 2000. During fiscal 2002, we opened 41 new stores and renovated 127 existing stores and continued to expand square footage and add deli-bakeries in some of these stores as we did in fiscal 2001 and 2000. During fiscal 2001, we opened 47 new stores and renovated 145 existing stores. During fiscal 2000, we opened 66 new stores and renovated 173 existing stores.

Total store square footage increased 2.5% from 53.3 million square feet at the end of fiscal 2001 to 54.7 million at the end of fiscal 2002, primarily due to the opening of 41 new stores. Total store square footage increased 3.8% from 51.4 million square feet in fiscal 2000 to 53.3 million square feet at the end of fiscal 2001, primarily due to the opening of 47 new stores. Our total operating distribution space was 9.5 million square feet at the end of fiscal 2002 and 2001 and 10.3 million square feet at the end of fiscal 2000. The decrease in distribution space during fiscal 2001 was due to the closing of our Green Cove Springs, Florida distribution center.

In fiscal 2003, we plan to incur approximately $450 million of capital expenditures, including approximately $120 million to renovate existing stores, approximately $160 million for new store construction and approximately $170 million for information technology, logistics and distribution spending. We plan to finance capital expenditures during fiscal 2003 through funds generated from operations and existing bank facilities and through use of leases when necessary.

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Cash used in financing activities was $381.8 million in fiscal 2002 compared to $403.6 million in fiscal 2001 and cash provided by financing activities of $2.3 billion in fiscal 2000. The decrease in cash used in financing activities from fiscal 2001 to fiscal 2002 was primarily the result of a cash settlement on April 19, 2001 for the hedge contracts related to the $2.6 billion bond offering used as long-term financing for the Hannaford acquisition. In addition, we made a dividend payment of $86.0 million in 2002 compared to $28.6 million in 2001. Cash used by financing activities in 2001 changed sharply from the level of cash provided by financing activities in 2000 due primarily to cash borrowings received to finance the Hannaford acquisition in 2000. In fiscal 2000 we paid $46.0 million in fees in connection with the initial short-term financing for the Hannaford acquisition along with approximately $93 million in dividends.

Debt

We maintain a revolving credit facility with a syndicate of commercial banks providing $350.0 million in committed lines of credit. In December 2002, the credit facility was amended and the line of credit was reduced from $500.0 million to $350.0 million. The credit facility is secured by certain inventory of the Delhaize America operating companies. The $350.0 million facility expires in July 2005 and contains affirmative and negative covenants. Negative covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, and an asset coverage ratio. We must be in compliance with these covenants in order to have access to the credit facility. As of December 28, 2002, we were in compliance with all covenants contained in the credit facility. A deteriorating economic or operating environment can subject us to a risk of non-compliance with the covenants. We had no outstanding borrowings under this facility as of December 28, 2002. During 2002, we had average borrowings of $4.7 million at a daily weighted average interest rate of 3.19%. There were borrowings of $140.0 million outstanding at December 29, 2001, all of which were repaid during 2002. This facility is utilized to provide short-term capital to meet liquidity needs as necessary.

On April 19, 2001, we completed the private offering of $600 million in notes at 7.375% due 2006, $1.1 billion in notes at 8.125% due 2011 and $900 million in debentures at 9.000% due 2031. We used the proceeds of this offering to repay in full the outstanding borrowings used to fund the Hannaford acquisition. On November 16, 2001, we offered to exchange the original debt securities for exchange securities that were identical in all material respects to the original debt securities except that such debt securities are registered under the Securities Act, are not subject to the transfer restrictions applicable to the original debt securities and are not subject to any covenants regarding exchange or registration rights. The exchange offer expired on December 17, 2001. $2,542,142,000 of original debt securities were tendered for exchange securities and $57,858,000 in original debt securities were not exchanged.

At the end of fiscal 2002, we had outstanding medium-term notes of $15.8 million due from 2003 to 2006 at interest rates of 8.53% to 8.73% and other notes outstanding of $81.7 million due from 2003 to 2016 at interest rates of 6.16% to 14.15%. At the end of fiscal 2002, we also had long-term debt securities outstanding of $270.8 million, of which $149.5 million matures in 2007 at an interest rate of 7.55% and $121.3 million matures in 2027 at an interest rate of 8.05%. We had mortgage notes payable of $33.6 million due from 2003 to 2016 at interest rates of 7.5% to 10.2% at the end of fiscal 2002.

During the last half of 2002, we repurchased $45 million of our $900 million 9.00% debentures and $23.975 million of our 8.05% debt securities resulting in $8.1 million gain from the early extinguishment of debt offset by expenses of $1.7 million for the related unamortized debt issuance costs and discount written off. Net other loss from extinguishment of debt included $1.5 million loss for the related hedge loss written off. We elected early adoption of SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB statement No. 13, and Technical Corrections,” and applied the provisions to our early extinguishment of debt activity during fiscal 2002 (see Note 7 for further discussion).

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On December 12, 2001, we were granted a term loan facility by Delhaize the Lion Coordination Center S.A., a Belgian company wholly owned by Delhaize Group, in the amount of $38.0 million intended for general corporate and working capital requirements. On September 19, 2002, we repaid the $38.0 million loan plus accrued interest totaling $1.1 million.

We enter into significant leasing obligations related to our store properties. Capital lease obligations outstanding at the end of fiscal 2002 were $730.9 million compared with $713.9 million at the end of fiscal 2001. These leases generally have terms of up to 20 years. We also had significant operating lease commitments at the end of fiscal 2002. Total annual minimum operating lease commitments are approximately $237.2 million in fiscal 2003, including approximately $27.3 million related to closed store properties, decreasing gradually to approximately $210.3 million in 2007, including approximately $21.7 million related to closed store properties.

As set forth in the tables below, we also have periodic short-term borrowings under informal credit arrangements that are available to us at the lenders’ discretion.

Market Risk

Our company is exposed to changes in interest rates primarily as a result of our long-term debt requirements. Our interest rate risk management objectives are to limit the effect of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We maintain certain variable-rate debt to take advantage of lower relative interest rates currently available. We have not entered into any of our financial instruments for trading purposes.

During the fourth quarter of 2001 and the third quarter of 2002, we entered into interest rate swap agreements to manage our exposure to interest rate movements by effectively converting a portion of our debt from fixed to variable rates. Maturity dates of interest rate swap arrangements match those of the underlying debt. These agreements involve the exchange of fixed rate payments for variable rate payments without the exchange of the underlying principal amounts. Variable rates for our agreements are based on six-month or three-month U.S. dollar LIBOR and are reset on a semiannual basis or quarterly basis. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and recognized over the life of the agreements as an adjustment to interest expense. The notional principal amounts of interest rate swap arrangements as of December 28, 2002 were $300 million maturing in 2006 and $200 million maturing in 2011. These agreements are accounted for as fair value hedges.

Prior to the offering of the bonds and debentures on April 19, 2001, our Company entered into interest rate hedge agreements to hedge against potential increases in interest rates. The notional amount of these hedge agreements was $1.75 billion. These hedge agreements were structured to hedge against the risk of increasing market interest rates based on U.S. treasury rates, with the specified rates based on the expected maturities of the related securities. These hedge agreements were settled in connection with the completion of the offering of the bonds and debentures, resulting in a payment in the amount of an unrealized loss of approximately $214 million. As a result of the adoption of Statement of Accounting Standards No. 133 at the beginning of fiscal 2001, the unrealized loss was recorded in other comprehensive income (loss), net of deferred taxes, and is being amortized to interest expense over the term of the associated debt securities. The unrealized loss was reduced as of the date of the Delhaize Group share exchange as a result of the application of purchase accounting. The remaining unrealized loss at December 28, 2002 and December 29, 2001 was $49.5 million and $55.9 million, net of deferred taxes, respectively.

The table set forth below provides the expected principal payments (net of related discounts or premiums) and related interest rates of our long-term debt by fiscal year of maturity.

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We do not trade in foreign markets or in commodities, nor do we have significant concentrations of credit risk. Accordingly, we do not believe that foreign exchange risk, commodity risk or credit risk pose a significant threat to our company.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 28, 2002:

Self Insurance

We are self-insured for workers’ compensation, general liability and vehicle accident claims. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Maximum self-insured retention, including defense costs per occurrence, ranges from $0.5 million to $1.0 million per individual claim for workers’ compensation and $5.0 million for automobile liability and general liability. These retentions increased in fiscal 2002 from $500,000 in fiscal 2001. We are insured for covered costs, including defense costs, in excess of these retentions. It is possible that the final resolution of some of these claims may require us to make significant expenditures in excess of our existing reserves over an extended period of time and in a range of amounts that cannot be reasonably estimated.

Self-insurance expense related to the above totaled $60.3 million in 2002, $43.3 million in 2001, and $43.8 million in 2000. Total claim payments were $47.7 million in 2002, $44.1 million in 2001, and $37.3 million in 2000.

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We implemented a captive insurance program in fiscal 2001 pursuant to which the self-insured reserves related to workers’ compensation, general liability and auto coverage were reinsured by Pride Reinsurance Company, an Irish reinsurance captive owned by an affiliated company of Delhaize Group. The purpose for implementing the captive insurance program is to provide Delhaize Group continuing flexibility in its risk management program while providing certain excess loss protection through anticipated reinsurance contracts with Pride Reinsurance Company. In August 2001, upon incorporation of Delhaize Insurance Co., a subsidiary of our company, we paid an initial premium of approximately $118.5 million, which included loss reserves of approximately $104.0 million and $14.5 million of premiums for the policy period from September 1, 2001 through December 29, 2001. In 2002, we paid an annual premium of approximately $48.8 million and a $7.8 million adjustment necessary to meet the annual actuarial estimate of the liability for claims outstanding. The Delhaize Insurance Co. subsidiary consisted of the following balances:

These amounts are included in our consolidated balance sheets.

Impact of Inflation

During fiscal 2002, we experienced actual deflation in our cost of merchandise as a result of transitioning to an Every Day Low Cost (EDLC) program at Food Lion. EDLC is not a promotional strategy, but is a program that impacts the everyday cost of each item. This program factors vendor promotional dollars into the everyday cost of goods through a discount taken from the list price on the invoice, which is reflected as a reduction of inventory balances and ultimately lowers cost of goods sold when the inventory is sold. EDLC encourages more effective promotional plans, which in turn, allows our Company to deliver the best value to our customers. This new ELDC program and its impact on cost is the primary cause of the $32.8 million decrease in the Company’s LIFO reserve during fiscal 2002. During fiscal 2001, we experienced slight inflation on merchandise purchases of 1.09%. During fiscal 2000, we experienced slight deflation on merchandise purchases.

Related Party Transactions

On April 25, 2001, the Company and Delhaize Group completed a share exchange, whereby each outstanding share of the Company’s Class A and Class B common stock not already owned by Delhaize Group or its wholly-owned subsidiary, Delhaize The Lion America, Inc. (“Detla”), was exchanged for 0.40 Delhaize Group American Depositary Shares (“ADSs”), which are listed on the New York Stock Exchange, or, at the option of a Delhaize America shareholder, 0.40 Delhaize Group ordinary shares, which are listed on Euronext Brussels. Each Delhaize Group ADS represents one ordinary share of Delhaize Group. The Delhaize Group share exchange was structured to be tax-free to our shareholders for U.S. federal income tax purposes. The Delhaize Group share exchange was unanimously approved by our board of directors and the board of directors of Delhaize Group, unanimously recommended to our board of directors by a four-person special committee of independent directors, and approved by our shareholders and the shareholders of Delhaize Group. Until April 25, 2001, shares of Delhaize America common stock were listed on the New York Stock Exchange.

The Company has entered into a joint venture with Delhaize Group regarding Bel-Thai Supermarket Co., Ltd. (“Bel-Thai”), a supermarket company based in Thailand. On January 18, 2000, the Company acquired, through a wholly-owned subsidiary, a 51% interest in Bel-Thai for approximately $3.9 million. Delhaize Group owns the remaining 49% interest in Bel-Thai. The Company subsequently contributed additional capital of approximately $8.0 million to Bel-Thai, including $2.4 million in December 2002. The Company’s investment in Bel-Thai was consummated pursuant to arms-length negotiations and was approved by the Board of Directors of the Company (by a vote of the directors unaffiliated with Delhaize). In addition, the Company obtained a fairness opinion from Salomon Smith Barney, an investment banking firm, as to the fairness of the transaction to the Company. The Company’s share of Bel-Thai’s operating loss for fiscal 2002 was not material to the Company’s consolidated results of operations.

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On November 27, 2001, the Company loaned $12 million to Detla. The loan balance increased to $16.5 million by the end of fiscal 2002. This loan was amended during 2002 to extend the maturity date until November 27, 2007. Until the maturity date, Detla will pay interest on the unpaid principal amount at a rate equal to LIBOR plus 125 basis points. The $16.5 million is included in “Other Assets” in the Company’s Consolidated Balance Sheet.

On December 12, 2001, the Company was granted a term loan facility by Delhaize The Lion Coordination Center S.A., a Belgian Company wholly owned by Delhaize Group, in the amount of $38 million intended for general corporate and working capital requirements. On September 19, 2002, the Company repaid the $38 million loan plus accrued interest totaling $1.1 million. Originally scheduled to mature on December 12, 2006, the note required interest at a rate equal to LIBOR plus 125 basis points. This loan was recorded in long-term debt in the Company’s 2001 Consolidated Balance Sheet.

The consolidated balance sheets for December 28, 2002 and December 29, 2001 include approximately $114.6 million and $86.0 million in dividends payable to Delhaize Group.

The Company implemented a captive insurance program in fiscal 2001, pursuant to which the self-insured reserves related to workers’ compensation, general liability and auto coverage were reinsured by Pride Reinsurance Company, an Irish reinsurance captive owned by an affiliated company of Delhaize Group. The purpose for implementing the captive insurance program is to provide Delhaize Group continuing flexibility in its risk management program while providing certain excess loss protection through anticipated reinsurance contracts with Pride Reinsurance Company. The balance sheet includes an approximately $13.9 million net receivable from the Irish reinsurance captive related to claims paid by the Company but not yet reimbursed. See Note 1 for further information regarding the captive insurance company.

Recently Adopted Accounting Standards

In April 2002, the Financial Accounting Standards Board, or FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement modifies the treatment of sale-leaseback transactions and extinguishment of debt requiring gains and losses to be treated as ordinary income in most circumstances.

The Company has applied the provisions of SFAS No. 145 to its early extinguishment of debt activity during fiscal 2002 and has classified the gain related to early extinguishment in its income statement below interest expense. See the Company’s Consolidated Statement of Income (Loss) for fiscal 2002. See further discussion in Managements’ Discussion and Analysis — Debt.

On December 30, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which required that we cease amortizing goodwill and other intangible assets with indefinite lives, and begin an annual assessment of potential impairment of goodwill and other indefinite lived intangible assets by comparing the book value of these assets to their current fair value. Accordingly, during the first quarter of 2002, the Company performed its transitional assessment for potential impairment at each of our three operating banners, since each chain represents a separate operating segment as defined by SFAS No. 131 and a separate reporting unit as defined by SFAS No. 142. In performing its assessment, the carrying value of assets and liabilities was determined for each reporting unit and compared to the fair value of each reporting unit, which was obtained from independent appraisals. If the carrying value of the reporting unit exceeded its fair value, an assessment of impairment was then necessary.

The Company’s impairment assessment at its individual operating banners resulted in a non-cash impairment charge totaling approximately $288 million before taxes ($284 million net of taxes), which was recorded as a cumulative effect of change in accounting principle in the first quarter 2002. This impairment charge relates primarily to goodwill associated with the Delhaize Group share exchange and with the Company’s acquisitions of Kash n’ Karry and Hannaford. In addition, this impairment, including the fourth quarter 2002 reduction in intangible values noted below at the Kash n’ Karry banner, is due to Kash n’ Karry’s recent operating performance. The Florida market, where Kash n’ Karry is concentrated, is one of the most competitive markets in the Southeast region. In addition, this market has experienced the impact of security concerns and economic pressures, which continue to negatively impact temporary residence and tourism in the state. The Hannaford banner carries a significant goodwill balance due to the initial acquisition in 2000 and the assignment of goodwill to this banner related to the share exchange. The Company has experienced changes in economic conditions subsequent to these events.

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The Company’s policy requires that an annual impairment assessment will be conducted in the fourth quarter of each year in accordance with SFAS 142. During the fourth quarter of 2002, testing led to additional impairment loss at the Company’s Kash n’ Karry banner. As a result, the intangible values at our Kash n’ Karry banner were reduced by approximately $26.9 million during the fourth quarter of 2002.

As a result of the adoption of SFAS No. 142, amortization expense of approximately $88 million for goodwill and other indefinite life assets was appropriately not recognized in fiscal 2002.

The following schedule reconciles the income before cumulative effect of change in accounting principle adjusted to exclude after-tax amortization expense in fiscal 2000 and 2001, prior to the adoption of SFAS No. 142: