Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ........to...........

Commission File number 0-6080

DELHAIZE AMERICA, INC.

P.O. Box 1330, 2110 Executive Drive, Salisbury, NC 28145-1330

(704) 633-8250

     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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Outstanding shares of common stock of the Registrant as of May 12, 2003.

Class A Common Stock — 91,050,642,127

Class B Common Stock — 75,287,145

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

1

DELHAIZE AMERICA, INC.
INDEX TO FORM 10-Q

For the Quarter Ended March 29, 2003

INDEX

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
For the 13 weeks ended March 29, 2003 and March 30, 2002
(Dollars in thousands)

See notes to the unaudited condensed consolidated financial statements.

3

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

See notes to unaudited condensed consolidated financial statements.

4

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 13 weeks ended March 29, 2003 and March 30, 2002
(Dollars in thousands)

See notes to unaudited condensed consolidated financial statements.

5

Notes to Unaudited Condensed Consolidated Financial Statements

1) Basis of Presentation:

The accompanying condensed consolidated financial statements are presented in accordance with the requirements for Form 10-Q and, consequently, do not include all the disclosures normally required by generally accepted accounting principles or those normally made in the Annual Report on Form 10-K of Delhaize America, Inc (“Delhaize America” or the “Company”). Accordingly, the reader of this Form 10-Q should refer to the Company’s Form 10-K for the year ended December 28, 2002 for further information.

The financial information presented herein has been prepared in accordance with the Company’s customary accounting practices and has not been audited. In the opinion of management, the financial information includes all adjustments, consisting of only normal recurring items, necessary for a fair presentation of interim results.

The financial statement presentation includes the impact of the Company’s closing of 42 under performing Food Lion and Kash n’ Karry stores during the first quarter of 2003. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, a portion of the costs associated with these stores, as well as related operating activity prior to closing for these stores, was recorded as “discontinued operations” in the Company’s Condensed Consolidated Statement of Income (Loss) for all periods presented.

2) Supplemental Disclosure of Cash Flow Information:

Selected cash payments and non-cash activities during the period were as follows:

3) 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 on March 29, 2003 and March 30, 2002. Meat, produce and deli inventories are valued on the first-in, first-out (FIFO) method. If the FIFO method was used entirely, inventories would have been $32.0 million and $65.3 million greater as of March 29, 2003 and March 30, 2002, respectively. Application of the LIFO method resulted in no impact on cost of goods sold for the 13 weeks ended March 29, 2003 and a $0.6 million increase for the 13 weeks ended March 30, 2002.

4) Reclassification

Certain financial statement items in the prior periods have been reclassified to conform to the current period’s presentation.

5) Accounting for Stock Issued to Employees

The Company has a stock option plan that is described fully in Note 14 to the Company’s Annual Report on Form 10-K for the year ended December 28, 2002. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations”. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, to stock-based employee compensation.

6

The weighted average fair value at date of grant for options granted during the first quarter of 2003 and 2002 was $5.36 and $10.99 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model using the following assumptions:

6) Derivative Financial Instruments

Prior to the offering of the bonds and debentures on April 19, 2001, the 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 SFAS No.133, “Derivative Instruments and Hedging Activities”, at the beginning of fiscal 2001, the unrealized loss was recorded in other comprehensive income, net of deferred taxes, and is being amortized to interest expense over the term of the associated debt securities. The Company amortized approximately $1.3 million, net of tax of the other comprehensive loss associated with these hedge agreements to interest expense during both the first quarter ended March 29, 2003 and March 30, 2002. 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 March 29, 2003, and March 30, 2002, totaled approximately $48.2 million and $54.6 million, net of deferred taxes, respectively.

During the fourth quarter of 2001 and the third quarter of 2002, the Company entered into interest rate swap agreements to manage the exposure to interest rate movements by effectively converting a portion of the debt from fixed to variable rates. Maturity dates of the Company’s 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 the Company’s agreements are based on six-month or three-month U.S. dollar LIBOR and are reset on a semiannual basis or a 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 at March 29, 2003 were $300 million maturing in 2006 and $200 million maturing in 2011. These agreements are accounted for as fair value hedges. For the 13 weeks ended March 29, 2003, interest expense decreased by $4.2 million in connection with these agreements. These agreements met the criteria for using the short-cut method, which assumes 100% hedge effectiveness, as prescribed by SFAS No. 133. The fair value of the Company’s debt has been increased by $19.8 million at March 29, 2003 with these agreements. The Company has also recorded a derivative asset in connection with these agreements in the amount of $27.4 million recorded in other assets.

7) Goodwill and Other Intangible Assets

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.

7

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. 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 Delhaize Group share exchange.

8) Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings and other comprehensive earnings. Other comprehensive earnings include revenues, expenses, gains and losses that have been excluded from the Company’s net income (loss) and recorded directly to shareholders’ equity. Included in other comprehensive income (loss) are unrealized losses on hedges and unrealized security holding gains. Comprehensive income (loss) was $53,875 and ($223,517) for the 13 weeks ended March 29, 2003 and March 30,2002, respectively.

9) Recently Adopted Accounting Standards

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, was issued and amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. Certain new disclosure provisions of SFAS No. 148 are required for fiscal years ending after December 15, 2002. See Note 5 to the Company’s Condensed Consolidated Financial Statements for the first quarter of fiscal 2003.

In November 2002, the Financial Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which is an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this standard did not have an impact on the Company’s financial statements. See Debt Guarantees below.

In September 2002, Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received”, was proposed and a consensus was reached in January 2003. The issue was revised and finalized in March 2003. This issue addresses the appropriate accounting, by a retailer, for cash consideration received from a vendor and directs that cash consideration received from a vendor should be presumed to be a reduction of inventory unless it is a reimbursement of specific costs incurred in advertising the vendor’s products. Previously the Company recorded allowances as a reduction of cost of sales when earned. This change will have a timing impact on certain allowances that will now be an adjustment to inventory cost and recognized in cost of sales when the product is sold.

Upon adoption of EITF Issue No. 02-16 in 2003, the Company recorded the cumulative effect of a change in accounting principle of $10.9 million, net of tax. This charge was recorded in the Company’s Condensed Consolidated Statement of Income (Loss) and reflects an adjustment of the Company’s opening inventory balance. As a result of the adoption of this standard, certain allowances will be recorded as a reduction of inventory as appropriate.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued by the FASB. SFAS No. 146 addresses significant issues relating to the recognition, measurement and reporting of costs associated with exit and disposal activities (including store closings). SFAS No. 146 replaces previous accounting guidance, principally EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Issue No. 94-3 required that a liability for an exit cost be recognized when the company committed to a specific plan; whereas, SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. See Note 11 to the Company’s Condensed Consolidated Financial Statements for the first quarter of fiscal 2003.

In June 2001, the FASB also issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The effect of adopting this standard did not have a significant effect on the Company’s financial statements.

8

Debt Guarantees

The wholly owned direct subsidiaries named below will fully and unconditionally and jointly and severally guarantee the debt of Delhaize America.

Food Lion, LLC is a North Carolina limited liability company that operates all of the Company’s Food Lion stores. Food Lion’s executive offices are located at 2110 Executive Drive, Salisbury, North Carolina 28145-1330.

Hannaford Bros. Co. is a Maine corporation that operates all of the Company’s Hannaford stores. Hannaford’s executive offices are located at 145 Pleasant Hill Road, Scarborough, Maine 04074.

Kash n’ Karry Food Stores, Inc. is a Delaware corporation that operates all the Company’s Kash n’ Karry stores. Kash n’ Karry’s executive offices are located at 2110 Executive Drive, Salisbury, North Carolina 28145-1330.

10) Recently Issued Accounting Standards

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company is currently assessing the potential effect of SFAS No. 149 on its financial statements.

11) Discontinued Operations

During the first quarter of 2003, the Company closed 42 under performing Food Lion and Kash n’ Karry stores. In accordance with the provisions of SFAS No. 144, a portion of the costs associated with these stores, as well as related operating activity prior to closing for these stores, was recorded in “discontinued operations” in the Company’s Condensed Consolidated Statement of Income (Loss).

For the 13 weeks ended March 29, 2003 and March 30, 2002, discontinued operations generated sales and other revenues of $16.5 million and $42.3 million, respectively, with net operating losses after taxes of $3.8 million and $2.3 million, respectively. During the first quarter of 2003 in accordance with SFAS No. 146, the Company recorded an initial reserve of $27.5 million to discontinued operations ($17.7 million after taxes) for rent, real estate taxes and common area maintenance expenses (other liabilities), and severance and outplacement costs (accrued expenses). The Company recorded property retirement (asset impairment) of $5.0 million, which was substantially offset by gains on capital lease retirements of $5.0 million. Additional discontinued expenses not reserved totaled $0.7 million after taxes.

The following table shows the reserve balances as of March 29, 2003.

12) Streamlining

During the first quarter of 2003, Food Lion initiated additional cost saving opportunities by streamlining and optimizing the functioning of its support and management structure. These initiatives include a reduction in work force affecting approximately 400 associates. As a result, the Company recorded a pre-tax charge of $2.4 million, which was included in Selling and Administrative Expenses, and represents related severance, benefits, and outplacement service costs. The Company paid $0.6 million of the initial reserve during the first quarter of 2003 and the outstanding $1.8 million is included in the Company’s Condensed Consolidated Balance Sheet in Accrued Expenses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (13 weeks ended March 29, 2003 compared to the 13 weeks ended March 30, 2002)

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures normally required by generally accepted accounting principles or those normally made in the Company’s Annual Report on Form 10-K. Accordingly, the reader of this Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended December 28, 2002 for further information. Reclassifications have been made for all current and historical information presented herein from that contained in the Company’s prior annual reports to shareholders and SEC filings on forms 10-Q, 10-K and 8-K.

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 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

9

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. The reader should refer to Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 28, 2002 for further information regarding significant accounting policies.

Results of Operations

The following tables set forth the unaudited condensed consolidated statements of income(loss) for the 13 weeks ended March 29, 2003 and for the 13 weeks ended March 30, 2002 for informational purposes. The 2002 results have been adjusted to classify the results of operations for the 42 stores closed during the first quarter of 2003 as “discontinued operations”; their net sales and other revenues, cost of goods sold, and selling and administrative expenses have been reflected on a net basis in “discontinued operations” in our condensed consolidated statement of income (loss).

The following tables set forth, the percentage, which the listed captions bear to net sales and other revenues for the periods indicated:

Sales

We record revenues primarily from the sale of products in over 1,440 retail stores. Net sales and other revenues were $3.7 billion for the quarter ended March 29, 2003, resulting in a decrease of 0.67% over the corresponding period of 2002. Comparable store sales decreased 2.2% during the first quarter of 2003 as compared to the first quarter of 2002. Sales performance during the first quarter of 2003 has been negatively impacted by the timing of the Easter holiday, which fell in the first quarter of 2002 versus the second quarter of 2003. Excluding the negative impact of the timing of Easter, comparable store sales decreased 1.1%. Sales performance during 2003 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 continues to experience corporate layoffs, high unemployment, and generally depressed economic conditions.

10

We continue to see an increase in competitive activity as a greater number of retailers battle for the consumers’ dollars. During the first three months of 2003, we have experienced 18 competitive store 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 combination of everyday low prices, planned promotional activity, and consistent low price offerings through the first quarter of 2003.

As of March 29, 2003, we operated 1,444 stores, which consisted of 1,188 stores operating primarily under the Food Lion banner, 119 stores operating under the Hannaford and Shop n’ Save banners and 137 stores operating under the Kash n’ Karry banner. During the first quarter we opened three new stores all of which were under our Food Lion banner. In addition, we remodeled six stores in the first quarter including three Food Lion stores, two Kash n’ Karry stores and one Hannaford store. During the quarter we closed 43 Food Lion stores, and one Kash n’ Karry store, resulting in a net decrease of 41 stores.

Gross Profit

Gross profit as a percentage of sales was 26.30% for the 13 weeks ended March 29, 2003, compared to 25.86% 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 at the Food Lion banner and strong performance at the Hannaford banner, partially as a result of synergy initiatives. During the first quarter of 2003, gross profit was also positively impacted by cost reductions across the distribution operation at Food Lion.

No LIFO provision is required for the first quarter of 2003 compared to a provision of $0.6 million for first quarter of 2002. During the first quarter of 2003, inflation/deflation conditions appear to be relatively flat.

Selling and administrative expenses

Selling and administrative expenses (which include depreciation and amortization) as a percentage of sales were 20.46% in first quarter of 2003 compared to 20.73% in the first quarter of 2002. Excluding depreciation and amortization, selling and administrative expenses as a percentage of sales were 17.42% for the first quarter of 2003 compared to 17.69% for the corresponding period of the prior year. The decrease in selling and administrative expenses (excluding depreciation and amortization) for the first quarter compared to the corresponding period of last year is primarily due to decreases in store labor costs as a result of productivity and standard practice improvements, lower retirement plan expense due to changes in the Food Lion and Kash n’ Karry benefit plans along with a gain from an early lease termination on a closed store. Additional decrease in selling and administrative expenses resulted from Food Lion completing a majority of its corporate support streamline efforts during the first quarter of 2003.

Depreciation and amortization expense during the first quarter of 2003 was $111.8 million or 3.04% of sales compared to $112.7 million or 3.04% of sales for the first quarter of the prior year. During the quarter ended March 30, 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. Under SFAS No. 142 the Company is required to annually assess goodwill and other intangible assets 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 change in accounting principle on the Company’s Condensed Consolidated Statement of Income (Loss).

Interest Expense

Interest expense during the first quarter of 2003 was $79.7 million or 2.16% of sales compared to $87.3 million or 2.36% of sales for the first quarter of the prior year. Interest expense was lower in the first quarter of 2003 compared with the first quarter of 2002 primarily due to the interest reduction from interest rate swap agreements and the repurchase of $68.975 million in debentures and debt securities during the last half of 2002.

Store Closings

The following table shows the number of stores closed and planned to be closed at the end of the first quarter of 2003, 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.

11

The following table reflects closed store liabilities as of March 29, 2003 and activity during the quarter, including additions to closed store liabilities charged to operations and adjustments to liabilities based on changes in facts and circumstances and payments made.

The March 29, 2003 balance of approximately $160.9 million consisted of lease liabilities and other exit cost liabilities of $129.0 million and $31.9 million, respectively. During the quarter, the Company completed the closure of 42 under performing Food Lion and Kash n’ Karry stores. The March 29, 2003 balance includes lease liabilities of $22.4 million and other exit costs of $3.0 million associated with these 42 stores.

We provided for closed store liabilities in the quarter 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, and insurance costs to be incurred after the store closes (all of which are contractually required payments under the lease agreements) 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 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. We use a discount rate based on the current treasury note rates adjusted for our current credit spread to calculate the present value of the remaining rent payments on closed stores.

The revenues and operating results for stores closed and not relocated with the exception of stores that have been classified as discontinued operations are not material to our revenues and operating results for the quarter. Future cash obligations for closed store liabilities are tied principally to the remaining non-cancelable lease payments less sublease payments to be received.

Asset Impairment Charge

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, 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.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, our policy requires that an impairment assessment of Goodwill and Other Intangible Assets with indefinite lives be performed at least annually. We will be conducting this assessment in the fourth quarter of each year unless facts and circumstances require an assessment at an earlier date.

Liquidity and Capital Resources

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

At March 29, 2003, we had cash and cash equivalents of $308.5 million. We have historically generated positive cash flow from operations. Cash provided by operating activities totaled $248.1 million for the 13 weeks ended March 29, 2003, compared with $323.8 million for the corresponding period last year. Cash provided by operating activities for the 13 weeks ended March 29, 2003 was primarily due to income of

12

$63.0 million before cumulative effect of changes in accounting principle, a decrease in inventory of $81.1 million, increases in accrued expenses of $61.8 million, and an increase in income tax payable of $49.7 million. The decrease in cash provided by operating activities from the corresponding period last year was primarily due to the decrease in accounts payable, and the decrease in accounts receivable offset by a decrease in inventory.

Cash flows used in investing activities decreased to $59.3 million for the 13 weeks ended March 29, 2003, compared with $90.2 million for the corresponding period last year primarily due to a decrease in capital expenditures of $58.7 million for the 13 weeks ended March 29, 2003 compared with $92.4 million for the corresponding period in 2002. For the 13 weeks ended March 29, 2003, we have opened three new stores and completed the renovation of six existing stores compared to eight openings and 29 renovations completed for the corresponding period of last year.

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.

Cash flows used in financing activities for the quarter ended March 29, 2003 were $12.1 million compared to $154.1 million for the same period last year. The decrease in cash used in financing activities was primarily the result of short-term borrowings repaid in 2002.

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 subsidiaries. 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 March 29, 2003, 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 March 29, 2003 and have had no borrowings during 2003. There were no borrowings outstanding at March 30, 2002. This facility is utilized to provide short-term capital to meet liquidity needs as necessary.

At March 29, 2003, we had outstanding notes of $600 million at 7.375% due 2006, $149.5 million at 7.55% due 2007, $1.1 billion in notes at 8.125% due 2011, $121.3 million at 8.05% due 2027 and $855 million in debentures at 9.00% due 2031. We also had medium-term notes of $15.8 million due from 2003 to 2006 at interest rates of 8.53% to 8.73% and outstanding other notes of $78.8 million due from 2004 to 2016 at interest rates of 6.31% to 14.15%. The Company had mortgage notes payable of $32.9 million due from 2003 to 2016 at interest rates of 7.5% to 10.2% at March 29, 2003.

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.

We enter into significant leasing obligations related to our store properties. Capital lease obligations outstanding at March 29, 2003 were $711.0 million compared with $722.2 million at March 30, 2002. These leases generally have original terms of up to 20 years.

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.

Informal Credit Arrangements

Market Risk

We are 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 the exposure to interest rate movements by effectively converting a portion of our debt from fixed to variable rates. Maturity dates of the Company’s interest rate swap arrangements match those of the underlying debt. These agreements involve the exchange of fixed rate payments for

13

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 amounts of interest rate swap arrangements at March 29, 2003 were $300 million maturing in 2006 and $200 million maturing in 2011. These agreements are accounted for as fair value hedges. For the 13 weeks ended March 29, 2003, interest expense was decreased $4.2 million in connection with these agreements. These agreements met the criteria for using the short-cut method, which assumes 100% hedge effectiveness, as prescribed by SFAS No. 133. The fair value of our debt has been increased by $19.8 million at March 29, 2003 in connection with these agreements. We have also recorded a derivative asset in connection with these agreements in the amount of $27.4 million recorded in other assets.

Prior to the offering of the original debt securities discussed under the heading “Debt” above, we 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 original debt securities, resulting in a payment in the amount of an unrealized loss of approximately $214 million. As a result of the adoption of SFAS No. 133 at the beginning of fiscal 2001, the unrealized loss was recorded in other comprehensive loss, net of 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 the end of first quarter 2003 was approximately $48.2 million, net of taxes.

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 as of December 28, 2002.

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:

Recently Adopted Accounting Standards

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, was issued and amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS

14

No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. Certain new disclosure provisions of SFAS No. 148 are required for fiscal years ending after December 15, 2002. See Note 5 to the Company’s Condensed Consolidated Financial Statements for the first quarter of fiscal 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which is an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this standard did not have an impact on the Company’s financial statements. See Debt Guarantees below.

In September 2002, Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received”, was proposed and a consensus was reached in January 2003. The issue was revised and finalized in March 2003. This issue addresses the appropriate accounting, by a retailer, for cash consideration received from a vendor and directs that cash consideration received from a vendor should be presumed to be a reduction of inventory unless it is a reimbursement of specific costs incurred in advertising the vendor’s products. Previously the Company recorded allowances as a reduction of cost of sales when earned. This change will have a timing impact on certain allowances that will now be an adjustment to inventory cost and recognized in cost of sales when the product is sold.

Upon adoption of EITF Issue No. 02-16 in 2003, the Company recorded the cumulative effect of a change in accounting principle of $10.9 million, net of tax. This charge was recorded in the Company’s Condensed Consolidated Statement of Income (Loss) and reflects an adjustment of the Company’s opening inventory balance. As a result of the adoption of this standard, certain allowances will be recorded as a reduction of inventory as appropriate.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued by the FASB. SFAS No. 146 addresses significant issues relating to the recognition, measurement and reporting of costs associated with exit and disposal activities (including store closings). SFAS No. 146 replaces previous accounting guidance, principally EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Issue No. 94-3 required that a liability for an exit cost be recognized when the company committed to a specific plan; whereas, SFAS No.146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. See Note 11 to the Company’s Condensed Consolidated Financial Statements for the first quarter of fiscal 2003.

In June 2001, the FASB also issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The effect of adopting this standard did not have a significant effect on the Company’s financial statements.

Debt Guarantees

The wholly owned direct subsidiaries named below will fully and unconditionally and jointly and severally guarantee the debt of Delhaize America.

Food Lion, LLC is a North Carolina limited liability company that operates all of the Company’s Food Lion stores. Food Lion’s executive offices are located at 2110 Executive Drive, Salisbury, North Carolina 28145-1330.

Hannaford Bros. Co. is a Maine corporation that operates all of the Company’s Hannaford stores. Hannaford’s executive offices are located at 145 Pleasant Hill Road, Scarborough, Maine 04074.

Kash n’ Karry Food Stores, Inc. is a Delaware corporation that operates all the Company’s Kash n’ Karry stores. Kash n’ Karry’s executive offices are located at 2110 Executive Drive, Salisbury, North Carolina 28145-1330.

Recently Issued Accounting Standards

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company is currently assessing the potential effect of SFAS No. 149 on its financial statements.

Discontinued Operations

During the first quarter of 2003, the Company closed 42 under performing Food Lion and Kash n’ Karry stores. In accordance with the provisions of SFAS No. 144, a portion of these costs associated with these stores, as well as related operating activity prior to closing, was recorded in “discontinued operations” in the Company’s Condensed Consolidated Statement of Income (Loss).

For the 13 weeks ended March 29, 2003 and March 30, 2002, discontinued operations generated sales and other revenues of $16.5 million and $42.3 million, respectively, with net operating losses after taxes of $3.8 million and $2.3 million, respectively. During the first quarter of 2003 in accordance with SFAS No. 146, the Company recorded an initial reserve of $27.5 million to discontinued operations ($17.7 million after taxes) for rent, real estate taxes and common area maintenance expenses (other liabilities), and severance

15

and outplacement costs (accrued expenses). The Company recorded property retirement (asset impairment) of $5.0 million, which was substantially offset by gains on capital lease retirements of $5.0 million. Additional discontinued expenses not reserved totaled $0.7 million after taxes.

The following table shows the reserve balances as of March 29, 2003.

Streamlining

During the first quarter of 2003, Food Lion initiated additional cost saving opportunities by streamlining and optimizing the functioning of its support and management structure. These initiatives include a reduction in work force affecting approximately 400 associates. As a result, the Company recorded a pre-tax charge of $2.4 million, which was included in Selling and Administrative Expenses, and represents related severance, benefits, and outplacement service costs. The Company paid $0.6 million of the initial reserve during the first quarter of 2003 and the outstanding $1.8 million is included in the Company’s Condensed Consolidated Balance Sheet in Accrued Expenses.

Effective Income Tax Rate

The provision for income taxes reflects management’s best estimate of the annual effective tax rate. The effective income tax rate decreased from 40% for the 13 weeks ended March 30, 2002 to 38% for the 13 weeks ended March 29, 2003. The decrease was primarily due to updated estimates of federal and state taxes which were lower than amounts previously estimated.

Other

All statements in this report, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as expansion and growth of the Company’s business, future capital expenditures and the Company’s business strategy, are “forward-looking statements” within the meaning of the Securities Litigation Reform Act. In reviewing such information, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking statements. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. Many of these factors have previously been identified in filings or statements made by or on behalf of the Company, including filings with the Securities and Exchange Commission of Forms 10-Q, 10-K and 8-K.

Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking statements include: changes in the general economy or in the Company’s primary markets, changes in consumer spending, competitive factors, the nature and extent of continued consolidation in the industry, changes in the rate of inflation and interest costs on borrowed funds, changes in state or federal legislation or regulation, changes in the availability and cost of labor, adverse determinations with respect to litigation or other claims, inability to develop new stores or complete remodels as rapidly as planned, the ability to integrate and achieve operating improvements at Hannaford as well as other companies Delhaize America, Inc. acquires, and stability of product costs — supply or quality control problems with the Company’s vendors detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission.

The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The information set forth under the heading “Market Risk” under Item 2 of this Form 10-Q is hereby incorporated herein by reference.

Item 4. Controls and Procedures

Based on their evaluation, as of a date within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

16

PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)

Reports on Form 8-K

The Company filed a report on Form 8-K on January 7, 2003, in connection with the amendment of its existing revolving credit facility.

17

SIGNATURE

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

18

CERTIFICATION

I, Pierre-Olivier Beckers, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Delhaize America, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;