##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 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 April 3, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from __________ to ___________ Commission File number 0-6080 DELHAIZE AMERICA, INC. 
 (Exact name of registrant as specified in its charter)
 NORTH CAROLINA
    
    56-0660192(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 P.O. Box 1330, 2110 Executive Drive, Salisbury, NC 28145-1330(Address of principal executive office)
    
    (Zip Code)
 (704) 633-8250 
 (Registrants telephone number, including area code)
 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. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes [  ] No [X] Outstanding shares of common stock of the Registrant as of May 18, 2004. Class A Common Stock  91,270,348,481
Class B Common Stock   75,468,935 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




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DELHAIZE AMERICA, INC.
INDEX TO FORM 10-Q
April 3, 2004 PageForward Looking Statements
        
        
        3-4PART I. FINANCIAL
            INFORMATIONItem 1. Financial
            Statements (Unaudited)Condensed Consolidated
            Statements of Income for the 13 weeks ended April 3, 2004
            and March 29, 2003
        
        
        5Condensed Consolidated
            Balance Sheets as of April 3, 2004 and January 3, 2004 (Audited)
        
        
        6Condensed Consolidated
            Statements of Cash Flows for the 13 weeks ended April 3,
            2004 and March 29, 2003
        
        
        7Notes to Condensed
            Consolidated Financial Statements
        
        
        8-17Item 2. Managements
            Discussion and Analysis of Financial Condition and Results of Operation
        
        
        17-25Item 3. Quantitative
            and Qualitative Disclosures About Market Risk
        
        
        26Item 4. Controls
            and Procedures
        
        
        26PART II. OTHER INFORMATIONItem 6. Exhibits
            and Reports on Form 8-K
        
        
        26Signature
        
        
        27Exhibit Index
        
        
        28
 Unless the context otherwise requires, the terms Delhaize America, the
Company, we, us and our refer to Delhaize America, Inc., a North
Carolina corporation together with its consolidated subsidiaries. 2




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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. Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date this quarterly report on Form 10-Q is filed with the
Securities and Exchange Commission. We assume no obligation to update or revise
them or provide reasons why actual results may differ. Important factors that
could cause our actual results to differ materially from our expectations
include, without limitation:  
    
    The grocery retailing industry continues to experience fierce
competition from other food retailers, supercenters, mass
merchandisers, club or warehouse stores, drug stores and restaurants.
Our continued success is dependent upon our ability to compete in this
industry, develop and implement retailing strategies and continue to
reduce operating expenses. The competitive environment may cause us to
reduce our prices in order to gain or maintain share of sales, thus
reducing margins. While we believe our opportunities for sustained,
profitable growth are considerable, unanticipated actions of
competitors could impact our sales and net income.
    
    Our future results could be adversely affected due to pricing and
promotional activities of existing and new competitors, including
non-traditional food retailers; our response actions; the state of the
economy, including inflationary or deflationary trends in certain
commodities; recessionary times in the economy; and our ability to
sustain the cost reductions that we have identified and implemented.
    
    Changes in the general business and economic conditions in our
operating regions, including the rate of inflation, population growth,
and employment and job growth in the markets in which we operate may
affect our ability to hire and train qualified employees to operate our
stores. This would negatively affect earnings and sales growth. General
economic changes may also affect the shopping habits of our customers,
which could affect sales and earnings.
    
    Consolidation in the food industry is likely to continue and the
effects on our business, favorable or unfavorable, cannot be foreseen.
    
    Our ability to integrate any companies we acquire or have acquired
and achieve operating improvements at those companies will affect our
financial results.
    
    Increases in the cost of inputs, such as utility costs or raw
material costs, increased product costs, and increased labor and labor related (e.g., health and
welfare and pension) costs could negatively impact financial ratios.
    
    Adverse weather conditions could increase the cost our suppliers
charge for their products, decrease or increase the customer demand for
certain products, interrupt operations at affected stores, or interrupt
operations of our suppliers.
    
    We are subject to labor relations issues, including union
organizing activities, that result in an increase in costs or lead to a
strike, thus impairing operations and decreasing sales. We are also
subject to labor relations issues at entities involved in our supply
chain, including both suppliers and those involved in transportation
and shipping.
    
    Changes in laws and regulations, including changes in accounting
standards, taxation requirements, and environmental laws may have a
material impact on our financial statements.
    
    Our future results could be adversely affected by issues affecting
the food distribution and retail industry generally, such as food
safety concerns, an increase in consumers eating away from home and the
manner in which vendors target their promotional dollars.
    
    Our comparable store sales growth could be affected by increases or
decreases in private-label sales, the impact of our new store openings,
as well as competitors openings. 3




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
    
    Interest expense on variable rate borrowings will vary with changes
in capital markets and the amount of debt that we have outstanding.
Also, although we have long-term notes payable which bear an effective
fixed interest rate, the fair market value of our fixed rate long-term
notes payable is sensitive to changes in interest rates. We run the
risk that market rates will decline, and the required payments will
exceed those based on current market rates.
    
    Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, if development
costs vary from those budgeted, or if significant projects are not
completed in the time frame expected or on budget.
    
    Depreciation and amortization expenses may vary from our estimates due to the timing of new store openings.
    
    LIFO charges and credits will be affected by changes in the cost of inventory
    
    We are self-insured for workers compensation, general liability,
vehicle accident and druggist claims. 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 $3.0
million for automobile liability and general liability, including
druggist liability, with a $2.0 million and a $5.0 million deductible
in addition to the retention on the excess policy for automobile
liability and druggists, respectively. We are insured for covered
costs, including defense costs, in excess of these retentions and
deductibles. 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.
    
    Our access to capital markets on favorable terms and leasing costs
could be negatively affected by credit conditions. Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives. 4




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PART I.FINANCIAL INFORMATION Item 1.Financial Statements DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 13 weeks ended April 3, 2004 and March 29, 2003
(Dollars in thousands) 13 Weeks
    
    13 WeeksEnded
    
    EndedApril 3, 2004
    
    March 29, 2003Net sales and other revenues
    
    $
    3,857,193
    
    
    $
    3,627,592Cost of goods sold
    
    
    2,861,893
    
    
    
    2,750,035Selling and administrative expenses
    
    
    787,091
    
    
    
    737,928Operating income
    
    
    208,209
    
    
    
    139,629Interest expense
    
    
    80,069
    
    
    
    79,328Income from continuing operations
before income taxes
    
    
    128,140
    
    
    
    60,301Provision for income taxes
    
    
    50,969
    
    
    
    21,702Income from continuing
            operations
    
    
    77,171
    
    
    
    38,599Loss from discontinued operations, net of tax
    
    
    53,573
    
    
    
    24,091Income before cumulative effect
of change in accounting principle
    
    
    23,598
    
    
    
    14,508Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    10,946Net income
    
    $
    23,598
    
    
    $
    3,562
 See notes to unaudited condensed consolidated financial statements. 5




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DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of April 3, 2004 and January 3, 2004
(Dollars in thousands) April 3, 2004
    
    January 3, 2004(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    483,026
    
    
    $
    313,629Receivables, net
    
    
    116,696
    
    
    
    111,729Receivable from affiliate
    
    
    11,427
    
    
    
    14,708Inventories
    
    
    1,146,891
    
    
    
    1,203,034Prepaid expenses
    
    
    83,065
    
    
    
    41,234Deferred tax assets
    
    
    
    
    
    
    26,491Other assets
    
    
    14,007
    
    
    
    9,936Total current assets
    
    
    1,855,112
    
    
    
    1,720,761Property and equipment, net
    
    
    2,904,546
    
    
    
    2,980,455Goodwill, net
    
    
    2,894,664
    
    
    
    2,895,541Other intangibles, net
    
    
    762,940
    
    
    
    775,830Reinsurance recoverable from affiliate
    
    
    132,790
    
    
    
    129,869Other assets
    
    
    169,880
    
    
    
    170,582Total assets
    
    $
    8,719,932
    
    
    $
    8,673,038LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    720,556
    
    
    $
    749,687Payable to affiliate
    
    
    321
    
    
    
    2,118Accrued expenses
    
    
    328,894
    
    
    
    298,389Capital lease obligations  current
    
    
    35,962
    
    
    
    35,686Long term debt  current
    
    
    17,339
    
    
    
    13,036Other liabilities  current
    
    
    72,082
    
    
    
    55,626Deferred income taxes
    
    
    6,237
    
    
    
    Income taxes payable
    
    
    16,547
    
    
    
    1,154Total current liabilities
    
    
    1,197,938
    
    
    
    1,155,696Long-term debt
    
    
    2,935,795
    
    
    
    2,940,135Capital lease obligations
    
    
    668,397
    
    
    
    685,852Deferred income taxes
    
    
    239,862
    
    
    
    270,685Other liabilities
    
    
    310,333
    
    
    
    274,956Total liabilities
    
    
    5,352,325
    
    
    
    5,327,324Commitments and contingencies (Note 15)Shareholders equity:Class A non-voting common stock
    
    
    163,076
    
    
    
    163,076Class B voting common stock
    
    
    37,736
    
    
    
    37,736Accumulated other comprehensive loss, net of tax
    
    
    (61,581
    )
    
    
    (62,901
    )Additional paid-in capital, net
of unearned compensation
    
    
    2,475,033
    
    
    
    2,474,412Retained earnings
    
    
    753,343
    
    
    
    733,391Total shareholders equity
    
    
    3,367,607
    
    
    
    3,345,714Total liabilities and
shareholders equity
    
    $
    8,719,932
    
    
    $
    8,673,038
 See notes to unaudited condensed consolidated financial statements. 6




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DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 13 weeks ended April 3, 2004 and March 29, 2003
(Dollars in thousands) 13 Weeks Ended
    
    13 Weeks EndedApril 3, 2004
    
    March 29, 2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    23,598
    
    
    $
    3,562Adjustments to reconcile net income
to net cash provided by operating activities:Cumulative effect of change in accounting
principle, net of tax (Note 10)
    
    
    
    
    
    
    10,946Change in accounting method (Note 10)
    
    
    
    
    
    
    87,308Provision for loss on disposal of discontinued
operations
    
    
    72,842
    
    
    
    27,507Streamline charges
    
    
    
    
    
    
    2,346Depreciation and amortization
    
    
    116,179
    
    
    
    110,276Depreciation and amortization  discontinued operations
    
    
    802
    
    
    
    1,939Amortization of debt fees/costs
    
    
    498
    
    
    
    489Amortization of debt premium
    
    
    317
    
    
    
    283Amortization of deferred loss on derivative
    
    
    2,111
    
    
    
    2,071Amortization and termination of restricted shares
    
    
    948
    
    
    
    1,237Accretion of escrow
    
    
    (490
    )
    
    
    Accrued interest on interest rate swap
    
    
    (3,306
    )
    
    
    (4,201
    )(Gain) loss on disposals of property and
capital lease terminations
    
    
    (743
    )
    
    
    1,592Deferred income taxes provision (benefit)
    
    
    1,103
    
    
    
    (27,579
    )Other
    
    
    13
    
    
    
    496Changes in operating assets and liabilities which provided (used) cash:Receivables
    
    
    (4,967
    )
    
    
    25,287Net receivable from affiliate
    
    
    1,484
    
    
    
    (6,106
    )Income tax receivable
    
    
    
    
    
    
    6,036Inventories
    
    
    56,143
    
    
    
    71,669Prepaid expenses
    
    
    (41,831
    )
    
    
    (49,068
    )Other assets
    
    
    1,536
    
    
    
    (1,544
    )Accounts payable
    
    
    (29,131
    )
    
    
    (83,664
    )Accrued expenses
    
    
    28,564
    
    
    
    61,750Income taxes payable
    
    
    16,330
    
    
    
    20,355Other liabilities
    
    
    (4,546
    )
    
    
    (14,842
    )Total adjustments
    
    
    213,856
    
    
    
    244,583Net cash provided by operating activities
    
    
    237,454
    
    
    
    248,145CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (58,263
    )
    
    
    (58,653
    )Proceeds from sale of property
    
    
    4,692
    
    
    
    1,617Other investment activity
    
    
    (2,513
    )
    
    
    (2,235
    )Net cash used in investing activities
    
    
    (56,084
    )
    
    
    (59,271
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on long-term debt
    
    
    (2,318
    )
    
    
    (4,247
    )Principal payments under capital lease obligations
    
    
    (8,488
    )
    
    
    (7,791
    )Escrow funding of debt service requirements
    
    
    2,808
    
    
    
    Parent common stock repurchased
    
    
    (4,567
    )
    
    
    (19
    )Tax payment for restricted shares vested
    
    
    (432
    )
    
    
    Proceeds from stock options exercised
    
    
    1,024
    
    
    
    Net cash used in financing activities
    
    
    (11,973
    )
    
    
    (12,057
    )Net increase in cash and cash equivalents
    
    
    169,397
    
    
    
    176,817Cash and cash equivalents at beginning of year
    
    
    313,629
    
    
    
    131,641Cash and cash equivalents at end of period
    
    $
    483,026
    
    
    $
    308,458
 See notes to unaudited condensed consolidated financial statements. 7




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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
January 3, 2004 for further information.
Reclassifications and restatements for discontinued operations have been made
for all current and historical information presented herein from that contained
in the Companys prior SEC filings on Forms 10-Q and 10-K. The financial information presented herein has been prepared in accordance with
the Companys customary accounting practices. In the opinion of management, the
financial information includes all adjustments, including normal recurring
items, necessary for a fair presentation of interim results. 2) Supplemental Disclosure of Cash Flow Information: Selected cash payments and non-cash activities during the period were as
follows: 13 Weeks
    
    13 WeeksEnded
    
    Ended(Dollars in thousands)
    
    April 3, 2004
    
    March 29, 2003Cash payments for income taxes
    
    $
    2,893
    
    
    $
    9,269Cash payments for interest, net of amounts
capitalized
    
    
    23,284
    
    
    
    20,217Non-cash investing and financing activities:Capitalized lease obligations incurred for store
properties and equipment
    
    
    3,300
    
    
    
    7,301Change in reinsurance recoverable and other liabilities
    
    
    2,921
    
    
    
    3,734Harveys adjustment to purchase price allocation:Property
    
    
    61
    
    
    
    Reduction of tax payable and goodwill for tax adjustment
    
    
    937
    
    
    
    
 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% and 78% of
inventories on April 3, 2004 and January 3, 2004, respectively. Meat, produce
and deli inventories are valued on the average cost method rather than the LIFO
method. If the Company did not report under the LIFO method, inventories would
have been $34.9 million and $33.6 million greater as of April 3, 2004 and
January 3, 2004, respectively. Application of the LIFO method resulted in
increases in cost of goods sold of $1.3 million for the 13 weeks ended April 3,
2004 and no impact on cost of goods sold for the 13 weeks ended March 29, 2003.
As stated in Note 10, the Company changed its application of the LIFO method of
accounting for store inventories from the retail method to the average item
cost method effective December 29, 2002. In 2003, upon the adoption of Emerging Issues Task Force (EITF) Issue No.
02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor, certain vendor allowances are recorded
as a reduction of inventory. Previously, the Company recorded vendor allowances
as a reduction of cost of sales when earned. This change had a timing impact on
certain vendor allowances that are now an adjustment to inventory cost and
recognized in cost of sales when the product is sold. 4) Supplier Allowances The Company receives allowances and credits from suppliers primarily for volume
incentives, new product introductions, in-store promotion income and
co-operative advertising income. Volume incentives are based on contractual
arrangements generally covering a period of one year or less and have been
historically included in the cost of inventory and recognized as earned in cost
of sales when the
product is sold. New product introduction allowances compensate the Company for
costs incurred associated with product handling and have been historically
deferred and recognized as a reduction in cost of sales over the product
introductory period. Non-refundable credits from suppliers for in-store
promotions such as product displays require related activities by the Company.
Similarly, co-operative advertising requires the Company to conduct the related
advertising. In-store promotions income and co-operative advertising income
have historically been included in cost of sales and recognized when the
Company performs the related activities. In 2003, upon the adoption of EITF Issue No. 02-16, in-store promotion and
co-operative advertising allowances are now recorded as a reduction in the cost
of inventory and recognized in cost of sales when the product is sold unless
the allowance represents the reimbursement 8




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of a specific, identifiable cost
incurred by the Company to sell the vendors product. The reimbursement of
specific, identifiable costs to sell a vendors product should be netted
against the cost the Company incurs and any excess reimbursement should be
included in cost of sales and inventory. The Company has reviewed the
promotional funding received from vendors and concluded that these arrangements
are primarily for general advertising purposes and not the reimbursement of a
specific, identifiable cost incurred by the Company. 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, during the first quarter of 2003. This charge was recorded as a decrease
in net income in the Companys consolidated statement of income and reflects an
adjustment, which decreased the Companys opening inventory balance. The
adoption effectively transfers a portion of the benefit associated with
supplier allowances from cost of sales to inventory until the related product
is sold. 5) Reclassification Certain financial statement items in the prior period have been reclassified to
conform to the current periods presentation. 6) Accounting for Stock Issued to Employees The Company participates in a stock option plan (the Delhaize Group Plan) of
its parent, Delhaize Group, which is described fully in Note 14 to the
Companys Annual Report on Form 10-K for the year ended January 3, 2004. The
Company accounts for the Delhaize Group Plan under the recognition and
measurement principles of Accounting Principles Board, or 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 the Delhaize Group Plan have an exercise price equal the
market value of the underlying Delhaize Group American Depository Share stock
on the date of grant. Additionally, the Company still has options outstanding
under a 1996 Food Lion Plan, 1988 and 1998 Hannaford Plans and a 2000 Delhaize
America Plan; however, the Company can no longer grant options under these
plans. The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards (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. 13 weeks ended
    
    13 weeks endedApril 3, 2004
    
    March 29, 2003Net earnings  as reported
    
    $
    23,598
    
    
    $
    3,562Deduct: Total stock-based employee
compensation expense determined
using fair value based method
(net of tax)
    
    
    2,411
    
    
    
    2,405Net earningspro forma
    
    $
    21,187
    
    
    $
    1,157
 The weighted average fair value at date of grant for options granted under the
Delhaize Group Plan during the first quarter of 2004 and 2003 was $10.65 and
$5.36 per option, respectively. The fair value of options at date of grant was
estimated using the Black-Scholes model based on the following assumptions: 13 Weeks Ended
    
    13 Weeks EndedApril 3, 2004
    
    March 29, 2003Expected dividend yield(%)
    
    
    3.6
    
    
    
    2.6Expected volatility (%)
    
    
    41.0
    
    
    
    41.0Risk-free interest rate(%)
    
    
    3.1
    
    
    
    3.2Expected term (years)
    
    
    5.4
    
    
    
    5.2
 7) Derivative Financial Instruments During the fourth quarter of 2001 and the third quarter of 2002, the Company
entered into interest rate swap agreements, effectively converting a portion of
the 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 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. On December 30, 2003, the
Company terminated $100 million of the 2011 interest rate swap arrangements.
The notional principal amounts of interest rate swap arrangements at April 3,
2004 were $300 million maturing in 2006 and $100 million maturing in 2011. For
the 13 weeks ended April 3, 2004 and March 29, 2003, interest expense was
reduced by $3.4 million and $4.2 million, respectively, 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,
Derivative Instruments 9




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##### 



and Hedging Activities. The Company has recorded a
derivative asset in connection with these agreements in the amount of $24.8
million and $19.5 million at April 3, 2004 and January 3, 2004, respectively,
which is included in the Companys Condensed Consolidated Balance Sheet in
Other Assets. Prior to the offering of bonds and debentures in 2001, the Company entered into
interest rate agreements to hedge against potential increases in interest
rates. These hedge agreements were settled in 2001 with the loss recorded in
other comprehensive income (loss), net of taxes and amortized to interest
expense over the term of the associated debt securities. This 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, net of
taxes, at April 3, 2004, and January 3, 2004, totaled approximately $43.0
million and $44.3 million, respectively. 8) Intangible Assets Intangible assets are comprised of the following: (Dollars in thousands)
    
    April 3, 2004
    
    Fiscal 2003Goodwill
    
    $
    2,983,616
    
    
    $
    2,984,492Trademarks
    
    
    486,752
    
    
    
    486,752Favorable lease rights
    
    
    362,630
    
    
    
    365,883Prescription files
    
    
    18,626
    
    
    
    18,693Liquor license
    
    
    3,528
    
    
    
    3,528Other
    
    
    23,663
    
    
    
    23,4623,878,815
    
    
    
    3,882,810Less accumulated amortization
    
    
    221,211
    
    
    
    211,439$
    3,657,604
    
    
    $
    3,671,371
 The following represents a summary of changes in gross goodwill at April 3,
2004
and fiscal 2003. April 3, 2004
    
    Fiscal 2003Balance at beginning of year
    
    $
    2,984,492
    
    
    $
    2,996,256Additions
    
    
    61
    
    
    
    4,057Reduction of goodwill for
tax adjustment
    
    
    (937
    )
    
    
    (15,821
    )Balance at end of period
    
    $
    2,983,616
    
    
    $
    2,984,492
 Amortization expense totaled $10.1 million for the 13 weeks ended April 3, 2004
and $9.1 million for the 13 weeks ended March 29, 2003. The Companys policy requires that an annual impairment assessment be conducted
in the fourth quarter of each year in accordance with SFAS 142. The Company had
no impairment loss for 2003. The carrying amount of goodwill and trademarks at each of the Companys
reporting units follows: April 3, 2004
    
    April 3, 2004
    
    Fiscal 2003
    
    Fiscal 2003(Dollars in millions)
    
    Goodwill
    
    Trademarks
    
    Goodwill
    
    TrademarksFood Lion
    
    $
    1,142
    
    
    $
    249
    
    
    $
    1,138
    
    
    $
    249Hannaford
    
    
    1,749
    
    
    
    223
    
    
    
    1,754
    
    
    
    223Harveys
    
    
    4
    
    
    
    5
    
    
    
    4
    
    
    
    5$
    2,895
    
    
    $
    477
    
    
    $
    2,896
    
    
    $
    477
 As of April 3, 2004 and January 3, 2004, the Companys intangible assets with
finite lives consist of favorable lease rights, liquor licenses, pharmacy
files, and developed software. The components of its intangible assets with
finite lives are as follows: April 3, 2004
    
    Fiscal 2003Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    Accumulated(Dollars in millions)
    
    Value
    
    Amortization
    
    Net
    
    Value
    
    Amortization
    
    NetFavorable lease
rights
    
    $
    363
    
    
    $
    (111
    )
    
    $
    252
    
    
    $
    366
    
    
    $
    (102
    )
    
    $
    264Other
    
    
    46
    
    
    
    (12
    )
    
    
    34
    
    
    
    46
    
    
    
    (11
    )
    
    
    35Total
    
    $
    409
    
    
    $
    (123
    )
    
    $
    286
    
    
    $
    412
    
    
    $
    (113
    )
    
    $
    299
 Estimated amortization expense for intangible assets with finite lives for the
five succeeding fiscal years follows: (Dollars in millions)2004
    
    $
    37.62005
    
    
    35.12006
    
    
    32.92007
    
    
    29.02008
    
    
    23.9
 10




---



##### 



9) Comprehensive Income (Loss) Comprehensive income (loss) includes net earnings and other comprehensive
earnings (losses). Other comprehensive earnings (losses) include items that are
currently 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, minimum pension liability adjustments and
unrealized security holding gains. Comprehensive income was $24.9 million and
$5.3 million for the 13 weeks ended April 3, 2004 and March 29, 2003,
respectively. 10) Accounting Changes In the second quarter of 2003, the Company changed its application of the LIFO
method of accounting for store inventories from the retail method to the
average item cost method. The effect of the change on the December 28, 2002
inventory valuation resulted in a decrease in inventory of $87.3 million at the
beginning of fiscal year 2003. The change was made to more accurately reflect
inventory value by eliminating the estimation inherent in the retail method.
The cumulative effect of this change on periods prior to December 28, 2002
cannot be determined and accordingly, the effect of this change has been
included as a component of cost of sales in the condensed consolidated
statement of income for the 13 weeks ended March 29, 2003. In addition, the Company adopted EITF Issue No. 02-16 during first quarter of
2003 and recorded the cumulative effect of a change in accounting principle of
$10.9 million, net of tax during the first quarter. 11) Store Closings The following table shows the number of stores closed at the end of the first
quarter of 2004: DiscontinuedOperations
    
    Closed
    
    Planned Closings
    
    TotalAs of January 3, 2004
    
    
    39
    
    
    
    165
    
    
    
    2
    
    
    
    206Store closings added
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Stores sold/lease terminated
    
    
    (4
    )
    
    
    (2
    )
    
    
    
    
    
    
    (6
    )As of April 3, 2004
    
    
    70
    
    
    
    163
    
    
    
    2
    
    
    
    235
 The following table reflects closed store liabilities as of April 3, 2004 and
activity during the quarter, including additions to closed store liabilities
charged to operations or discontinued operations and adjustments to liabilities
based on changes in facts and circumstances and payments made. Qtr 1 2004 Disc Op
    
    Qtr 1 2004 Closed
    
    Qtr 1 2004 TotalBalance at January 3, 2004
    
    $
    23.4
    
    
    $
    116.6
    
    
    $
    140.0Additions:Store closings  lease obligations
    
    
    46.6
    
    
    
    0.0
    
    
    
    46.6Store closing  other exit costs
    
    
    6.9
    
    
    
    0.0
    
    
    
    6.9Total additions
    
    
    53.5
    
    
    
    0.0
    
    
    
    53.5Adjustments:Adjustments to estimates-lease obligation
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    0.2Adjustments to estimates-other exit costs
    
    
    0.2
    
    
    
    (0.3
    )
    
    
    (0.1
    )Total adjustments
    
    
    0.6
    
    
    
    (0.5
    )
    
    
    0.1Reductions:Lease payments made
    
    
    (1.9
    )
    
    
    (3.6
    )
    
    
    (5.5
    )Payments for other exit costs
    
    
    (0.4
    )
    
    
    (0.9
    )
    
    
    (1.3
    )Total reductions
    
    
    (2.3
    )
    
    
    (4.5
    )
    
    
    (6.8
    )Balance at April 3, 2004
    
    $
    75.2
    
    
    $
    111.6
    
    
    $
    186.8
 The April 3, 2004 balance of approximately $186.8 million consisted of lease
liabilities and other exit cost liabilities of $155.5 million and $31.3
million, respectively and includes lease liabilities of $65.4 million and other
exit costs of $9.8 million associated with discontinued operations. During the
first quarter of 2004, the Company completed the closure of 35 underperforming
stores, 34 Kash nKarry stores and one Food Lion store. The Company 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 19 years. 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 11




---



##### 



of the
obligation is reversed in the period that such settlement is determined. The
Company uses a discount rate based on the current treasury note rates adjusted
for the Companys 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 the Companys 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. 12) Discontinued Operations The Company classifies operations as discontinued if the operations and cash
flows have been eliminated from ongoing operations, there is no significant
continuing involvement and a re-location within the vicinity has not occurred. The Company closed 35 underperforming stores during the 13 weeks ended April 3,
2004, as well as, 44 underperforming stores through fiscal 2003. In accordance
with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, a portion of the costs associated with the closure of
these stores, as well as related operating activity prior to closing for these
stores, was recorded in Loss from discontinued operations, net of tax in the
Companys Consolidated Statement of Income. Operating activity prior to closing for the discontinued stores is shown below: 13 weeks ended
    
    13 weeks ended(Dollars in thousands)
    
    April 3, 2004
    
    March 29, 2003Net sales and other revenues
    
    $
    22,747
    
    
    $
    70,047Net (loss)
    
    $
    (5,413
    )
    
    $
    (5,655
    )
 During the first quarter of 2004 in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, the Company recorded a
$72.8 million loss to discontinued operations ($46.4 million after taxes). The
loss included an initial reserve of $53.5 million for rent, real estate taxes,
common area maintenance expenses (other liabilities) and $1.9 million for
severance and outplacement costs (accrued expenses). The remaining loss
included property retirement (asset impairment) of $22.1 million and gains on
capital lease retirements of $4.7 million. Additional discontinued operations
expenses not reserved totaled $1.8 million after taxes for the first quarter of
2004. In the first quarter of 2003, 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 operations expenses not reserved totaled $0.8 million after taxes
for the first quarter of 2003. The following table shows the reserve balances for discontinued operations as
of April 3, 2004: Other
    
    Accrued(Dollars in thousands)
    
    liabilities
    
    expenses
    
    TotalReserve balance as of January 3, 2004
    
    $
    (23,417
    )
    
    $
    
    
    
    $
    (23,417
    )Additions
    
    
    (53,458
    )
    
    
    (1,941
    )
    
    
    (55,399
    )Utilizations
    
    
    1,716
    
    
    
    1,831
    
    
    
        3,547Reserve balance as of April 3, 2004
    
    $
    (75,159
    )
    
    $
    (110
    )
    
    $
        (75,269
    )
 13) Recently Issued and Adopted Accounting Standards In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which is an interpretation of
Accounting Research Bulletin (ARB) No. 51. FIN 46 addresses consolidation by
business enterprises of variable interest entities. This standard does not
currently have an impact on the Companys financial statements. 14) Guarantor Subsidiaries Delhaize America, Inc. has issued 7.375% notes due 2006, 7.55% notes due 2007,
8.125% notes due 2011, 8.05% notes due 2027 and 9.000% debentures due 2031.
Substantially all of Delhaize Americas subsidiaries (the Guarantor
Subsidiaries) have fully and unconditionally, jointly and severally guaranteed
this debt. The Guarantor Subsidiaries and non-guarantor subsidiaries are
wholly-owned subsidiaries of the Company. The non-guaranteeing subsidiaries
represent less than 3% on an individual and aggregate basis of consolidated
assets, pretax earnings, cash flow, and equity. Therefore, the non-guarantor
subsidiaries information is not separately presented in the tables below, but
rather is included in the column labeled Guarantor Subsidiaries. Condensed
consolidated financial information for the Company and its Guarantor
Subsidiaries is as follow: 12




---



##### 



Delhaize America, Inc.
Consolidated Statements of Income (Loss)
For the 13 Weeks ended April 3, 2004 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales and other revenues
    
    $
    
    
    
    $
    3,857,193
    
    
    $
    
    
    
    $
    3,857,193Cost of goods sold
    
    
    
    
    
    
    2,861,893
    
    
    
    
    
    
    
    2,861,893Selling and administrative
expenses
    
    
    8,275
    
    
    
    778,816
    
    
    
    
    
    
    
    787,091Operating (loss) income
    
    
    (8,275
    )
    
    
    216,484
    
    
    
    
    
    
    
    208,209Interest expense
    
    
    56,456
    
    
    
    23,613
    
    
    
    
    
    
    
    80,069Equity in earnings of
subsidiaries
    
    
    (63,731
    )
    
    
    
    
    
    
    63,731
    
    
    
    (Loss) income from
continuing operations
before income taxes
    
    
    (1,000
    )
    
    
    192,871
    
    
    
    (63,731
    )
    
    
    128,140(Benefit) provision for
income taxes
    
    
    (24,598
    )
    
    
    75,567
    
    
    
    
    
    
    
    50,969Income before loss from
discontinued operations
    
    
    23,598
    
    
    
    117,304
    
    
    
    (63,731
    )
    
    
    77,171Loss from discontinued
operations, net of tax
    
    
    
    
    
    
    53,573
    
    
    
    
    
    
    
    53,573Net income
    
    $
    23,598
    
    
    $
    63,731
    
    
    $
    (63,731
    )
    
    $
    23,598
 Delhaize America, Inc.
Consolidated Statements of Income (Loss)
For the 13 Weeks ended March 29, 2003 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales and other revenues
    
    $
    
    
    
    $
    3,627,592
    
    
    $
    
    
    
    $
    3,627,592Cost of goods sold
    
    
    
    
    
    
    2,750,035
    
    
    
    
    
    
    
    2,750,035Selling and administrative
Expenses
    
    
    5,317
    
    
    
    732,611
    
    
    
    
    
    
    
    737,928Operating (loss) income
    
    
    (5,317
    )
    
    
    144,946
    
    
    
    
    
    
    
    139,629Interest expense
    
    
    55,146
    
    
    
    24,182
    
    
    
    
    
    
    
    79,328Equity in earnings of
subsidiaries
    
    
    (41,073
    )
    
    
    
    
    
    
    41,073
    
    
    
    (Loss) income from
continuing operations
before income taxes
    
    
    (19,390
    )
    
    
    120,764
    
    
    
    (41,073
    )
    
    
    60,301(Benefit) provision for
income taxes
    
    
    (22,952
    )
    
    
    44,654
    
    
    
    
    
    
    
    21,702Income before loss from
discontinued operations
    
    
    3,562
    
    
    
    76,110
    
    
    
    (41,073
    )
    
    
    38,599Loss from discontinued
operations, net of tax
    
    
    
    
    
    
    24,091
    
    
    
    
    
    
    
    24,091Income before cumulative
effect of changes in
accounting principle
    
    
    3,562
    
    
    
    52,019
    
    
    
    (41,073
    )
    
    
    14,508Cumulative effect of
changes in accounting
principle, net of tax
    
    
    
    
    
    
    10,946
    
    
    
    
    
    
    
    10,946Net income
    
    $
    3,562
    
    
    $
    41,073
    
    
    $
    (41,073
    )
    
    $
    3,562
 13




---



##### 



Delhaize America, Inc.
Consolidated Balance Sheets
As of April 3, 2004 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    332,752
    
    
    $
    150,274
    
    
    $
    
    
    
    $
    483,026Receivables, net
    
    
    1,327
    
    
    
    115,634
    
    
    
    (265
    )
    
    
    116,696Receivable from affiliate
    
    
    9,386
    
    
    
    25,469
    
    
    
    (23,428
    )
    
    
    11,427Income tax receivable
    
    
    
    
    
    
    1,813
    
    
    
    (1,813
    )
    
    
    Inventories
    
    
    
    
    
    
    1,146,891
    
    
    
    
    
    
    
    1,146,891Prepaid expenses
    
    
    1,711
    
    
    
    81,354
    
    
    
    
    
    
    
    83,065Other assets
    
    
    
    
    
    
    14,007
    
    
    
    
    
    
    
    14,007Total current assets
    
    
    345,176
    
    
    
    1,535,442
    
    
    
    (25,506
    )
    
    
    1,855,112Property and equipment, net
    
    
    7,004
    
    
    
    2,897,542
    
    
    
    
    
    
    
    2,904,546Goodwill, net
    
    
    
    
    
    
    2,894,664
    
    
    
    
    
    
    
    2,894,664Other intangibles, net
    
    
    
    
    
    
    762,940
    
    
    
    
    
    
    
    762,940Reinsurance recoverable from affiliate
    
    
    
    
    
    
    132,790
    
    
    
    
    
    
    
    132,790Deferred tax asset
    
    
    67,575
    
    
    
    
    
    
    
    (67,575
    )
    
    
    Other assets
    
    
    94,771
    
    
    
    75,109
    
    
    
    
    
    
    
    169,880Investment in and advances to
subsidiaries
    
    
    5,842,726
    
    
    
    
    
    
    
    (5,842,726
    )
    
    
    Total assets
    
    $
    6,357,252
    
    
    $
    8,298,487
    
    
    $
    (5,935,807
    )
    
    $
    8,719,932Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    63
    
    
    $
    720,493
    
    
    $
    
    
    
    $
    720,556Payable to affiliate
    
    
    12,938
    
    
    
    10,811
    
    
    
    (23,428
    )
    
    
    321Accrued expenses
    
    
    110,368
    
    
    
    218,526
    
    
    
    
    
    
    
    328,894Capital lease obligations  current
    
    
    
    
    
    
    35,962
    
    
    
    
    
    
    
    35,962Long-term debt  current
    
    
    
    
    
    
    17,604
    
    
    
    (265
    )
    
    
    17,339Other liabilities  current
    
    
    
    
    
    
    72,082
    
    
    
    
    
    
    
    72,082Deferred income taxes
    
    
    
    
    
    
    6,237
    
    
    
    
    
    
    
    6,237Income taxes payable
    
    
    18,360
    
    
    
    
    
    
    
    (1,813
    )
    
    
    16,547Total current liabilities
    
    
    141,729
    
    
    
    1,081,715
    
    
    
    (25,506
    )
    
    
    1,197,938Long-term debt
    
    
    2,847,511
    
    
    
    88,284
    
    
    
    
    
    
    
    2,935,795Capital lease obligations
    
    
    
    
    
    
    668,397
    
    
    
    
    
    
    
    668,397Deferred income taxes
    
    
    
    
    
    
    307,437
    
    
    
    (67,575
    )
    
    
    239,862Other liabilities
    
    
    405
    
    
    
    309,928
    
    
    
    
    
    
    
    310,333Total liabilities
    
    
    2,989,645
    
    
    
    2,455,761
    
    
    
    (93,081
    )
    
    
    5,352,325Commitments and contingencies (Note 15)Total shareholders equity
    
    
    3,367,607
    
    
    
    5,842,726
    
    
    
    (5,842,726
    )
    
    
    3,367,607Total liabilities and
shareholdersequity
    
    $
    6,357,252
    
    
    $
    8,298,487
    
    
    $
    (5,935,807
    )
    
    $
    8,719,932
 14




---



##### 



Delhaize America, Inc.
Consolidated Balance Sheets
As of January 3, 2004 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    147,090
    
    
    $
    166,539
    
    
    $
    
    
    
    $
    313,629Receivables, net
    
    
    1,327
    
    
    
    110,667
    
    
    
    (265
    )
    
    
    111,729Receivable from affiliate
    
    
    12,086
    
    
    
    72,138
    
    
    
    (69,516
    )
    
    
    14,708Income tax receivable
    
    
    11,895
    
    
    
    
    
    
    
    (11,895
    )
    
    
    Inventories
    
    
    
    
    
    
    1,203,034
    
    
    
    
    
    
    
    1,203,034Prepaid expenses
    
    
    2,409
    
    
    
    38,825
    
    
    
    
    
    
    
    41,234Deferred tax assets
    
    
    68,378
    
    
    
    26,491
    
    
    
    (68,378
    )
    
    
    26,491Other assets
    
    
    
    
    
    
    9,936
    
    
    
    
    
    
    
    9,936Total current assets
    
    
    243,185
    
    
    
    1,627,630
    
    
    
    (150,054
    )
    
    
    1,720,761Property and equipment, net
    
    
    7,222
    
    
    
    2,973,233
    
    
    
    
    
    
    
    2,980,455Goodwill, net
    
    
    
    
    
    
    2,895,541
    
    
    
    
    
    
    
    2,895,541Other intangibles, net
    
    
    
    
    
    
    775,830
    
    
    
    
    
    
    
    775,830Reinsurance recoverable from affiliate
    
    
    
    
    
    
    129,869
    
    
    
    
    
    
    
    129,869Other assets
    
    
    88,540
    
    
    
    82,042
    
    
    
    
    
    
    
    170,582Investment in and advances to
subsidiaries
    
    
    5,964,277
    
    
    
    
    
    
    
    (5,964,277
    )
    
    
    Total assets
    
    $
    6,303,224
    
    
    $
    8,484,145
    
    
    $
    (6,114,331
    )
    
    $
    8,673,038Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    663
    
    
    $
    749,024
    
    
    $
    
    
    
    $
    749,687Payable to affiliate
    
    
    57,638
    
    
    
    13,996
    
    
    
    (69,516
    )
    
    
    2,118Accrued expenses
    
    
    53,414
    
    
    
    244,975
    
    
    
    
    
    
    
    298,389Capital lease obligations  current
    
    
    
    
    
    
    35,686
    
    
    
    
    
    
    
    35,686Long-term debt  current
    
    
    
    
    
    
    13,301
    
    
    
    (265
    )
    
    
    13,036Other liabilities  current
    
    
    
    
    
    
    55,626
    
    
    
    
    
    
    
    55,626Income taxes payable
    
    
    
    
    
    
    13,049
    
    
    
    (11,895
    )
    
    
    1,154Total current liabilities
    
    
    111,715
    
    
    
    1,125,657
    
    
    
    (81,676
    )
    
    
    1,155,696Long-term debt
    
    
    2,845,482
    
    
    
    94,653
    
    
    
    
    
    
    
    2,940,135Capital lease obligations
    
    
    
    
    
    
    685,852
    
    
    
    
    
    
    
    685,852Deferred income taxes
    
    
    
    
    
    
    339,063
    
    
    
    (68,378
    )
    
    
    270,685Other liabilities
    
    
    313
    
    
    
    274,643
    
    
    
    
    
    
    
    274,956Total liabilities
    
    
    2,957,510
    
    
    
    2,519,868
    
    
    
    (150,054
    )
    
    
    5,327,324Commitments and contingencies (Note 15)Total shareholders equity
    
    
    3,345,714
    
    
    
    5,964,277
    
    
    
    (5,964,277
    )
    
    
    3,345,714Total liabilities and
shareholdersequity
    
    $
    6,303,224
    
    
    $
    8,484,145
    
    
    $
    (6,114,331
    )
    
    $
    8,673,038
 15




---



##### 



Delhaize America, Inc.
Consolidated Statements of Cash Flows
For the 13 Weeks ended April 3, 2004 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    ConsolidatedNet cash (used in) provided by
operating activities
    
    $
    (6,031
    )
    
    $
    243,485
    
    
    $
    237,454Cash flows from investing activitiesCapital expenditures
    
    
    (1
    )
    
    
    (58,262
    )
    
    
    (58,263
    )Proceeds from sale of property
    
    
    
    
    
    
    4,692
    
    
    
    4,692Other investment activity
    
    
    (2,542
    )
    
    
    29
    
    
    
    (2,513
    )Net cash used in investing
activities
    
    
    (2,543
    )
    
    
    (53,541
    )
    
    
    (56,084
    )Cash flows from financing activitiesPrincipal payments on long-term debt
    
    
    
    
    
    
    (2,318
    )
    
    
    (2,318
    )Principal payments under capital
lease obligations
    
    
    
    
    
    
    (8,488
    )
    
    
    (8,488
    )Escrow maturities
    
    
    
    
    
    
    2,808
    
    
    
    2,808Net change in advances to
subsidiaries
    
    
    198,211
    
    
    
    (198,211
    )
    
    
    Parent common stock repurchased
    
    
    (4,567
    )
    
    
    
    
    
    
    (4,567
    )Tax payment for restricted shares
vested
    
    
    (432
    )
    
    
    
    
    
    
    (432
    )Proceeds from stock options exercised
    
    
    1,024
    
    
    
    
    
    
    
    1,024Net cash provided by (used in)
financing activities
    
    
    194,236
    
    
    
    (206,209
    )
    
    
    (11,973
    )Net increase (decrease) in cash and
cash equivalents
    
    
    185,662
    
    
    
    (16,265
    )
    
    
    169,397Cash and cash equivalents at beginning
of year
    
    
    147,090
    
    
    
    166,539
    
    
    
    313,629Cash and cash equivalents at end of
period
    
    $
    332,752
    
    
    $
    150,274
    
    
    $
    483,026
 Delhaize America, Inc.
Consolidated Statements of Cash Flows
For the 13 Weeks ended March 29, 2003 Parent
    
    Guarantor(Dollars in thousands)
    
    (Issuer)
    
    Subsidiaries
    
    ConsolidatedNet cash provided by
operating activities
    
    $
    489
    
    
    $
    247,656
    
    
    $
    248,145Cash flows from investing activitiesCapital expenditures
    
    
    (3
    )
    
    
    (58,650
    )
    
    
    (58,653
    )Proceeds from sale of property
    
    
    
    
    
    
    1,617
    
    
    
    1,617Other investment activity
    
    
    (2,485
    )
    
    
    250
    
    
    
    (2,235
    )Net cash used in investing
activities
    
    
    (2,488
    )
    
    
    (56,783
    )
    
    
    (59,271
    )Cash flows from financing activitiesPrincipal payments on long-term debt
    
    
    
    
    
    
    (4,247
    )
    
    
    (4,247
    )Principal payments under capital
lease obligations
    
    
    
    
    
    
    (7,791
    )
    
    
    (7,791
    )Net change in advances to
subsidiaries
    
    
    160,255
    
    
    
    (160,255
    )
    
    
    Parent common stock repurchased
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )Net cash provided by (used in)
financing activities
    
    
    160,236
    
    
    
    (172,293
    )
    
    
    (12,057
    )Net increase in cash and
cash equivalents
    
    
    158,237
    
    
    
    18,580
    
    
    
    176,817Cash and cash equivalents at beginning
of year
    
    
    31,827
    
    
    
    99,814
    
    
    
    131,641Cash and cash equivalents at end of
period
    
    $
    190,064
    
    
    $
    118,394
    
    
    $
    308,458
 16




---



##### 



The wholly-owned direct subsidiaries named below fully and unconditionally and
jointly and severally guarantee Delhaize Americas 7.375% notes due 2006,
7.550% notes due 2007, 8.125% notes due 2011, 8.05% notes due 2027 and 9.000%
debentures due 2031.  
    
    Food Lion, LLC is a North Carolina limited liability company that
operates substantially 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
substantially all of the Companys Hannafords 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
executive offices are located at 6401 Harney Road, Suite A, Tampa,
Florida 33610.  
    
    J.H. Harvey Co., LLC is a Georgia limited liability company that
operates all of the Companys Harveys stores. Harveys executive
offices are located at 727 S. Davis St., Nashville, Georgia 31639. 15) Commitments and Contingencies The Company is involved in various claims and lawsuits arising out of the
normal conduct of its business. Although the ultimate outcome of these legal
proceedings cannot be predicted with certainty, the Companys management
believes that the resulting liability, if any, would not have a material effect
upon the Companys consolidated results of operation, financial position or
liquidity. Item 2.Managements Discussion and Analysis of Financial Condition and Result
of Operations (13 weeks ended April 3, 2004 compared to the 13 weeks ended
March 29, 2003) The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto in this Quarterly
Report and the audited financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operation contained in our Form
10-K for the year ended January 3, 2004. Executive Summary Delhaize America, a wholly-owned subsidiary of Delhaize Group, engages in one
line of business, the operation of retail food supermarkets in the eastern
United States. Delhaize America is a holding company having four subsidiary
operating companies that do business primarily under the banners Food Lion,
Hannaford, Kash n Karry and Harveys. Our 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. We offer nationally and regionally advertised
brand name merchandise as well as products manufactured and packaged for us
under the private labels of Food Lion, Hannaford, Kash n Karry and
Harveys. Our business is highly competitive and characterized by low profit margins. We
compete with national, regional and local supermarket chains, supercenters,
discount food stores, single unit stores, convenience stores, warehouse clubs,
drug stores and restaurants. We continue to develop and evaluate new retailing
strategies at each of our banners in the eastern United States to respond to
local consumers needs and maintain and increase our market share. During the first quarter of
fiscal 2004, Delhaize America posted increased sales and successful cost and expense reduction
initiatives.  
    
    Food Lion Focus. During first quarter of 2004, Food Lion continued
to focus on excellence in execution, in-stock conditions, cleanliness,
freshness, increased convenience, customer service and local marketing.
Food Lion continued to experience accelerated sales momentum in first quarter of 2004 as
compared to first quarter of 2003.  
    
    Market Renewal. Following the launch of Food Lions market renewal
in Raleigh in fiscal 2003, a second renewal program is underway  in Charlotte, North Carolina. Market renewal represents a change in
Food Lions historical approach to remodeling activity. In the past,
annual capital spending for remodel activity was dedicated to stores
based on age and our related remodel calendar. Through market renewal,
remodel spending is focused on key markets to maximize consumer
recognition and reaction. Market renewal was developed to make our
stores, particularly produce and meat departments, more appealing and
customer focused. As an integral part of this project, Food Lion also
brings a sharper focus on assortment development, marketing, merchandising and training associates. 17




---



##### 




    
    Bloom, A Food Lion Market. Food Lion plans to open five pilot
stores to test a new store concept, format and brand name. The pilot
stores will be named bloom, A Food Lion Market, a new brand under the
Food Lion banner. These stores will be supermarkets with a focus on convenience, designed to provide a simple, uncomplicated and
hassle-free shopping experience. As its Thought for Food tagline
suggests, Bloom will appeal to customers with a focus on shopping
solutions, value-adding services, home meal replacement, easy-to-shop
store lay-out and technology features that expedite the shopping
experience to bring full meaning to the broad term convenience. The
pilot stores are the result of the work of a cross-functional team from
around the Group that developed this new store concept based on
comprehensive consumer research  
    
    Festival Strategy. At Hannaford, the Festival Strategy supported
strong sales performance throughout first quarter of 2004. The Festival
Strategy is designed to create a sustainable advantage against all
competitive impacts including traditional and non-traditional
competitors.  
    
    Growth of Harveys. In October of 2003, we expanded our business by
acquiring Harveys, a chain of 43 supermarkets primarily in South
Georgia. We believe this chain is strengthening our position in a
Georgia market where we currently do not have a strong presence and
will give us opportunities to focus on local consumers needs in this
market to grow the Harveys business. As part of this strategy, five
Food Lion stores converted to Harveys stores during the first quarter
of 2004, while eight additional stores will be converted during 2004.  
    
    Inventory Management. During first quarter of 2004, we
continued to
transition our Food Lion inventory system to the existing Hannaford
system, adapting the Hannaford system to Food Lion needs with upgrades.
The system will improve our current margin analysis, shrink control
and inventory management at Food Lion, through full
visibility to item-level data. At the end of first quarter of 2004,
the new inventory system and processes had been implemented in over 650
Food Lion stores and should be implemented in all of our stores by the
third quarter of 2004. We will also roll out the Hannaford inventory
system in our Kash n Karry banner during the second quarter of 2004.  
    
    Cost Reduction and Continuous Improvement. In addition to our sales
growth, we continued our focus in first quarter of 2004 on cost
reduction and continuous improvement efforts, particularly at our Food
Lion  banner, to drive further efficiencies in our processes and
systems. These efforts allow us to make planned price
investments to meet the continued competitive environment, particularly
in the Southeast and Florida. We plan to continue cost savings and
continuous improvement initiatives to maintain and reinforce the price
leadership of Food Lion among supermarket operators in the Southeast,
re-position our Kash nKarry banner and continue the strong performance
of Hannaford.  
    
    Improving Economy. The economy has continued its recovery
in the Southeast and Florida, which has helped our sales in these
territories. During 2004, Delhaize America plans to continue its refocus on its core markets
to build on accelerating supermarket sales momentum. As part of this strategy,
Kash n Karry, which had strong comparable sales in the last half of 2003 and
the first quarter of 2004, will be rebranded over the coming three years to the
new banner name Sweetbay Supermarket. As part of this effort, we closed 34
underperforming Kash n Karry stores in the Orlando area and east coast of
Florida in the first quarter of 2004 to focus our efforts in the remaining
stores in our core area on the west coast of Florida, including the Tampa/St.
Petersburg market where we have a solid market position and consumer
perceptions are strong. We plan to build on this position by delivering on meat
and produce quality, variety and value for consumers in ways that differentiate
us from our competitors. At our Food Lion banner in the short term, we will
continue to focus on excellence in execution, in-stock conditions, cleanliness,
freshness, increased convenience, customer service and local marketing. In the
medium term, we will focus on market renewal in key markets. At Hannaford, the
Festival Strategy will evolve in response to shifting customer needs, as this
strategy is founded on the principle of listening to consumers and anticipating
their needs. Recent Developments On May 12, 2004, our company, the Bank of New York, as Trustee (the Trustee)
and Food Lion, LLC, Hannaford Bros. Co., Kash n Karry Food Stores, Inc., FL
Food Lion, Inc., Risk Management Services, Inc., Hannbro Company, Martins
Foods Of South Burlington, Inc., Shop n Save-Mass., Inc., Hannaford
Procurement Corp., Boney Wilson & Sons, Inc., J.H. Harvey Co., LLC and
Hannaford Licensing Corp., each 18




---



##### 



a direct or indirect wholly-owned subsidiary of our company (collectively, the
Subsidiary Guarantors), executed a Second Supplemental to the Indenture,
dated as of August 25, 1991, between our company and the Trustee, as amended by
the First Supplemental Indenture, dated as of April 21, 1997, between our
company and the Trustee. Under the terms of the Second Supplemental Indenture,
each of the Subsidiary Guarantors fully and unconditionally and jointly and
severally guaranteed our $150,000,000 in original aggregate principal amount of
7.55% Notes due 2007 and $150,000,000 in original aggregate principal amount of
8.05% Notes due 2027. On March 15, 2004, the Company reached an agreement with The United Food &
Commercial Workers International Union (the UFCW) providing that the UFCW
will end its corporate campaign against the Company. The agreement
additionally resolves all outstanding disputes between the UFCW and the
Company, including all litigation. Critical Accounting Policies We have chosen accounting policies we believe are appropriate to accurately and
fairly report our operating results and financial position and we apply these
accounting policies in a consistent manner. The significant accounting
policies are summarized in Note 1 to our Annual Report on Form 10-K for the
year ended January 3, 2004. 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. Asset impairment- During 2002, we adopted 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 future cash flows. If impairment is
identified for retail stores, we compare the asset groups estimated fair 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. Impairment losses are significantly impacted by estimates of future operating
cash flows and estimates of fair value. We estimate future cash flows based on
the experience and knowledge of the markets in which our stores are located.
These estimates are adjusted for variable factors such as inflation and general
economic conditions. We estimate fair value based on our experience and
knowledge of the real estate markets where the store is located and also
include an independent third-party appraiser in certain situations. Goodwill and other intangible assets On December 30, 2001, we 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. Fair value is estimated based on discounted cash
flow projections provided by reporting unit management. When the carrying value
of the reporting unit exceeds its fair value, a provision for impairment is
recorded. We conduct an annual impairment assessment in the fourth quarter of
each year in accordance with SFAS No. 142. The evaluation of goodwill and intangibles with indefinite useful lives for
impairment requires management to use significant judgments and estimates
including, but not limited to, projected future revenue, cash flows and
discount rates. We believe that, based on current conditions, materially
different reported results are not likely to result from goodwill and
intangible impairments. However, a change in assumptions or market conditions
could result in a change in estimated future cash flows and the likelihood of
materially different reported results. Inventories- Inventories are stated at the lower of cost or market. Meat,
produce and deli-bakery inventories are valued on the average cost method
rather than the LIFO 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. Supplier Allowances- We receive allowances and credits from suppliers
primarily for volume incentives, new product introductions, in-store promotion
income and co-operative advertising income. Volume incentives are based on
contractual arrangements generally covering a period of one year or less and
have been historically included in the cost of inventory and recognized as
earned in cost of sales when the product is sold. New product introduction
allowances compensate us for costs incurred associated with product handling
and have been historically deferred and recognized as a reduction in cost of
sales over the product introductory period. Non-refundable credits from
suppliers for in-store promotions such as product displays require related
activities by us. Similarly, co-operative advertising requires us to conduct
the related advertising. In-store promotions income and co-operative
advertising income have historically been included in cost of sales and
recognized when we perform the related activities. 19




---



##### 



In 2003, upon the adoption of EITF Issue No. 02-16, in-store promotion and
co-operative advertising allowances are now recorded as a reduction in the cost
of inventory and recognized in cost of sales when the product is sold unless
the allowance represents the reimbursement of a specific, identifiable cost
incurred by us to sell the vendors product. The reimbursement of specific,
identifiable costs to sell a vendors product should be netted against the cost
we incur and any excess reimbursement should be included as a reduction in cost
of sales and inventory. We have reviewed the promotional funding received from
vendors and concluded that these arrangements are primarily for general
advertising purposes and not the reimbursement of a specific, identifiable cost
incurred by us. Upon adoption of EITF Issue No. 02-16 in 2003, we recorded the cumulative
effect of a change in accounting principle of $10.9 million, net of tax, during
the first quarter of 2003. This charge was recorded as a decrease in net income
in our consolidated statement of income and reflects an adjustment, which
decreased our opening inventory balance. The adoption effectively transfers a
portion of the benefit associated with supplier allowances from cost of sales
to inventory until the related product is sold. Estimating some rebates received from third party vendors requires us to make
assumptions and judgments regarding specific purchase or sales levels and
estimate related inventory turns. We constantly review the relevant significant
assumptions and estimates and make adjustments as necessary. Although we
believe the assumptions and estimates used are reasonable, significant changes
in these arrangements or purchase volumes could have a material effect on
future cost of sales. Self-insurance-We are self-insured for workers compensation, general
liability, vehicle accident and druggist 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 $3.0 million for automobile
liability and general liability with a $ 2.0 million and a $5.0 million
deductible in addition to the retention on the excess policy for automobile
liability and druggists, respectively. We are insured for covered costs,
including defense costs, in excess of these retentions and deductibles. The
significant assumptions used in the development of the actuarial estimates are
grounded upon our historical claims data, including the average monthly claims
and the average lag time between incurrence and payment. 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
(Pride), 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. Premiums are transferred annually to Pride through Delhaize Insurance
Co., a subsidiary of Delhaize America, Inc. The actuarial estimates are subject to a high degree of uncertainty from
various sources, including changes in claim reporting patterns, claim
settlement patterns, judicial decisions, legislation, and economic conditions.
Although we believe that the actuarial estimates are reasonable, significant
differences related to the items noted above could materially affect our
self-insurance obligations and the level of future premiums to Pride. 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 adjusted for our current credit spread to calculate the present
value of the remaining rent payments on closed stores. 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. 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 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. When severance costs are incurred in
connection with store closings, a liability for the termination benefits is
recognized and measured at its fair value at the communication date. 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. Calculating the estimated losses requires significant judgments and estimates
that could be impacted by factors such as the extent of interested buyers, the
ability to obtain subleases, the creditworthiness of sublessees, and our
success at negotiating early termination agreements with lessors. These factors
are significantly dependent on general economic conditions and resultant demand
for commercial property. 20




---



##### 



Results of Operation The following tables set forth the unaudited condensed consolidated statements
of income for the 13 weeks ended April 3, 2004 and for the 13 weeks ended March
29, 2003 for informational purposes. The 2003 results have been adjusted to
classify the results of operation for the 35 stores closed during the 13 weeks
ended April 3, 2004 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. 13 Weeks
    
    13 WeeksEnded
    
    EndedApril 3, 2004
    
    March 29, 2003(unaudited)
    
    (unaudited)Net sales and other revenues
    
    $
    3,857,193
    
    
    $
    3,627,592Cost of goods sold
    
    
    2,861,893
    
    
    
    2,750,035Selling and administrative expenses
    
    
    787,091
    
    
    
    737,928Operating income
    
    
    208,209
    
    
    
    139,629Interest expense
    
    
    80,069
    
    
    
    79,328Income from continuing operations before
income taxes
    
    
    128,140
    
    
    
    60,301Provision for income taxes
    
    
    50,969
    
    
    
    21,702Income from continuing
            operations
    
    
    77,171
    
    
    
    38,599Loss from discontinued operations, net of tax
    
    
    53,573
    
    
    
    24,091Income before cumulative effect of changes in
accounting principle
    
    
    23,598
    
    
    
    14,508Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    10,946Net income
    
    $
    23,598
    
    
    $
    3,562
 The following table sets forth, for the periods indicated, the percentage at
which the listed amounts bear to net sales and other revenues: 13 Weeks
    
    13 WeeksEnded
    
    EndedApril 3, 2004
    
    March 29, 2003%
    
    %(unaudited)
    
    (unaudited)Net sales and other revenues
    
    
    100.00
    
    
    
    100.00Cost of goods sold
    
    
    74.20
    
    
    
    75.81Selling and administrative expenses
    
    
        20.40
    
    
    
    20.34Operating income
    
    
    5.40
    
    
    
    3.85Interest expense
    
    
    2.08
    
    
    
    2.19Income from continuing operations before
income taxes
    
    
    3.32
    
    
    
    1.66Provision for income taxes
    
    
    1.32
    
    
    
    0.60Income from continuing
            operations
    
    
    2.00
    
    
    
    1.06Loss from discontinued operations, net of tax
    
    
    1.39
    
    
    
    0.66Income before cumulative effect of changes
in accounting principle
    
    
    0.61
    
    
    
    0.40Cumulative effect of change in accounting
principle, net of tax
    
    
    0.00
    
    
    
    0.30Net income
    
    
    0.61
    
    
    
    0.10
 Note: Cost of goods sold includes
    a December 29, 2002 adoption charge of $87.3 million (2.41% of sales)
    in the 13 weeks ended March 29, 2003 related to the conversion in
    inventory accounting from the retail method to average item cost method at
    the Food Lion and Kash n Karry banners. The cumulative effect of change
    in accounting principle is discussed in Note 10. Sales We record revenues primarily from the sale of products in our retail stores.
Net sales and other revenues for the first quarter of 2004 were $3.9 billion,
resulting in an increase of 6.3% over the corresponding period of 2003. Of this
increase, 2.3% resulted from the acquisition of the 43 Harveys stores during
the fourth quarter of fiscal 2003. Comparable store sales increased 2.5% during
the first quarter of 2004. First quarter sales of 2004 have been positively
impacted by a continued focus on operational excellence at Food Lion and
continued strength of Hannafords Festival strategy, as well as improving sales
trends at our Kash n Karry stores. 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
2004, we experienced nine net competitive store openings in our operating area
- increasing the amount of grocery square footage available to consumers. In addition, many competitors
continued to invest heavily in
promotional spending in the form of aggressive advertised pricing, buy one and
get one or two free offers, double and triple couponing and other aggressive
pricing strategies. 21




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##### 



As of April 3, 2004, we operated 1,484 stores, which consisted of 1,211 stores
operating primarily under the Food Lion banner, 122 stores operating under the
Hannaford banner, 103 stores operating under the Kash n Karry banner and 48
stores under the Harveys banner. During the first quarter of 2004, we opened
nine new stores; four under the Food Lion banner and five under the Harveys
banner. In addition, we closed six Food Lion stores and 34 Kash n Karry
stores, resulting in a net decrease of 31 stores. Retail store square footage
totaled 54.4 million square feet at April 3, 2004, resulting in a 2.0% increase
over first quarter of 2003. Gross Profit Gross profit as a percentage of sales was 25.80% for the 13 weeks ended April
3, 2004, compared to 24.19% for the corresponding period of 2003. Gross margin
comparisons with last year are positively impacted by the Companys store
inventory accounting change last year from the retail method to the average
item cost method. The effect of the change on the December 28, 2002 inventory
valuation resulted in a decrease in inventory of $87.3 million at the beginning
of fiscal 2003 with a corresponding increase to cost of goods sold (2.41% of
sales). We continued planned price initiatives that started in the second quarter of
2003 at our Food Lion banner that positively impacted sales performance and
trends in 2004. These planned margin reductions include a combination of
promotional activity and every day shelf pricing adjustments that were
partially funded by cost reductions and continuous improvement efforts.
Additional decline in gross profit resulted from higher than prior year
inventory shrink at our Food Lion banner. Food Lion transitioned its inventory
system to the existing Hannaford system in more than 650 stores at the end of
first quarter. This system will enable us to improve our current margin
analysis, shrink control and inventory management at Food Lion
through full visibility to item-level detail data. Selling and Administrative Expenses Selling and administrative expenses (which include depreciation and
amortization) as a percentage of sales were 20.40% in first quarter of 2004
compared to 20.34% in the first quarter of 2003. Excluding depreciation and
amortization, selling and administrative expenses as a percentage of sales were
17.39% for the first quarter of 2004 and 17.30% for the corresponding period
last year. Selling and administrative expenses for the first quarter of 2004
include expenses for the 43 Harveys stores acquired in fiscal 2003, additional
operating costs related to the launch of Sweetbay Supermarkets and increased
store labor at our Food Lion and Hannaford stores to support continued sales
growth. These increases in selling and administrative expenses were reduced by
Food Lions continued focus on cost improvement. Selling and administrative
expenses for first quarter of 2003 were reduced by a gain from an
early lease termination on a closed store. Depreciation and amortization
expense during the first quarter of 2004 was $116.2 million or 3.01% of sales compared to $110.3 million or  3.04% of sales for the first quarter of the prior
year. Depreciation and amortization of $116.2 million increased over
the first quarter of last year of $110.3 million due to leasehold
improvements and equipment purchases for new stores and renovations
since the first quarter of last year. The decrease as a percent of
sales is due to our strong sales performance during first quarter
this year. Interest Expense (Dollars in millions) (Percent of net sales and
    
    13 Weeks ended
    
    
    
    
    
    13 Weeks endedother revenues)
    
    April 3, 2004
    
    %
    
    March 29, 2003
    
    %Interest expense
    
    $
    80.1
    
    
    
    2.08
    
    
    $
    79.3
    
    
    
    2.19
 Interest expense for the first quarter of 2004 increased over the first quarter
of 2003 due to a decrease in the benefit from our interest rate swap agreements
and increased interest expense from additional store capital leases offset by
increased investment income due to higher cash balances. 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. Our LIFO reserve increased $1.3 million for the first quarter of 2004 due to
slight inflation. No LIFO provision was required for the first quarter of 2003
since the inflation/deflation conditions were relatively flat. Discontinued Operations The Company closed 35 underperforming stores during the 13 weeks ended April 3,
2004. In accordance with the provisions of SFAS No. 144, a portion of the costs
associated with the closure of these stores, as well as related operating activity prior to closing for these
stores, was recorded in Loss from discontinued operations, net of tax in the
Companys Consolidated Statement of Income. 22




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##### 



Income Taxes 13 Weeks Ended
    
    13 Weeks Ended(Dollars in millions)
    
    April 3, 2004
    
    March 29, 2003Provision for income taxes
    
    $
    51.0
    
    
    $
    21.7Effective tax rate
    
    
    39.8
    %
    
    
    36.0
    %
 Our effective tax rate increased in the first quarter of 2004 from the first
quarter of 2003 primarily due to the following reasons. First, the rate was
lower in the first quarter of 2003 because of the relative effect of ongoing
tax saving initiatives over a lower level of Income from continuing operations
before income taxes. Income from continuing operations before income taxes was
lower in 2003 primarily due to the inventory accounting charge discussed in
Note 10. Second, the 2004 rate is higher due to increased state audit activity. The Internal Revenue Service has completed its audit for tax years 1999 though
2001. This audit resulted in a proposed refund of approximately $30 million
associated with the timing of certain tax deductions, which therefore resulted
in no impact to our Condensed Consolidated Statement of Income for the period
ended April 3, 2004. We recently received a letter stating the congressional
Joint Committee on Taxation has completed its consideration of such refund and
has taken no exception to the conclusions reached by the Internal Revenue
Service. Liquidity and Capital Resources We have funded our operations and acquisitions from cash internally generated
from our operations and borrowings. At April 3, 2004, we had cash and cash equivalents of $483.0 million compared
with $308.5 million at March 29, 2003. We have historically generated positive
cash flow from operations. Cash provided by operating activities totaled $237.5
million for the 13 weeks ended April 3, 2004, compared with $248.1 million for
the corresponding period last year. The decrease in cash provided by operating
activities over the comparable period is primarily due to the funding of our
retirement plan. This year the funding was made in the first quarter compared
to the second quarter last year. Additional factors contributing to the
decrease in cash provided by operating activities over last year were changes
in receivables, inventories and accounts payable. Cash flows used in investing activities decreased to $56.1 million for the 13
weeks ended April 3, 2004, compared with $59.3 million for the corresponding
period last year primarily due to proceeds received from the sale of three Kash
n Karry stores and the sale of land during the first quarter of 2004. Capital expenditures were $58.3 million for the 13 weeks ended April 3, 2004
compared to $58.7 million for the prior year period. During first quarter of
2004, we opened nine new stores compared with three new stores and six
renovations for the corresponding period of last year. In fiscal 2004, we plan to incur approximately $450 million of capital
expenditures. We plan to finance capital expenditures during fiscal 2004
through funds generated from operations and existing bank facilities and
through the use of leases when necessary. Cash flows used in financing activities were $12.0 million for both the 13
weeks ended April 3, 2004 and March 29, 2003. Debt We maintain a revolving credit facility with a syndicate of commercial banks
providing $350.0 million in committed lines of credit. 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 all covenants in order to have access to the credit facility.
As of April 3, 2004, 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 April 3, 2004, and had no borrowings
during 2004 and 2003. This facility is utilized to provide short-term capital
to meet liquidity needs as necessary. At April 3, 2004, the Company had the following longterm debt: (Dollars in thousands) Notes, 7.375%, due 2006
    
    $
    613,299
    
    
    
    (a
    )Notes, 7.55%, due 2007
    
    
    149,679
    
    
    
    (a
    )Notes, 8.125%, due 2011
    
    
    1,102,677
    
    
    
    (a
    )Notes, 8.05%, due 2027
    
    
    121,504
    
    
    
    (a
    )Debentures, 9.00%, due 2031
    
    
    855,000
 23




---



##### 



Medium-term notes, 8.67% to 8.73%, due 2006
    
    
    5,086
    
    
    
    (a
    )Other notes, 6.31% to 14.15%, due Nov. 2004 to 2016
    
    
    70,548
    
    
    
    (a
    )Mortgage payables, 7.55% to 10.20%, due Oct. 2004 to 2016
    
    
    25,055
    
    
    
    (a
    )Financing obligation, 7.25%, due 2004 to 2018
    
    
    10,286$
    2,953,134Less current portion
    
    
    17,339$
    2,935,795
 (a) Net of associated discount and premium In October 2003, our Hannaford banner invoked the defeasance provisions of its
outstanding, 8.54% Senior Notes due 2004, 6.31% Senior Notes due 2008, 6.50%
Senior Notes due 2008, 7.41% Senior Notes due 2009, 6.58% Senior Notes due
2011, and 7.06% Senior Notes due 2016 (collectively, the Notes) and placed
sufficient funds in an escrow account to satisfy the remaining principal and
interest payments due on the Notes. As a result of this defeasance, Hannaford
is no longer subject to the negative covenants contained in the agreements
governing these notes. As of April 3, 2004, $72.2 million in aggregate
principal amount of these notes was outstanding. Cash committed to fund the
escrow and not available for general corporate purposes is considered
restricted. At April 3, 2004, restricted funds of $14.0 million and $68.0
million are recorded in Current Other Assets and Non-current Other Assets,
respectively. We enter into significant leasing obligations related to our store properties.
Capital lease obligations outstanding at April 3, 2004 were $704.4 million
compared with $711.0 million at March 29, 2003. These leases generally have
terms of up to 25 years. We also had significant operating lease commitments at
the end of fiscal 2003. As set forth in the table below, we also have periodic short-term borrowings
under informal credit arrangements that are available to us at the lenders
discretion. (Dollars in millions)
    
    April 3, 2004
    
    March 29, 2003Outstanding borrowings at period end
    
    $
    0
    
    
    $
    0Average borrowings
    
    
    0.0
    
    
    
    1.3Maximum amount outstanding
    
    
    0.0
    
    
    
    37.0Daily weighted average interest rate
    
    
    0
    %
    
    
    2.81
    %
 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. The mix of fixed-rate debt and floating-rate
debt is managed within policy guidelines. We have not entered into any
financial instruments for trading purposes. During the fourth quarter of 2001 and the third quarter of 2002, we entered
into interest rate swap agreements, 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
semi-annual 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. On December 30, 2003, we terminated $100
million of the 2011 interest rate swap arrangements. The notional principal
amounts of interest rate swap arrangements as of April 3, 2004 were $300
million maturing in 2006 and $100 million maturing in 2011. These agreements
met the criteria for using the short-cut method, which assumes 100% hedge
effectiveness, as prescribed by SFAS No. 133. We have recorded a derivative
asset in connection with these agreements in the amount of $24.8 million and
$19.5 million at April 3, 2004 and January 3, 2004, respectively, recorded in
our Consolidated Balance Sheets in Other Assets. Prior to the offering of bonds and debentures in 2001, the Company entered into
interest rate agreements to hedge against potential increases in interest
rates. These hedge agreements were settled in 2001 with the loss recorded in
other comprehensive income (loss), net of taxes and amortized to interest
expense over the term of the associated debt securities. This 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, net of
taxes, at April 3, 2004, and January 3, 2004, totaled approximately $43.0
million and $44.3 million, respectively. The table set forth below provides the expected principal payments and related
interest rates of our long-term debt by fiscal year of maturity as of January
3, 2004. (Dollars in millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Fair ValueNotes, due 2006
    
    
    
    
    
    
    
    
    
    $
    600.0
    (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    648.0Average interest rate
    
    
    
    
    
    
    
    
    
    
    7.38
    %Notes, due 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,100.0
    (b)
    
    $
    1,250.4Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.13
    %
 24




---



##### 



(Dollars in millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Fair ValueDebentures, due 2031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    855.0
    
    
    $
    1,026.6Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.00
    %Medium term notes
    
    
    
    
    
    
    
    
    
    $
    5.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.5Average interest rate
    
    
    
    
    
    
    
    
    
    
    8.71
    %Debt securities, due 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    150.0
    
    
    
    
    
    
    
    
    
    
    $
    164.7Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.55
    %Debt securities, due 2027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    126.0
    
    
    $
    139.9Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.05
    %Mortgage payables
    
    $
    5.0
    
    
    $
    2.6
    
    
    $
    2.9
    
    
    $
    3.2
    
    
    $
    2.8
    
    
    $
    9.3
    
    
    $
    28.1Average interest rate
    
    
    9.56
    %
    
    
    8.85
    %
    
    
    8.85
    %
    
    
    8.86
    %
    
    
    8.92
    %
    
    
    8.67
    %Other notes
    
    $
    8.8
    
    
    $
    12.1
    
    
    $
    12.2
    
    
    $
    12.2
    
    
    $
    12.2
    
    
    $
    18.8
    (c)
    
    $
    80.4Average interest rate
    
    
    6.82
    %
    
    
    6.93
    %
    
    
    6.95
    %
    
    
    6.98
    %
    
    
    6.98
    %
    
    
    7.32
    %Financing obligation
    
    $
    0.5
    
    
    $
    (2.5
    )
    
    $
    0.4
    
    
    $
    0.5
    
    
    $
    0.5
    
    
    
    11.0
    
    
    $
    10.4Average interest rate
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
 (a) $300.0 million notional amount was swapped for a variable interest rate
based on a six-month or three-month U.S. dollar LIBOR reset on a semi-annual or
quarterly basis. The carrying value of these notes was increased by $13.0
million at January 3, 2004, to reflect the fair value of the interest rate
swap. (b) $100.0 million notional amount was swapped for a variable interest rate
based on a six-month or three-month U.S. dollar LIBOR reset on a semi-annual or
quarterly basis. The carrying value of these notes was increased by $1.0
million at January 3, 2004, to reflect the fair value of the interest rate
swap. (c) See Note 7 of the Companys Consolidated Financial Statements for Hannaford
defeasance discussion. 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 We assumed various financial obligations and commitments in the normal course
of our operations and financing activities. Financial obligations are
considered to represent known future cash payments that we are required to make
under existing contractual arrangements, such as debt and lease agreements. A
table representing the scheduled maturities of our contractual obligations as
of January 3, 2004 was included under the heading Contractual Obligations and
Commitments on page 23 of the Companys 2003 Annual Report on Form 10-K filed
with the SEC on April 2, 2004. There were no significant changes from the table
referenced above. Self-Insurance We are self-insured for workers compensation, general liability, vehicle
accident and druggist 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 $3.0 million for automobile liability and general
liability, including druggist liability, with a $2.0 million and a $5.0 million
deductible in addition to the retention on the excess policy for automobile
liability and druggists, respectively. We are insured for covered costs,
including defense costs, in excess of these retentions and deductibles. 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. 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, 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. Premiums are transferred
annually to Pride through Delhaize Insurance Co., a subsidiary of Delhaize
America, Inc. In the fourth quarter of 2003, we renegotiated our property insurance lowering
our self-insured retention per occurrence to $5.0 million for named storms and
$2.5 million for all other losses. Prior to the renewal, the amount of the
deductible for each named storm occurrence as insured was calculated as five
percent of the total insured value at all locations where physical loss or
damage occurred. In fiscal 2003, we incurred property loss of $16.9 million (which includes a $14.3
million loss of inventory) related to Hurricane Isabel. 25




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##### 



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 Our management, with the participation of our Chief Executive Officer and Chief
Accounting Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and Chief Accounting Officer have
concluded that, as of such date, our disclosure controls and procedures are
effective. There was no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the end of the period covered by this Quarterly Report on
Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a). Exhibits Exhibit
    
    Description4(a)
    
    Fourth Supplemental Indenture, dated March 10, 2004 and effective as of
December 31, 2003, by and among Delhaize America, Inc., Food Lion, LLC,
Hannaford Bros. Co, Kash n Karry Food Stores, Inc., FL Food Lion, Inc.,
Risk Management Services, Inc., Hannbro Company, Martins Foods of South
Burlington, Inc., Shopn Save-Mass, Inc., Hannaford Procurement Corp.,
Boney Wilson & Sons, Inc., J.H. Harvey Co., LLC, Hannford Licensing Corp.
and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 4(h) of the Companys Annual Report on Form 10-K dated April 2,
2004) (SEC File No. 0-6080)4(b)
    
    Second Supplemental Indenture, dated as of May 12, 2004, by and among
Delhaize America, Inc., Food Lion, LLC, Hannaford Bros. Co, Kash n Karry
Food Stores, Inc., FL Food Lion, Inc., Risk Management Services, Inc.,
Hannbro Company, Martins Foods of South Burlington, Inc., Shopn
Save-Mass, Inc., Hannaford Procurement Corp., Boney Wilson & Sons, Inc.,
J.H. Harvey Co., LLC, Hannford Licensing Corp. and The Bank of New York,
as Trustee31(a)
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)31(b)
    
    Certification of Chief Accounting Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)32
    
    Certifications of Chief Executive Officer and Chief Accounting Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350)
 (b). Reports on Form 8-K None. 26




---



##### 



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. DELHAIZE AMERICA, INC.DATE:
May 18, 2004
    
        BY:    /s/ Carol M. HerndonCarol M. HerndonExecutive Vice President ofAccounting and Analysis andChief Accounting Officer
 27




---



##### 



Exhibit Index Exhibit
    
    Description4(a)
    
    Fourth Supplemental Indenture, dated March 10, 2004 and effective as of
December 31, 2003, by and among Delhaize America, Inc., Food Lion, LLC,
Hannaford Bros. Co, Kash n Karry Food Stores, Inc., FL Food Lion, Inc.,
Risk Management Services, Inc., Hannbro Company, Martins Foods of South
Burlington, Inc., Shopn Save-Mass, Inc., Hannaford Procurement Corp.,
Boney Wilson & Sons, Inc., J.H. Harvey Co., LLC, Hannford Licensing Corp.
and The Bank of New York , as Trustee (incorporated by reference to
Exhibit 4(h) of the Companys Annual Report on Form 10-K dated April 2,
2004) (SEC File No. 0-6080)4(b)
    
    Second Supplemental Indenture, dated as of May 12, 2004, by and among
Delhaize America, Inc., Food Lion, LLC, Hannaford Bros. Co, Kash n Karry
Food Stores, Inc., FL Food Lion, Inc., Risk Management Services, Inc.,
Hannbro Company, Martins Foods of South Burlington, Inc., Shopn
Save-Mass, Inc., Hannaford Procurement Corp., Boney Wilson & Sons, Inc.,
J.H. Harvey Co., LLC, Hannford Licensing Corp. and The Bank of New York,
as Trustee31(a)
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)31(b)
    
    Certification of Chief Accounting Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)32
    
    Certifications of Chief Executive Officer and Chief Accounting Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350)
 28