DELHAIZE AMERICA INC - 10-Q Quarterly Report

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

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.


				Page

PART I		FINANCIAL INFORMATION

	Item 1.		Financial Statements (Unaudited)

			Condensed Consolidated Statements of Income for the 13 weeks ended September 27, 2003 and September 28, 2002	3

			Condensed Consolidated Statements of Income (Loss) for the 39 weeks ended September 27, 2003 and September 28, 2002	4

			Condensed Consolidated Balance Sheets as of September 27, 2003 and December 28, 2002 (Audited)	5

			Condensed Consolidated Statements of Cash Flows for the 39 weeks ended September 27, 2003 and September 28, 2002	6

			Notes to Condensed Consolidated Financial Statements	7-12

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-22

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	22

	Item 4.		Controls and Procedures	22

PART II		OTHER INFORMATION

	Item 6.		Exhibits and Reports on Form 8-K	22

Signature				23

Exhibit Index				24

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 13 weeks ended September 27, 2003 and September 28, 2002
(Dollars in thousands)


	13 Weeks		13 Weeks
	Ended		Ended
	September 27, 2003		September 28, 2002

Net sales and other revenues	$	3,872,194	$	3,774,860
Cost of goods sold (Note 9)		2,912,871		2,822,274
Selling and administrative expenses		778,100		778,586

Operating income		181,223		174,000
Interest expense		78,373		83,019
Net gain from extinguishment of debt		—		882
Net other loss from extinguishment of debt		—		260

Income from continuing operations before income taxes		102,850		91,603
Provision for income taxes		38,353		36,412

Income before loss from discontinued operations		64,497		55,191
Loss from discontinued operations, net of tax		1,371		3,133

Net income	$	63,126	$	52,058

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
For the 39 weeks ended September 27, 2003 and September 28, 2002
(Dollars in thousands)


	39 Weeks		39 Weeks
	Ended		Ended
	September 27, 2003		September 28, 2002

Net sales and other revenues	$	11,347,091	$	11,191,282
Cost of goods sold (Note 9)		8,553,074		8,338,374
Selling and administrative expenses		2,296,190		2,302,686

Operating income		497,827		550,222
Interest expense		237,146		252,406
Net gain from extinguishment of debt		—		882
Net other loss from extinguishment of debt		—		260

Income from continuing operations before income taxes		260,681		298,438
Provision for income taxes		95,883		117,720

Income before loss from discontinued operations		164,798		180,718
Loss from discontinued operations, net of tax		26,536		8,606

Income before cumulative effect of changes in accounting principle		138,262		172,112
Cumulative effect of changes in accounting principle, net of tax		10,946		284,097

Net income (loss)	$	127,316	$	(111,985	)

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 27, 2003 and December 28,2002
(Dollars in thousands)


		September 27, 2003			December 28, 2002

		(Unaudited)			(Audited)
ASSETS
Current assets:
	Cash and cash equivalents	$	302,412		$	131,641
	Receivables, net		121,947			142,371
	Receivable from affiliate		12,256			14,483
	Income tax receivable		196			6,036
	Inventories		1,197,673			1,340,847
	Prepaid expenses		43,047			30,622
	Deferred tax assets		39,559			18,976
	Other assets		10,466			—

	Total current assets		1,727,556			1,684,976
Property and equipment, net			2,972,293			3,041,465
Goodwill, net			2,907,305			2,907,305
Other intangibles, net			776,828			792,689
Reinsurance recoverable from affiliate			128,943			119,827
Other assets			175,524			88,554

	Total assets	$	8,688,449		$	8,634,816

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	717,362		$	762,179
	Dividend payable		—			114,636
	Payable to affiliate		—			8,959
	Accrued expenses		398,501			314,851
	Capital lease obligations — current		34,555			32,652
	Long term debt — current		14,125			28,294
	Other liabilities — current		55,825			49,372

	Total current liabilities		1,220,368			1,310,943
Long-term debt			2,938,415			2,951,072
Capital lease obligations			672,317			698,283
Deferred income taxes			294,718			357,314
Other liabilities			274,808			273,502

	Total liabilities		5,400,626			5,591,114

Commitments and contingencies (Note 15)
Shareholders’ equity:
Class A non-voting common stock			163,076			53,222
Class B voting common stock			37,736			37,645
Accumulated other comprehensive loss, net of tax			(66,579	)		(71,130	)
Additional paid-in capital, net of unearned compensation			2,471,696			2,467,397
Retained earnings			681,894			556,568

	Total shareholders’ equity		3,287,823			3,043,702

	Total liabilities and shareholders’ equity	$	8,688,449		$	8,634,816

DELHAIZE AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 39 weeks ended September 27, 2003 and September 28, 2002
(Dollars in thousands)


		39 Weeks Ended			39 Weeks Ended
		September 27, 2003			September 28, 2002

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	127,316		$	(111,985	)
Adjustments to reconcile net income(loss) to net cash provided by operating activities:
	Cumulative effect of changes in accounting principle, net of tax		10,946			284,097
	Change in accounting method (Note 9)		87,308			—
	Provision for loss on disposal of discontinued operations		27,844			—
	Streamline charges		2,346			—
	Depreciation and amortization		336,350			340,602
	Depreciation and amortization — discontinued operations		480			4,478
	Amortization of debt fees/costs		1,466			1,507
	Amortization of debt premium/(discount)		754			852
	Amortization of deferred loss on derivative		6,215			6,378
	Amortization and termination of restricted shares		4,014			8,783
	Accrued interest on interest rate swap		(3,929	)		(4,780	)
	Loss on disposals of property and capital lease terminations		623			298
	Net gain from extinguishment of debt		—			(882	)
	Net other loss from extinguishment of debt		—			260
	Deferred income taxes (benefit) provision		(85,541	)		5,035
	Other		698			(538	)
Changes in operating assets and liabilities which provided (used) cash:
	Receivables		20,424			78,789
	Net receivable from affiliate		(6,732	)		2,930
	Income tax receivable		12,018			8,429
	Inventories		35,616			8,090
	Prepaid expenses		(12,425	)		(14,550	)
	Other assets		4,626			(63	)
	Accounts payable		(41,692	)		(2,601	)
	Accrued expenses		80,135			109,413
	Income taxes payable		—			60,684
	Other liabilities		(27,439	)		(18,095	)

	Total adjustments		454,105			879,116

	Net cash provided by operating activities		581,421			767,131

CASH FLOWS FROM INVESTING ACTIVITIES
	Capital expenditures		(263,702	)		(333,383	)
	Proceeds from sale of property		10,310			11,654
	Other investment activity		(15,197	)		(1,565	)

	Net cash used in investing activities		(268,589	)		(323,294	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net payments under short-term borrowings		—			(140,000	)
	Principal payments on long-term debt		(25,390	)		(76,238	)
	Principal payments under capital lease obligations		(23,681	)		(22,328	)
	Escrow funding for Senior Notes		(86,592	)		—
	Taxes paid on capital contribution		(4,692	)		—
	Dividends paid		—			(86,023	)
	Parent common stock repurchased		(2,306	)		(11,459	)
	Proceeds from stock options exercised		600			4,586

	Net cash used in financing activities		(142,061	)		(331,462	)

Net increase in cash and cash equivalents			170,771			112,375
Cash and cash equivalents at beginning of year			131,641			137,206

Cash and cash equivalents at end of period		$	302,412		$	249,581

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

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

The financial statement presentation includes the impact of the Company’s closing of 43 underperforming Food Lion and Kash n’ Karry stores, of which 42 stores were closed during the first quarter of 2003 and one store was closed during the second quarter of 2003. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, a portion of the costs associated with these stores, as well as related operating activity prior to closing for these stores, was recorded as “discontinued operations” in the Company’s Condensed Consolidated Statement of Income (Loss) for all periods presented.

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


		39 Weeks		39 Weeks
		Ended		Ended
(Dollars in thousands)		Sept 27, 2003		Sept 28, 2002

Cash payments for income taxes		$	154,356	$	38,359
Cash payments for interest, net of amounts capitalized			175,008		191,415
Non-cash investing and financing activities:
Capitalized lease obligations incurred for store properties and equipment			21,247		37,331
Capitalized lease obligations terminated for store properties and equipment			2,163		1,882
Dividend to Delhaize Group and Delta paid in stock			109,944		—
Change in reinsurance recoverable and other liabilities			9,116		1,947
Other			471		—
Investment in WWRE			—		3,000
Delhaize Group Share Exchange – final adjustment to purchase price allocation:
	Property		—		44,433
	Deferred income taxes		—		43,752
	Capital lease obligations		—		4,475
	Accrued expenses		—		5,156
Reclassification of deferred taxes to goodwill related to intangible assets that did not meet the separability criteria of SFAS No. 141			—		117,895

Inventories are stated at the lower of cost or market. Inventories valued using the last-in, first-out (LIFO) method comprised approximately 78% of inventories on September 27, 2003 and September 28 2002. 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 $33.3 million and $67.3 million greater as of September 27, 2003 and September 28, 2002, respectively. Application of the LIFO method resulted in increases in cost of goods sold of $1.3 million and $2.6 million for the 39 weeks ended September 27, 2003 and September 28, 2002, respectively. As stated in Note 9, 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 effective December 29, 2002.

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

The Company participates in a stock option plan of its parent, Delhaize Group, that is described fully in Note 14 to the Company’s Annual Report on Form 10-K for the year ended December 28, 2002 (the “Delhaize Group Plan”). Additionally, the Company still has options outstanding under a 1996 Food Lion Plan, a 1988 and 1998 Hannaford Plan and 2000 Delhaize America Plan; however, the Company can no longer grant options under these plans. The Company accounts for the Delhaize Group Plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations”. No stock-based employee compensation cost is reflected in net income, as all options granted under the Delhaize Group Plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, to stock-based employee compensation.

The weighted average fair value at date of grant for options granted under the Delhaize Group Plan during the third quarter of 2003 was $12.45. There were no options granted under the Delhaize Group Plan during the third quarter of 2002. The weighted average fair value at date of grant for options granted for the 39 weeks ended September 27, 2003 and September 28, 2002 was $8.44 and $16.34 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model using the following assumptions:


NORTH CAROLINA		56-0660192

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


	13 weeks ended		13 weeks ended		39 weeks ended		39 weeks ended
	Sept 27, 2003		Sept 28, 2002		Sept 27, 2003		Sept 28, 2002

Net earnings (loss) – as reported	$	63,126	$	52,058	$	127,316	$	(111,985	)
Deduct: Total stock-based employee compensation expense determined using fair value based method (net of tax)		2,973		3,678		8,158		7,769

Net earnings (loss)–pro forma	$	60,153	$	48,380	$	119,158	$	(119,754	)


Class A Common Stock – 91,270,348,481 Class B Common Stock — 75,468,935


		Sept 27, 2003		Sept 28, 2002

Expected dividend yield(%)			3.6		2.6
Expected volatility (%)	&