UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

Commission File No. 0-785

 

NASH-FINCH COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE		41-0431960
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
7600 France Avenue South, P.O. Box 355 Minneapolis, Minnesota		55435
(Address of principal executive offices)		(Zip Code)

 

(952) 832-0534

(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 the 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).

Yes ý  No o

 

As of July 13, 2004, 12,303,396 shares of Common Stock of the Registrant were outstanding.

 

 

Index

 

Part I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements and Notes
	Consolidated Statements of Income
	Consolidated Balance Sheets
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
Part II – OTHER INFORMATION
Item 1.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)

 

		Twelve Weeks Ended						Twenty-Four Weeks Ended
		June 19, 2004			June 14, 2003			June 19, 2004			June 14, 2003
Sales		$	906,393		$	888,612		$	1,785,847		$	1,745,276
Cost and expenses:
Cost of sales		806,928			785,031			1,588,535			1,541,671
Selling, general and administrative		72,323			74,994			145,752			149,441
Special charge		36,494			—			36,494			—
Depreciation and amortization		9,800			9,642			19,956			19,082
Operating earnings		(19,152		)	18,945			(4,890		)	35,082
Interest expense		6,487			7,035			12,992			17,826
(Loss) earnings before income taxes		(25,639		)	11,910			(17,882		)	17,256
Income tax (benefit) expense		(9,999		)	4,645			(6,974		)	6,730
Net (loss) earnings		$	(15,640	)	$	7,265		$	(10,908	)	$	10,526
Net (loss) earnings per share:
Basic earnings per share		$	(1.26	)	$	0.61		$	(0.88	)	$	0.88
Diluted earnings per share		$	(1.26	)	$	0.61		$	(0.88	)	$	0.88
Cash dividends per common share		$	0.135		$	0.18		$	0.27		$	0.18
Weighted average number of common shares outstanding and common equivalent shares outstanding:
Basic		12,404			11,906			12,340			11,904
Diluted		12,404			11,983			12,340			11,973

 

See accompanying notes to consolidated financial statements.

 

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NASH FINCH COMPANY & SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

		June 19, 2004			January 3, 2004			June, 14 2003
		(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	30,122		$	12,757		$	8,398
Accounts and notes receivable, net		143,163			145,902			148,787
Inventories		225,925			236,289			245,339
Prepaid expenses		11,757			15,136			15,172
Deferred tax assets		17,332			5,726			9,405
Total current assets		428,299			415,810			427,101
Investments in affiliates		20			20			20
Notes receivable, net		32,204			31,178			30,751
Property, plant and equipment:
Land		23,693			24,121			25,452
Buildings and improvements		160,524			163,693			156,049
Furniture, fixtures and equipment		312,725			328,318			325,971
Leasehold improvements		71,490			86,746			78,499
Construction in progress		533			1,673			7,676
Assets under capitalized leases		41,060			41,661			42,040
		610,025			646,212			635,687
Less accumulated depreciation and amortization		(382,961		)	(383,861		)	(372,284		)
Net property, plant and equipment		227,064			262,351			263,403
Goodwill		148,720			149,792			150,053
Investment in direct financing leases		11,316			13,426			13,959
Other assets		12,591			13,775			14,441
Total assets		$	860,214		$	886,352		$	899,728
Liabilities and Stockholders’ Equity
Current liabilities:
Outstanding checks		$	11,787		$	23,350		$	5,108
Current maturities of long-term debt and capitalized lease obligations		5,434			5,278			7,046
Accounts payable		175,391			166,742			175,214
Accrued expenses		80,077			78,768			89,004
Income taxes payable		14,750			10,614			10,954
Total current liabilities		287,439			284,752			287,326
Long-term debt		260,894			281,944			323,343
Capitalized lease obligations		41,715			44,639			45,962
Deferred tax liability, net		2,996			6,358			1,592
Other liabilities		21,157			12,202			11,316
Commitments and contingencies
Stockholders’ equity:
Preferred stock - no par value. Authorized 500 shares; none issued		—			—			—
Common stock - $1.66 2/3 par value. Authorized 50,000 shares, issued 12,322, 12,152 and 12,012 shares, respectively		20,539			20,255			20,021
Additional paid-in capital		30,212			27,995			26,458
Restricted stock		(347		)	(475		)	(676		)
Accumulated other comprehensive income		(5,228		)	(5,970		)	(7,638		)
Retained earnings		201,199			215,417			193,021
		246,375			257,222			231,186
Less cost of 20, 35 and 57 shares of common stock in treasury, respectively		(362		)	(765		)	(997		)
Total stockholders’ equity		246,013			256,457			230,189
Total liabilities and stockholders’ equity		$	860,214		$	886,352		$	899,728

 

See accompanying notes to consolidated financial statements.

 

4

 

NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

		Twenty-Four Weeks Ended
		June 19, 2004			June 14, 2003
Operating activities:
Net (loss) earnings		$	(10,908	)	$	10,526
Adjustments to reconcile net income to net cash provided by operating activities:
Special charge		36,494			—
Depreciation and amortization		19,956			19,082
Amortization of deferred financing costs		520			521
Amortization of rebatable loans		1,343			728
Provision for bad debts		2,131			2,881
Deferred income tax (benefit) expense		(14,969		)	6,177
Gain on sale of property, plant and equipment		(601		)	(413		)
LIFO charge		1,175			800
Asset impairments		—			390
Other		770			(161		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable		145			17,955
Inventories		9,189			2,175
Prepaid expenses		3,379			(2,564		)
Accounts payable		8,649			3,318
Accrued expenses		(3,099		)	(6,112		)
Income taxes payable		4,137			881
Other assets and liabilities		(213		)	(364		)
Net cash provided by operating activities		58,098			55,820
Investing activities:
Disposal of property, plant and equipment		2,628			1,449
Additions to property, plant and equipment		(6,774		)	(14,289		)
Business acquired, net of cash		—			(2,054		)
Loans to customers		(2,997		)	(4,142		)
Payments from customers on loans		1,488			2,717
Other		514			4
Net cash used in investing activities		(5,141		)	(16,315		)
Financing activities:
Payments of bank credit facility debt		(20,000		)	(33,400		)
Dividends paid		(3,310		)	(2,150		)
Payments of long-term debt		(1,037		)	(3,946		)
Payments of capitalized lease obligations		(1,166		)	(1,062		)
Decrease in outstanding checks		(11,563		)	(21,968		)
Other		1,484			—
Net cash used in financing activities		(35,592		)	(62,526		)
Net decrease in cash		17,365			(23,021		)
Cash and cash equivalents at beginning of year		12,757			31,419
Cash and cash equivalents at end of period		$	30,122		$	8,398

 

See accompanying notes to consolidated financial statements.

 

5

 

Nash Finch Company and Subsidiaries

Notes to Consolidated Financial Statements

June 19, 2004

 

Note 1 – Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2004.

 

The accompanying financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and its subsidiaries at June 19, 2004, January 3, 2004 and June 14, 2003, the results of operations for the twelve and twenty-four weeks ended June 19, 2004 and June 14, 2003 and the changes in cash flows for the twenty-four weeks ended June 19, 2004 and June 14, 2003.  All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements.  Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

Certain reclassifications between costs of sales and selling, general and administrative expenses (SG&A) in the first quarter of fiscal 2004 have been reflected in the consolidated statements of income for the twenty-four weeks ended June 19, 2004.  These reclassifications did not have an impact on operating earnings, loss before income taxes, net losses, cash flows or the financial position for any period.

 

On July 15, 2004, the Company furnished, as part of its Current Report on Form 8-K, its consolidated statements of income for the twelve and twenty-four weeks ended June 19, 2004.  These statements did not reflect the aforementioned reclassifications between cost of sales and SG&A for the twelve and twenty-four weeks ended June 19, 2004.  The following table reconciles the amounts furnished on our Form 8-K to the amounts presented in this Form 10-Q:

 

		Twelve Weeks Ended June 19, 2004			Twenty-four Weeks Ended June 19, 2004
Cost of sales, as furnished on Form 8-K		$	805,065		$	1,584,671
Reclassification		1,863			3,864
Cost of sales, as reported herein		$	806,928		$	1,588,535
SG&A expenses, as furnished on Form 8-K		$	74,186		$	149,616
Reclassification		(1,863		)	(3,864		)
SG&A expenses, as reported herein		$	72,323		$	145,752

 

Note 2 – Vendor Allowances and Credits

 

The Company participates with its vendors in a broad menu of promotions to increase sales of products.  These promotions fall into two main categories:  off-invoice allowances and performance- based allowances.  These promotional arrangements are often subject to negotiation with the Company’s vendors.

 

In the case of off-invoice allowances, discounts are typically offered by vendors with respect to certain merchandise purchased by the Company during a specified period of time.  The Company uses off-invoice allowances to support a variety of marketing programs such as reduced price offerings for specific time periods, food shows, pallet promotions and private label promotions.  The discounts are either reflected directly on the vendor invoice, as a reduction from the normal wholesale prices for merchandise to which the allowance applies, or the Company is allowed to deduct the allowance as an offset against the vendor’s invoice when it is paid.

 

In the case of performance-based allowances, the allowance or rebate is based on the Company’s completion of some specific activity, such as purchasing or selling product during a certain time period.  This basic performance requirement may be accompanied by an additional performance requirement such as providing advertising or special in-store promotion, tracking quantities of product

 

6

 

sold, slotting (adding a new item to the system) and merchandising a new item, or achieving certain minimum purchase quantities.  The billing for these performance-based allowances is normally in the form of a “bill-back” in which case the Company is invoiced at the regular price with the understanding that the Company may bill back the vendor for the requisite allowance when the performance is satisfied.

 

Collectively with its vendors, the Company plans promotions and arrives at the amount the respective vendor plans to spend on promotions with the Company. The Company and the vendors then monitor, review and discuss the results of such promotions, and resolve issues relating to promotions and billings.  Each vendor has its own method for determining the amount of promotional funds budgeted to be spent with the Company during the period.  In most situations, the vendor allowances are based on units the Company purchased from the vendor.  In other situations, the allowances are based on its past or anticipated purchases and/or the anticipated performance of the planned promotions.

 

The Company jointly negotiates with its vendors the promotional calendar that governs all promotions. Forecasting promotional expenditures is a critical part of the Company’s twice yearly planning sessions with its vendors.  Most vendors work with the Company to project not just overall spending, but also spending on a category and regional basis.  As individual promotions are completed and the associated billing is processed, the vendors track the Company’s promotional program execution and spend rate.  The vendors discuss the tracking, performance and spend rate with the Company on a regular basis throughout the year.  Depending upon the vendor arrangements, such discussions can occur on a weekly, monthly, quarterly or annual basis.  These communications include future promotions, product cost, targeted retails and price points, anticipated volume, promotion expenditures, vendor maintenance, billing issues and procedures, new items/discontinued items, and trade spend levels relative to budget per event and per year, as well as the resolution of any issues that arise between the vendor and the Company. In the future, the nature and menu of promotional programs and the allocation of dollars among them may change as a result of ongoing negotiations and commercial relationships between vendors and the Company.

 

Note 3 - Inventories

 

The Company uses the LIFO method for valuation of a substantial portion of inventories.  An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time.  Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of expected year-end inventory levels and costs.  Because these are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation. If the FIFO method had been used, inventories would have been approximately $45.6 million, $44.4 million and $46.3 million higher at June 19, 2004, January 3, 2004 and June 14, 2003, respectively.  For the twelve and twenty-four weeks ending June 19, 2004, the Company recorded a LIFO charge of $0.8 million and $1.2 million, respectively, compared to $0.4 million $0.8 million respectively, for the twelve and twenty-four weeks ended June 14, 2003.

 

Note 4 – Stock Option Plans

 

As permitted by the provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company has chosen to continue to apply Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock-based compensation.  As a result, the Company does not recognizecompensation costs if the option price equals or exceeds the market price at the date of grant. The following table illustrates the effect on net income and earnings per share for the twelve and twenty-four weeks ended June 19, 2004 and June 14, 2003 if the Company had applied the fair

 

7

 

value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

 

		Twelve Weeks Ended						Twenty-Four Weeks Ended
		June 19, 2004			June 14, 2003			June 19, 2004			June 14, 2003
Reported net (loss) earnings		$	(15,640	)	$	7,265		$	(10,908	)	$	10,526
Add: stock-based compensation expense from restricted stock plan included in net (loss) earnings		53			86			128			217
Deduct: stock-based compensation expense from restricted stock plan included in net (loss) earnings		(53		)	(86		)	(128		)	(217		)
Deduct: total stock-based employee compensation expense determined under fair value method for all option awards, net of tax		(284		)	(320		)	(426		)	(655		)
Adjusted net (loss) earnings		$	(15,924	)	$	6,945		$	(11,334	)	$	9,871
Reported basic earnings per share		$	(1.26	)	$	0.61		$	(0.88	)	$	0.88
Adjusted basic earnings per share		$	(1.28	)	$	0.58		$	(0.92	)	$	0.83
Reported diluted earnings per share		$	(1.26	)	$	0.61		$	(0.88	)	$	0.88
Adjusted diluted earnings per share		$	(1.28	)	$	0.58		$	(0.92	)	$	0.83

 

Note 5 – Other Comprehensive Income

 

Comprehensive income is as follows (in thousands):

 

		Twelve Weeks Ended						Twenty-Four Weeks Ended
		June 19, 2004			June 14, 2003			June 19, 2004			June 14, 2003
Net (loss) earnings:		$	(15,640	)	$	7,265		$	(10,908	)	$	10,526
Unrealized gain (loss), net of tax		275			(117		)	453			(80		)
Comprehensive income		$	(15,365	)	$	7,148		$	(10,455	)	$	10,446

 

During 2004 and 2003, other comprehensive income consisted of market value adjustments to reflect derivative instruments designated as cash flow hedges at fair value, pursuant to SFAS No. 133.

 

Note 6 – Special Charge

 

During the second quarter of 2004, the Company completed a strategic review that identified certain retail stores that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments.  As a result of this review, the Company announced that it was exiting its Buy·n·Save and AVANZA retail formats, closing its five Buy·n·Save outlets, and three AVANZA outlets located in Chicago and Pueblo, Colorado and closing ten conventional retail outlets, primarily operating under the Econofoods banner.  The Company is currently seeking purchasers for its three Denver area AVANZA stores.  As a result of these store dispositions, the Company recorded a pre-tax special charge of $36.5 million which was reflected in the “Special charge” line within the consolidated statements of income, and $3.3 million of costs reflected in operating earnings, primarily

 

8

 

involving inventory markdowns related to the store closures.  The special charge included $21.7 million for asset impairments (including $1.1 million of goodwill allocated to the stores being sold), $14.1 million for future lease obligations, $0.1 million in severance and $0.6 million in other charges based on management’s estimates for lease subsidies, future payments on exited real estate, lease terminations and the fair value of assets.  As of the end of the second quarter, the Company had closed all 18 stores and is continuing to market the three Denver area AVANZA stores.

 

Note 7 – Recently Adopted and Issued Accounting Standards

 

In December 2003, the FASB issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  The revisions to SFAS No. 132 required changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans.  The Company adopted revisions of SFAS No. 132 in the fourth quarter of fiscal 2003 and incorporated the revision in the Company’s consolidated financial statements as of January 3, 2004.  The interim disclosures can be found in Part I, Item 1 of this report under Note 10 – “Pension and Other Post-Retirement Benefits” in Notes to Consolidated Financial Statements.

 

Note 8 – Segment Reporting

 

A summary of the major segments of the business is as follows:

(In thousands)

 

Twelve weeks ended June 19, 2004

 

		Food Distribution			Military			Retail			Totals
Revenue from external customers		$	449,195		$	255,176		$	202,022		$	906,393
Inter-segment revenue		99,440			—			—			99,440
Segment profit		17,698			8,605			3,675			29,978

 

Twelve weeks ended June 14, 2003

 

		Food Distribution			Military			Retail			Totals
Revenue from external customers		$	420,740		$	247,853		$	220,019		$	888,612
Inter-segment revenue		113,940			—			—			113,940
Segment profit		14,281			6,695			9,259			30,235

 

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Twenty-four weeks ended June 19, 2004

 

		Food Distribution			Military			Retail			Totals
Revenue from external customers		$	880,323		$	508,866		$	396,658		$	1,785,847
Inter-segment revenue		197,268			—			—			197,268
Segment profit		32,191			16,822			6,425			55,438

 

Twenty-four weeks ended June 14, 2003

 

		Food Distribution			Military			Retail			Totals
Revenue from external customers		$	809,188		$	494,612		$	441,476		$	1,745,276
Inter-segment revenue		231,496			—			—			231,496
Segment profit		25,484			13,371			16,496			55,351

 

Reconciliation to statements of operations:

(In thousands)

 

Twelve weeks ended June 19, 2004 and June 14, 2003

 

		2004			2003
Profit and loss
Total profit for segments		$	29,978		$	30,235
Unallocated amounts:
Adjustment of inventory to LIFO		(783		)	(400		)
Unallocated corporate overhead		(18,340		)	(17,925		)
Special charge		(36,494		)	—
(Loss) earnings before income taxes		$	(25,639	)	$	11,910

 

Twenty-four weeks ended June 19, 2004 and June 14, 2003

 

		2004			2003
Profit and loss
Total profit for segments		$	55,438		$	55,351
Unallocated amounts:
Adjustment of inventory to LIFO		(1,175		)	(800		)
Unallocated corporate overhead		(35,651		)	(37,295		)
Special charge		(36,494		)	—
(Loss) earnings before income taxes		$	(17,882	)	$	17,256

 

Note 9 – Guarantees

 

In the normal course of business, the Company may guarantee lease and debt obligations of retailers.  In the event these retailers are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of their debt and lease obligations ($11.7 million as of June 19, 2004), which would be due in accordance with the underlying agreements.  We have also assigned various leases to certain food distribution customers.  If the assignees were to become unable to continue making payments under the

 

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assigned leases, we estimate our maximum potential obligation with respect to the assigned leases to be $9.7 million as of June 19, 2004.

 

Note 10 – Pension and Other Post-Retirement Benefits

 

The following table presents the components of the Company’s pension and postretirement net periodic benefit cost (in thousands):

 

Twelve Weeks Ended June 19, 2004 and June 14, 2003

 

		Pension Benefits						Other Benefits
		2004			2003			2004			2003
Service cost		$	—		$	5		$	2		$	61
Interest cost		594			610			76			127
Expected return on plan assets		(539		)	(559		)	—			—
Amortization of prior service cost		(4		)	(4		)	(7		)	(137		)
Recognized actuarial (gain) loss		41			32			20			72
Net periodic benefit cost		$	92		$	84		$	91		$	123

 

Twenty-four Weeks Ended June 19, 2004 and June 14, 2003

 

		Pension Benefits						Other Benefits
		2004			2003			2004			2003
Service cost		$	1		$	10		$	4		$	123
Interest cost		1,188			1,219			152			253
Expected return on plan assets		(1,078		)	(1,118		)	—			—
Amortization of prior service cost		(7		)	(7		)	(15		)	(275		)
Recognized actuarial (gain) loss		81			64			40			145
Net periodic benefit cost		$	185		$	168		$	181		$	246

 

Weighted-average assumptions used to determine net periodic benefit cost for the twelve and twenty-four weeks ended June 19, 2004 and June 14, 2003 were as follows:

 

		PENSION BENEFITS				OTHER BENEFITS
		2004		2003		2004		2003
Weighted-average assumptions
Discount rate		6.25	%	6.75	%	6.25	%	6.75	%
Expected return on plan assets		7.50	%	8.00	%	—		—
Rate of compensation increase		4.00	%	4.00	%	—		—

 

Total contributions to the Company’s pension plan in 2004 are expected to be approximately $300,000.

 

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the Unites States.  The act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit.  In accordance with FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost.  FAS 106-1 will become effective for the Company in the first interim period beginning after June 15, 2004, which for the Company is its third quarter of fiscal 2004.  Finalization of pending guidance could result in a

 

11

 

reduction in the accumulated post retirement benefit obligation and future net periodic post retirement benefit cost.

 

Note 11 – Subsidiary Guarantees

 

The following table presents summarized combined financial information for certain wholly owned subsidiaries which guarantee on a full, unconditional and joint and several basis, $165.0 million of senior subordinated notes due May 1, 2008, which were offered and sold by the Company on April 24, 1998.

 

The guarantor subsidiaries are 100% owned subsidiaries of the Company.  Condensed consolidating financial information for the Company and its guarantor subsidiaries is as follows:

 

NASH FINCH COMPANY AND SUBSIDIARIES

Consolidating Statements of Income

Twelve Weeks Ended June 19, 2004

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Sales		$	719,031		$	226,261		$	(38,899	)	$	906,393
Cost and expenses:
Cost of sales		645,847			199,980			(38,899		)	806,928
Selling, general and administrative		48,738			23,585			—			72,323
Special charge		36,494			—			—			36,494
Depreciation and amortization		7,370			2,430			—			9,800
Equity in consolidated subsidiaries		70			—			(70		)	—
Operating earnings		(19,488		)	266			70			(19,152		)
Interest expense		6,122			365			—			6,487
(Loss) earnings before income taxes		(25,610		)	(99		)	70			(25,639		)
Income tax (benefit) expense		(9,970		)	(29		)	—			(9,999		)
Net earnings		$	(15,640	)	$	(70	)	$	70		$	(15,640	)

 

12

 

Twenty-Four Weeks Ended June 19, 2004

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Sales		$	1,414,516		$	447,900		$	(76,569	)	$	1,785,847
Cost and expenses:
Cost of sales		1,270,190			394,914			(76,569		)	1,588,535
Selling, general and administrative		96,990			48,762			—			145,752
Special charge		36,494			—			—			36,494
Depreciation and amortization		15,261			4,695			—			19,956
Equity in consolidated subsidiaries		819			—			(819		)	—
Operating earnings		(5,238		)	(471		)	819			(4,890		)
Interest expense		12,297			695			—			12,992
(Loss) earnings before income taxes		(17,535		)	(1,166		)	819			(17,882		)
Income tax (benefit) expense		(6,627		)	(347		)	—			(6,974		)
Net (loss) earnings		$	(10,908	)	$	(819	)	$	819		$	(10,908	)

 

Twelve Weeks Ended June 14, 2003

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Sales		$	703,506		$	229,416		$	(44,310	)	$	888,612
Cost and expenses:
Cost of sales		629,452			199,889			(44,310		)	785,031
Selling, general and administrative		49,647			25,347			—			74,994
Depreciation and amortization		7,287			2,355			—			9,642
Equity in consolidated subsidiaries		(867		)	—			867			—
Operating earnings		17,987			1,825			(867		)	18,945
Interest expense		6,648			387			—			7,035
Earnings before income taxes		11,339			1,438			(867		)	11,910
Income tax expense		4,074			571			—			4,645
Net earnings		$	7,265		$	867		$	(867	)	$	7,265

 

13

 

Twenty-Four Weeks Ended June 14, 2003

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Sales		$	1,382,636		$	451,920		$	(89,280	)	$	1,745,276
Cost and expenses:
Cost of sales		1,236,426			394,525			(89,280		)	1,541,671
Selling, general and administrative		97,631			51,810			—			149,441
Depreciation and amortization		14,422			4,660			—			19,082
Equity in consolidated subsidiaries		(103		)	—			103			—
Operating earnings		34,260			925			(103		)	35,082
Interest expense		17,070			756			—			17,826
Earnings before income taxes		17,190			169			(103		)	17,256
Income tax expense		6,664			66			—			6,730
Net earnings		$	10,526		$	103		$	(103	)	$	10,526

 

14

 

NASH FINCH COMPANY AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

June 19, 2004

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments				Nash Finch Company & Subsidiaries
Assets
Current assets:
Cash and cash equivalents		$	29,656		$	466		$		—		$	30,122
Accounts and notes receivable, net		109,249			35,678			(1,764			)	143,163
Accounts receivable/payable subs		57,956			(57,956		)	—				—
Inventories		144,753			81,172			—				225,925
Prepaid expenses		10,422			1,335			—				11,757
Deferred tax assets		23,041			(5,709		)	—				17,332
Total current assets		375,077			54,986			(1,764			)	428,299
Investments in affiliates		197,072			—			(197,052			)	20
Notes receivable, net		24,033			8,171			—				32,204
Net property, plant and equipment		139,738			87,326			—				227,064
Goodwill		30,949			117,771			—				148,720
Other assets		14,909			8,998			—				23,907
Total assets		$	781,778		$	277,252		$		(198,816	)	$	860,214
Liabilities and Stockholders’ Equity
Current liabilities:
Outstanding checks		$	11,787		$	—		$	—			$	11,787
Current maturities of long-term debt and capitalized lease obligations		1,832			3,602			—				5,434
Accounts payable		141,483			35,672					(1,764	)	175,391
Accrued expenses		74,066			6,011			—				80,077
Income taxes payable		14,755			(5		)	—				14,750
Total current liabilities		243,923			45,280			(1,764			)	287,439
Long-term debt		251,364			9,530			—				260,894
Capitalized lease obligations		27,652			14,063			—				41,715
Deferred tax liability, net		(6,384		)	9,380			—				2,996
Other liabilities		19,210			1,947			—				21,157
Stockholders’ equity		246,013			197,052			(197,052			)	246,013
Total liabilities and stockholders’ equity		$	781,778		$	277,252		$		(198,816	)	$	860,214

 

15

 

January 3, 2004

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Assets
Current assets:
Cash and cash equivalents		$	12,182		$	575		$	—		$	12,757
Accounts and notes receivable, net		113,497			34,916			(2,511		)	145,902
Accounts receivable/payable subs		71,312			(71,312		)	—			—
Inventories		150,718			85,571			—			236,289
Prepaid expenses		13,564			1,572			—			15,136
Deferred tax assets		11,523			(5,797		)	—			5,726
Total current assets		372,796			45,525			(2,511		)	415,810
Investments in affiliates		197,891			—			(197,871		)	20
Notes receivable, net		20,832			10,346			—			31,178
Net property, plant and equipment		170,085			92,266			—			262,351
Goodwill		32,021			117,771			—			149,792
Other assets		16,073			11,128			—			27,201
Total assets		$	809,698		$	277,036		$	(200,382	)	$	886,352
Liabilities and Stockholders’ Equity
Current liabilities:
Outstanding checks		$	23,350		$	—		$	—		$	23,350
Current maturities of long-term debt and capitalized lease obligations		1,739			3,539			—			5,278
Accounts payable		137,599			31,654			(2,511		)	166,742
Accrued expenses		73,488			5,280			—			78,768
Income taxes payable		10,626			(12		)	—			10,614
Total current liabilities		246,802			40,461			(2,511		)	284,752
Long-term debt		271,653			10,291			—			281,944
Capitalized lease obligations		28,157			16,482			—			44,639
Deferred tax liability, net		(3,333		)	9,691			—			6,358
Other liabilities		9,962			2,240			—			12,202
Stockholders’ equity		256,457			197,871			(197,871		)	256,457
Total liabilities and stockholders’ equity		$	809,698		$	277,036		$	(200,382	)	$	886,352

 

16

 

June 14, 2003

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments				Nash Finch Company & Subsidiaries
Assets
Current assets:
Cash and cash equivalents		$	7,826		$	572		—				$	8,398
Accounts and notes receivable, net		107,637			43,146			$		(1,996	)	148,787
Accounts receivable/payable subs		71,191			(71,191		)	—				—
Inventories		150,435			94,904			—				245,339
Prepaid expenses		13,692			1,480			—				15,172
Deferred tax assets		14,395			(4,990		)	—				9,405
Total current assets		365,176			63,921			(1,996			)	427,101
Investments in affiliates		197,820			—			(197,800			)	20
Notes receivable, net		25,166			5,585			—				30,751
Net property, plant and equipment		175,816			87,587			—				263,403
Goodwill		32,021			118,032			—				150,053
Other assets		16,700			11,700			—				28,400
Total assets		$	812,699		$	286,825		$	(199,796		)	$	899,728
Liabilities and Stockholders’ Equity
Current liabilities:
Outstanding checks		$	5,108		$	—		$	—			$	5,108
Current maturities of long-term debt and capitalized lease obligations		3,546			3,500			—				7,046
Accounts payable		139,745			37,465			(1,996			)	175,214
Accrued expenses		81,259			7,745			—				89,004
Income taxes payable		10,900			54			—				10,954
Total current liabilities		240,558			48,764			(1,996			)	287,326
Long-term debt		311,905			11,438			—				323,343
Capitalized lease obligations		28,628			17,334			—				45,962
Deferred tax liability, net		(7,618		)	9,210			—				1,592
Other liabilities		9,037			2,279			—				11,316
Stockholders’ equity		230,189			197,800			(197,800			)	230,189
Total liabilities and stockholders’ equity		$	812,699		$	286,825		$	(199,796		)	$	899,728

 

17

 

NASH FINCH COMPANY AND SUBSIDIARIES

Consolidating Statements of Income

Twenty-Four Weeks Ended June 19, 2004

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Operating activities:
Net cash provided by operating activities		$	56,777		$	1,321		$	—		$	58,098
Investing activities:
Disposal of property, plant and equipment		1,951			677			—			2,628
Additions to property, plant and equipment		(6,110		)	(664		)	—			(6,774		)
Loans to customers		(2,997		)	—			—			(2,997		)
Payments from customers on loans		1,429			59			—			1,488
Other		514			—			—			514
Net cash (used in) provided by investing activities		(5,213		)	72			—			(5,141		)
Financing activities:
Payments of bank credit facility debt		(20,000		)	—			—			(20,000		)
Dividends paid		(3,310		)	—			—			(3,310		)
Payments of long-term debt		(276		)	(761		)	—			(1,037		)
Payments of capitalized lease obligations		(425		)	(741		)	—			(1,166		)
Decrease in outstanding checks		(11,563		)	—			—			(11,563		)
Other		1,484			—			—			1,484
Net cash used by in financing activities		(34,090		)	(1,502		)	—			(35,592		)
Net increase in cash		17,474			(109		)	—			17,365
Cash at beginning of year		12,182			575			—			12,757
Cash at end of year		$	29,656		$	466		$	—		$	30,122

 

18

 

Twenty-Four Weeks Ended June 14, 2003

(in thousands)

 

		Nash Finch			Guarantor Subsidiaries			Consolidation Adjustments			Nash Finch Company & Subsidiaries
Operating activities:
Net cash provided by operating activities		$	48,902		$	6,918		$	—		$	55,820
Investing activities:
Disposal of property, plant and equipment		691			758			—			1,449
Additions to property, plant and equipment		(9,230		)	(5,059		)	—			(14,289		)
Business acquired, net of cash		(2,661		)	607			—			(2,054		)
Loans to customers		(4,142		)	—			—			(4,142		)
Payments from customers on loans		2,476			241			—			2,717
Other		4			—			—			4
Net cash used in investing activities		(12,862		)	(3,453		)	—			(16,315		)
Financing activities:
Payments of bank credit facility debt		(33,400		)	—			—			(33,400		)
Dividends paid		(2,150		)	—			—			(2,150		)
Payments of long-term debt		(1,168		)	(2,778		)	—			(3,946		)
Payments of capitalized lease obligations		(384		)	(678		)	—			(1,062		)
Decrease in outstanding checks		(21,968		)	—			—			(21,968		)
Net cash used in financing activities		(59,070		)	(3,456		)	—			(62,526		)
Net increase (decrease) in cash		(23,030		)	9			—			(23,021		)
Cash at beginning of year		30,856			563			—			31,419
Cash at end of year		$	7,826		$	572		$	—		$	8,398

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

We are one of the leading food distribution and retail companies in the United States, with approximately $4.0 billion in annual sales.  Approximately 49% of our sales for the twelve and twenty-four weeks ended June 19, 2004 was attributable to our food distribution segment, which sells and distributes a wide variety of nationally branded and private label products to independent grocery stores and institutional customers primarily in the Midwest and Southeast.  Approximately 28% of our sales for the twelve and twenty-four weeks ended June 19, 2004 was attributable to our military food distribution segment, which contracts with vendors to distribute a wide variety of grocery products to military commissaries located primarily in the Mid-Atlantic region of the United States, and in Europe, Cuba, Puerto Rico and Iceland.  The remaining 23% of our sales for the twelve and twenty-four weeks ended June 19, 2004 was attributable to our retail segment, which as of June 19, 2004, operated 88 corporate-owned stores primarily in the Upper Midwest.

 

During the second quarter of 2004, our food distribution revenue grew by 6.8% compared to the same period last year primarily as a result of new customer accounts, the largest number of whom are former customers of Fleming Companies, Inc.  We believe that additional business opportunities will continue to be available to our food distribution segment throughout the second half of 2004 from former customers of Fleming and other wholesalers, from independent operators who purchase stores from major retailers seeking to rationalize their markets, and from retailers adding groceries to their product offerings.  Late in the second quarter, Albertson’s Inc. announced they had sold eleven of their stores to two of our food distribution customers in the Omaha area.  These transactions are expected to close in the third quarter of fiscal 2004.  The degree to which we are able to continue to capitalize on these opportunities will determine the degree to which new business gains can exceed customer attrition, which has historically ranged from two to four percent.  Our military segment also continued to capitalize on increased profitability in the second quarter of fiscal 2004 as a result of continued efficiencies gained through the consolidation of two large distribution centers in fiscal 2003.

 

During the second quarter of 2004, we completed a strategic review that identified certain retail stores that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments.  As a result of this review, we announced that we were exiting our Buy·n·Save and AVANZA retail formats, closing our five Buy·n·Save outlets, and three AVANZA outlets located in Chicago and Pueblo, Colorado and closing ten conventional retail outlets, primarily operating under the Econofoods banner.  We are currently seeking purchasers for our three Denver area AVANZA stores.  Exiting these underperforming assets is consistent with the our commitment to continue to lower operating costs, improve our balance sheet and focus investment and attention on core areas of our business.  As a result of our exit plan, we recorded a special charge of $36.5 million during the second quarter, which primarily represented asset impairment charges and provisions for future lease costs.  In addition, we recorded an additional $3.3 million of costs that were reflected within operating earnings, primarily involving inventory markdowns related to the store closures.  We estimate that our annualized pre-tax earnings improvement from the closure and sale of these stores will be approximately $16 million.  The 21 stores involved represent approximately 15% of our annualized retail sales and approximately 3% of our total annualized sales.  As of the end of the second quarter, we closed all 18 of the stores and are continuing to market the 3 Denver area AVANZA stores.  We believe that the closure and sale of these stores will benefit our retail segment by enabling us to focus on a variety of retail initiatives, such as improvements in merchandising and pricing strategies, store-level execution, and perishable offerings and quality.

 

20

 

RESULTS OF OPERATIONS

 

The following discussion compares our operating results for the twelve and twenty-four weeks ended June 19, 2004 to the twelve and twenty-four weeks ended June 14, 2003.

 

Sales

 

The following tables summarize our sales activity for the twelve and twenty-four weeks ended June 19, 2004 compared to the twelve and twenty-four weeks ended June 14, 2003 (dollars in millions):

 

Twelve Weeks Ended June 19, 2004 and June 14, 2003

 

 

Twenty-Four Weeks Ended June 19, 2004 and June 14, 2003

 

 

The increase in food distribution sales for the twelve and twenty four weeks ended June 19, 2004 is due to new business with former Fleming customers and other new accounts as well as growth from our existing customer base.

 

The increase in military segment sales for the twelve and twenty four weeks ended June 19, 2004 is primarily due to product line extensions in our domestic commissary business.

 

The decrease in retail segment sales for the twelve and twenty-four weeks ended June 19, 2004 primarily reflects a decrease in same store sales, which compares retail sales for stores which were in operation for the same number of weeks in the comparative periods.  Same store sales (not including the 21 stores whose disposition was announced during the second quarter 2004) decreased 5.5% for the second quarter 2004 as compared to the second quarter 2003.  Same stores sales decreased 8.3% for the first twenty-four weeks of 2004 as compared to the year-earlier period. These declines continue to reflect a difficult competitive environment in which supercenters and other alternative formats compete

 

21

 

for price conscious consumers.  During the twelve and twenty-four weeks ended June 19, 2004 our corporate store count changed as follows:

 

		Twelve Weeks		Twenty-Four Weeks
Number of stores at beginning of period		106		110
Closed or sold stores		(18	)	(22	)
Number of stores at end of period		88		88

 

Gross Profit

 

Gross profit (calculated as sales less cost of sales) for the twelve weeks ended June 19, 2004 was 11.0% of sales compared to 11.7% of sales for the same period last year.  Gross profit for the twenty-four weeks ended June19, 2004 was 11.0% of sales compared to 11.7% of sales for the same period last year.  Gross profit was negatively affected in both the quarterly and year-to-date comparisons because retail segment sales, which earn a higher gross profit than food and military distribution segment sales, represented a smaller percentage of our total sales.  In addition,gross profit for the twelve and twenty-four weeks ended June 19, 2004 was also adversely affected by additional costs of $3.2 million, primarily resulting from inventory markdowns related to our second quarter 2004 store closures.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (SG&A) for the twelve weeks ended June 19, 2004 were 8.0% of sales compared to 8.4% for the same period last year.  SG&A expenses for the twenty-four weeks ended June 19, 2004 were 8.2% of sales compared to 8.6% for the same period last year.  This decrease in SG&A expenses as a percentage of sales primarily reflected the fact that during the 2004 periods, sales in our retail segment, which has higher SG&A expenses than our food and military distribution segments, represented a smaller percentage of our total sales.

 

Special Charges

 

During the second quarter of 2004, we completed a strategic review that identified certain retail stores that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments.  As a result of this review, we announced that we were exiting our Buy·n·Save and AVANZA retail formats, closing our five Buy·n·Save outlets, and three AVANZA outlets located in Chicago and Pueblo, Colorado and closing ten conventional retail outlets, primarily operating under the Econofoods banner.  We are currently seeking purchasers for our three Denver area AVANZA stores.  Exiting these underperforming assets is consistent with the our commitment to continue to lower operating costs, improve our balance sheet and focus investment and attention on core areas of our business.  As a result of these store dispositions, we recorded a pre-tax special charge of $36.5 million which was reflected in the “Special charge” line within the consolidated statements of income, and $3.3 million of costs reflected in operating earnings, primarily involving inventory markdowns related to the store closures.  The special charge included $21.7 million for asset impairments (including $1.1 million of goodwill allocated to the stores being sold), $14.1 million for future lease obligations, $0.1 million in severance and $0.6 million in other charges based on management’s estimates for lease subsidies, future payments on exited real estate, lease terminations and the fair value of assets.  As of the end of the second quarter, we had closed all 18 of the stores and are continuing to market the three Denver area AVANZA stores.

 

22

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense for the twelve weeks ended June 19, 2004 was $9.8 million compared to $9.6 million for the same period last year, reflecting an increase of $0.2 million, or 2.1%.  Depreciation and amortization expense for the twenty-four weeks ended June 19, 2004 was $20.0 million compared to $19.1 million for the same period last year, reflecting an increase of $0.9 million, or 4.7%.  The increase in both periods primarily results from information technology projects completed subsequent to the first quarter of 2003 which are being depreciated over three years.

 

Interest Expense

 

Interest expense for the twelve weeks ended June 19, 2004 was $6.5 million compared to $7.0 million for the same period last year, reflecting a decrease of $0.5 million, or 7.1%.  Our average borrowing level under our bank credit facility decreased from $148.1 million for the twelve weeks ended June 14, 2003 to $94.8 million for the twelve weeks ended June 19, 2004.  This decrease was partially offset by an increase in our effective interest rate (including the impact of our interest rate swaps) from 4.8% for the twelve weeks ended June 14, 2003 to 5.8% for the twelve weeks ended June 19, 2004.  Interest expense for the twenty-four weeks ended June 19, 2004 was $13.0 million compared to $17.8 million for the same period last year, reflecting a decrease of $4.8 million, or 27.0%.  The decrease in interest expense for the twenty-four weeks ended June 19, 2004 is primarily due to $3.8 million paid to our bondholders and bank lenders in the first quarter of 2003 as consideration for waivers to extend the deadlines for filing certain 2002 and 2003 periodic reports.  In addition, our average borrowing level under our bank credit facility decreased from $154.0 million for the twenty-four weeks ended June 14, 2003 to $99.4 million for the twenty-four weeks ended June 19, 2004.  Partially offsetting the impact of these factors was an increase in our effective interest rate (including the impact of our interest rate swaps) from 4.8% for the twenty-four weeks ended June 14, 2003 to 5.6% for the twenty-four weeks ended June 19, 2004.

 

Income Taxes

 

Income tax expense is provided on an interim basis using management’s estimate of the annual effective rate.  The effective income tax rate was 39.0% for both the twelve and twenty-four weeks ended June 19, 2004 and June 14, 2003.

 

Net Earnings

 

Net losses for the twelve weeks ended June 19, 2004 were $15.6 million, or $1.26 per share, compared to net earnings of $7.3 million, or $0.61 per share, for the twelve weeks ended June 14, 2003.  Net losses for the twenty-four weeks ended June 19, 2004 were $10.9 million, or $0.88 per share, compared to net earnings of $10.5 million, or $0.88 per share for the twenty-four weeks ended June 14, 2003.  As noted above, net earnings for the twelve and twenty-four weeks ended June 19, 2004 included the impact of a special charge of $22.3 million net of tax, or $1.80 per share, related to previously discussed store dispositions, and $2.0 million, or $0.16 per share, in after-tax costs (primarily inventory markdowns) that were recorded in operating income and were related to the store closures.  Net earnings for the twenty-four weeks ended June 14, 2003 were adversely affected by $2.3 million net of tax, or $0.20 per share, paid to lenders as consideration for waivers.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  Management bases its estimates on historical experience, consultation with experts and various other

 

23

 

assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources.

 

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements.  We consider the accounting policies discussed under the caption “Critical Accounting Policies” in Part II, Item 7 of our Form 10-K for the year ended January 3, 2004 to be critical in that materially different amounts could be reported under different conditions or using different assumptions.

 

Any effects on our business, financial position or results of operations resulting from revised estimates or different assumptions are recorded in the period in which the facts that give rise to the revision become known.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Historically, we have financed our capital needs through a combination of internal and external sources.  These sources include cash flow from operations, short-term bank borrowings, various types of long-term debt and lease financing.  For the remainder of fiscal 2004, we expect that cash flow from operations will be sufficient to meet our working capital needs and enable us to further reduce our debt, with temporary draws on our revolving credit line needed during the year to build inventories for certain holidays.  Longer term, we believe that cash flows from operations, short-term bank borrowings, various types of long-term debt and lease and equity financing will be adequate to meet our working capital needs, planned capital expenditures and debt service obligations.

 

Operating cash flows for the twenty-four weeks ended June 19, 2004 remained relatively flat compared with the same period last year, increasing from $55.8 million to $58.1 million.

 

Cash used for investing activities decreased by $11.2 million for the twenty-four weeks ended June 19, 2004 as compared to the same period last year, primarily because we spent $7.5 million less on capital expenditures for the twenty-four weeks ended June 19, 2004 compared to the same period last year and made no acquisitions during the twenty-four weeks ended June 19, 2004 compared to $2.1 million in cash used for acquisitions during the same period last year.

 

Cash used for financing activities decreased by $26.9 million for the twenty-four weeks ended June 19, 2004 compared to the same period last year, primarily due to $20.0 million used to pay down our bank credit facility compared to $33.4 million used to pay down our bank credit facility during the twenty-four weeks ended June 14, 2003.  At June 19, 2004, $123.0 million in credit was available under our bank credit facility. In addition, our outstanding checks decreased by $11.6 million for the twenty-four weeks ended June 19, 2004 compared to a $22.0 million decrease during the same period a last year.

 

Bank Credit Facility

 

Our bank credit agreement has a five year term ending December 19, 2005 and provides a $100 million term loan and $150 million in revolving credit available for loans which includes $40 million in letters of credit.  During the second quarter of fiscal 2004, $20 million was paid down on our bank credit facility, reducing our term loan to $80 million.  The bank credit facility represents one of our primary sources of liquidity, both short-term and long-term, and the continued availability of credit

 

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under that agreement is of material importance to our ability to fund our capital and working capital needs.  We anticipate refinancing the current agreement during fiscal 2004.

 

The bank credit agreement contains various restrictive covenants, compliance with which is essential to continued credit availability under the credit agreement.  Among the most significant of these restrictive covenants are financial covenants which require us to maintain predetermined ratio levels related to interest coverage, fixed charge coverage, and leverage.  These ratios are based on EBITDA, on a rolling four quarter basis, with some adjustments (“Consolidated EBITDA”).  Consolidated EBITDA is a non-GAAP financial measure that is defined in our bank credit agreement as earnings before interest, income taxes, depreciation and amortization, adjusted to exclude extraordinary gains or losses, gains or losses from sales of assets other than inventory in the ordinary course of business, and non-cash LIFO and other charges (such as closed store lease costs and asset impairments), less subsequent cash payments made on non-cash charges.  Consolidated EBITDA should not be considered an alternative measure of our net income, operating performance, cash flow or liquidity.  It is provided as additional information relative to compliance with our debt covenants.

 

As of June 19, 2004, we were in compliance with all Consolidated EBITDA-based debt covenants as defined in our credit agreement which are summarized as follows:

 

Financial Covenant		Required Ratio		Actual Ratio
Interest Coverage Ratio (1)		3.25:1.00 (minimum)		4.20:1.00
Fixed Charge Coverage Ratio(2)		1.10:1.00 (minimum)		1.64:1.00
Leverage Ratio (3)		3.50:1.00 (maximum)		2.53:1.00

 

(1)          Ratio of Consolidated EBITDA for the trailing four quarters to interest expense for such period.

(2)          Ratio of Consolidated EBITDA plus rent expense for the trailing four quarters to the sum of interest expense, rent expense and capital expenditures for such period.

(3)          Total outstanding debt and capitalized leases to Consolidated EBITDA for the trailing four quarters.

 

Any failure to comply with any of these financial covenants would, after the expiration of any applicable cure period, constitute an event of default under the bank credit agreement, entitling a majority of the bank lenders to, among other things, terminate future credit availability under the agreement and accelerate the maturity of outstanding obligations under that agreement.

 

The following is a summary of the calculation of Consolidated EBITDA (in thousands) for the trailing four quarters ended June 19, 2004 and June 14, 2003:

 

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		2003 Qtr 3			2003 Qtr 4			2004 Qtr 1			2004 Qtr 2			Rolling 4 Qtr
Earnings (loss) before income taxes		$	14,105		$	20,572		$	7,757		$	(25,639	)	$	16,795
Interest expense		9,011			7,032			6,505			6,487			29,035
Depreciation and amortization		13,098			10,232			10,156			9,800			43,286
LIFO		41			(1,961		)	392			783			(745		)
Closed store lease costs		583			187			(129		)	1,146			1,787
Asset impairments		1,725			591			—			—			2,316
Gains on sale of real estate		(218		)	(338		)	(82		)	(14		)	(652		)
Subsequent cash payments on non-cash charges		(602		)	(598		)	(565		)	(625		)	(2,390		)
Special charge		—			—			—			36,494			36,494
Curtailment of post retirement plan		—			(4,004		)	—			—			(4,004		)
Total Consolidated EBITDA		$	37,743		$	31,713		$	24,034		$	28,432		$	121,922

 

		2002 Qtr 3			2002 Qtr 4			2003 Qtr 1			2003 Qtr 2			Rolling 4 Qtr.
Earnings before income taxes		$	10,508		$	12,538		$	5,346		$	11,910		$	40,302
Interest expense		9,235			6,957			10,791			7,035			34,018
Depreciation and amortization		12,298			9,218			9,440			9,642			40,598
LIFO		—			(3,457		)	400			400			(2,657		)
Closed store lease costs		353			1,101			354			32			1,840
Asset impairments		1,518			5,067			390			—			6,975
Gains on sale of real estate		(1,386		)	(2,428		)	(66		)	(126		)	(4,006		)
Subsequent cash payments on non-cash charges		(684		)	(421		)	(532		)	(508		)	(2,145		)
Special charge		(765		)	—			—			—			(765		)
Total Consolidated EBITDA		$	31,077		$	28,575		$	26,123		$	28,385		$	114,160

 

Borrowings under the credit facility are collateralized by a security interest in substantially all assets of the Company and its wholly-owned subsidiaries that are not pledged under other debt agreements.  The credit agreement also contains covenants that specify a minimum working capital ratio, limit our ability to incur debt (including guaranteeing the debt of others) and liens, acquire or dispose of assets, pay dividends on and repurchase our stock, make capital expenditures and make loans or advances to others, including customers.  Effective May 14, 2004, we obtained the consent of our credit agreement lenders to the closing or other disposition of the 21 retail stores that were the subject of the second quarter 2004 special charge.

 

Derivative Instruments

 

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities. Our objective in managing our exposure to changes in interest rates is to reduce fluctuations in earnings and cash flows. To achieve these objectives, we use derivative instruments, primarily interest rate swap agreements, to manage risk exposures when appropriate, based on market conditions.  We do not enter into derivative agreements for trading or other speculative purposes, nor are we a party to any leveraged derivative instrument.

 

The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in our consolidated balance sheet.  The related gains or losses on these contracts are deferred in stockholders’ equity as a component of other comprehensive income.  Deferred gains and losses are

 

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amortized as an adjustment to expense over the same period in which the related items being hedged are recognized in income.  However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the items being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.

 

Interest rate swap agreements are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures.  At June 19, 2004 we had three outstanding interest rate swap agreements which commenced on July 26, 2002, December 6, 2002 and June 6, 2003 to manage interest rates on a portion of our long-term debt.  The agreements expire on September 25, 2004, October 6, 2004 and October 6, 2004 with notional amounts of $50 million, $35 million and $35 million, respectively.  The agreements call for an exchange of interest payments with us making payments based on fixed rates of 2.75%, 3.5% and 3.97% for the respective time intervals and receiving payments based on floating rates, without an exchange of the notional amount upon which the payments are based.

 

Off-Balance Sheet Arrangements

 

As of the date of this report, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

FORWARD LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements regarding the Company contained in this report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.  Important factors known to us that could cause material differences include the following:

 

•                  the effect of competition on our distribution and retail businesses;

•                  our ability to identify and execute plans to maximize the value of our remaining retail operations and to expand our wholesale operations;

•                  general sensitivity to economic conditions;

•                  risks entailed by expansion, affiliations and acquisitions;

•                  credit risk from financial accommodations extended to customers;

•                  limitations on financial and operating flexibility due to debt levels and debt instrument covenants;

•                  changes in vendor promotions or allowances;

•                  changes in consumer spending, buying patterns or food safety concerns;

•                  adverse determinations or developments with respect to the SEC investigation discussed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended January 3, 2004, or with respect to litigation or other legal proceedings;

•                  unanticipated problems with product procurement;

•                  the success or failure of new business ventures or initiatives; and

•                  possible changes in the military commissary system.

 

These factors are discussed more fully in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 3, 2004 under the caption “Cautionary Factors.”  You should carefully

 

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consider each cautionary factor and all of the other information in this report.  We undertake no obligation to revise or update publicly any forward-looking statements.  You are advised, however to consult any future disclosures we make on related subjects in future reports to the SEC.

 

NEW ACCOUNTING STANDARDS

 

In December 2003, the FASB issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.  The revisions to SFAS No. 132 required changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans.  We adopted the revisions of SFAS No. 132 and incorporated them in our consolidated financial statements as of January 3, 2004.  The interim disclosures can be found in Part I, Item 1 of this report under Note 10 – “Pension and Other Post-Retirement Benefits” in Notes to Consolidated Financial Statements.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities.  We use interest rate swap agreements to manage our risk exposure (See Part II, Item 7 of our January 3, 2004 Form 10-K and Part I, Item 2 of this report under the caption “Liquidity and Capital Resources”).

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

Management of the Company, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report to provide reasonable assurance that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.  There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.                  LEGAL PROCEEDINGS.

 

On June 22, 2004, the United States District Court for the District of Minnesota dismissed with prejudice the securities class action which had been filed against the Company and certain of its executive officers in June 2003, and which had consolidated eight separate class actions previously filed in late 2002 and early 2003.  The consolidated action alleged that the defendants violated the Securities Exchange Act of 1934 by purportedly issuing false statements about the Company’s business and financial results in connection with vendor promotions.  On June 15, 2004, the consolidated shareholder derivative actions that had been filed in Minnesota state court against Nash Finch’s Board of Directors and certain officers were also dismissed with prejudice.  The derivative actions arose out of the same set of allegations as the federal securities class action.  Plaintiffs in the securities class action have subsequently moved to have the dismissal rescinded, and both dismissals are subject to appeal.

 

ITEM 4.                  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

(a)           The Company held its Annual Meeting of Stockholders on May 18, 2004.

 

(b)                                 Three incumbent directors were nominated by the Board to serve as directors of the Company for three-year terms expiring at the 2007 Annual Meeting of Stockholders.  All three nominees were elected, with the results of votes of security holders as follows:

 

(1)  Election of Directors		Votes For		Votes Withheld
Allister P. Graham		11,004,427		115,191
Ron Marshall		10,977,605		142,013
Laura Stein		10,970,589		149,029

 

ITEM 6.                  EXHIBITS AND REPORTS ON FORM 8-K.

 

(a)                                  Exhibits filed or furnished with this Form 10-Q:

 

10.1                           Consent to Credit Agreement dated as of May 14, 2004, among the Company, certain lenders and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), as administrative agent.

 

31.1                           Rule 13a-14(a) Certification of the Chief Executive Officer.

 

31.2                           Rule 13a-14(a) Certification of the Chief Financial Officer.

 

32.1                           Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (furnished herewith).

 

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(b)                                 Reports on Form 8-K:

 

On April 22, 2004, the Company furnished a Form 8-K reporting under “Item 12 – Results of Operations and Financial Condition” its results for the twelve weeks ended March 27, 2004.

 

On May 19, 2004, the Company furnished a Form 8-K reporting under “Item 9 – Regulation FD Disclosure” its decision to close or otherwise dispose of 21 corporate retail stores.

 

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SIGNATURES

 

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.

 

 

	NASH-FINCH COMPANY
	Registrant
Date:  July 23, 2004	By  /s/ Ron Marshall
	Ron Marshall
	Chief Executive Officer
Date: July 23, 2004	By  /s/ Robert B. Dimond
	Robert B. Dimond
	Executive Vice President and Chief Financial Officer

 

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NASH FINCH COMPANY

 

EXHIBIT INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

For the Twelve Weeks Ended June 19, 2004

 

Item No.		Item		Method of Filing
10.1		Consent to Credit Agreement dated as of May 14, 2004, among the Company, certain lenders and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), as administrative agent.		Filed herewith
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer		Filed herewith
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer		Filed herewith
32.1		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer		Furnished herewith

 

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