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EX-23.1 - EX-23.1 - NASH FINCH COc56667exv23w1.htm
EX-32.1 - EX-32.1 - NASH FINCH COc56667exv32w1.htm
EX-31.2 - EX-31.2 - NASH FINCH COc56667exv31w2.htm
EX-31.1 - EX-31.1 - NASH FINCH COc56667exv31w1.htm
EX-24.1 - EX-24.1 - NASH FINCH COc56667exv24w1.htm
EX-12.1 - EX-12.1 - NASH FINCH COc56667exv12w1.htm
EX-21.1 - EX-21.1 - NASH FINCH COc56667exv21w1.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended: January 2, 2010
o
  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period from          to          .
 
Commission file number: 0-785
 
NASH-FINCH COMPANY
(Exact name of Registrant as specified in its charter)
 
     
Delaware
(State of Incorporation)
  41-0431960
(I.R.S. Employer Identification No.)
7600 France Avenue South
P.O. Box 355
Minneapolis, Minnesota
(Address of principal executive offices)
  55440-0355
(Zip Code)
 
Registrant’s telephone number, including area code:
(952) 832-0534
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $1.66-2/3 per share
 
Common Stock Purchase Rights
 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act.  Yes o     No þ
 
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, and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Securities Exchange Act.
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 20, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $365,330,746, based on the last reported sale price of $28.45 on that date on NASDAQ.
 
As of February 24, 2010, 12,807,022 shares of Common Stock of the Registrant were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 19, 2010 (the “2010 Proxy Statement”) are incorporated by reference into Part III of this report, as specifically set forth in Part III.
 


 

 
Nash Finch Company
 
Index
 
             
        Page No.
 
    1  
  Business     2  
  Risk Factors     8  
  Unresolved Staff Comments     14  
  Properties     14  
  Legal Proceedings     16  
  Reserved     16  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     17  
  Selected Financial Data     19  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
  Quantitative and Qualitative Disclosures about Market Risk     37  
  Financial Statements and Supplementary Data     38  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     87  
  Controls and Procedures     87  
  Other Information     89  
 
  Directors, Executive Officers and Corporate Governance     89  
  Executive Compensation     91  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     91  
  Certain Relationships and Related Transactions and Director Independence     92  
  Principal Accountant Fees and Services     92  
 
PART IV
  Exhibits and Financial Statement Schedules     93  
    99  
 EX-12.1
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32.1


Table of Contents

 
Nash Finch Company
 
PART I
 
Throughout this report, we refer to Nash-Finch Company, together with its subsidiaries, as “we,” “us,” “Nash Finch” or “the Company.”
 
Forward-Looking Information
 
This report, including the information that is or will be incorporated by reference into this report, contains forward-looking statements that relate to trends and events that may affect our future financial position and operating results. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements in this report that are not historical in nature, particularly those that use terms such as “may,” “will,” “should,” “likely,” “expect,” “anticipate,” “estimate,” “believe” or “plan,” 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 food distribution, military and retail businesses;
 
  •  general sensitivity to economic conditions, including the uncertainty related to the current state of the economy in the U.S. and worldwide economic slowdown; recent disruptions to the credit and financial markets in the U.S. and worldwide; changes in market interest rates; continued volatility in energy prices and food commodities;
 
  •  macroeconomic and geopolitical events affecting commerce generally;
 
  •  changes in consumer buying and spending patterns;
 
  •  our ability to identify and execute plans to expand our food distribution, military and retail operations;
 
  •  possible changes in the military commissary system, including those stemming from the redeployment of forces, congressional action and funding levels;
 
  •  our ability to identify and execute plans to improve the competitive position of our retail operations;
 
  •  the success or failure of strategic plans, new business ventures or initiatives;
 
  •  our ability to successfully integrate and manage current or future businesses we acquire, including the ability to manage credit risks and retain the customers of those operations;
 
  •  changes in credit risk from financial accommodations extended to new or existing customers;
 
  •  significant changes in the nature of vendor promotional programs and the allocation of funds among the programs;
 
  •  limitations on financial and operating flexibility due to debt levels and debt instrument covenants;
 
  •  legal, governmental, legislative or administrative proceedings, disputes, or actions that result in adverse outcomes;
 
  •  failure of our internal control over financial reporting;
 
  •  changes in accounting standards;
 
  •  technology failures that may have a material adverse effect on our business;
 
  •  severe weather and natural disasters that may impact our supply chain;
 
  •  unionization of a significant portion of our workforce;
 
  •  costs related to a multi-employer pension plan;


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  •  changes in health care, pension and wage costs and labor relations issues;
 
  •  product liability claims, including claims concerning food and prepared food products;
 
  •  threats or potential threats to security; and
 
  •  unanticipated problems with product procurement.
 
A more detailed discussion of many of these factors is contained in Part I, Item 1A, “Risk Factors,” of this report on Form 10-K. You should carefully consider each of these factors 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 Securities and Exchange Commission (“SEC”).
 
ITEM 1.   BUSINESS
 
Originally established in 1885 and incorporated in 1921, we are the second largest publicly traded wholesale food distributor in the United States, in terms of revenue, serving the retail grocery industry and the military commissary and exchange systems. Our sales in fiscal 2009 exceeded $5.2 billion. Our business currently consists of three primary operating segments: food distribution, military food distribution and retail. Financial information about our business segments for the three most recent fiscal years is contained in Part II, Item 8 of this report under Note (19) — “Segment Information” in the Notes to Consolidated Financial Statements.
 
In November 2006, we announced the launch of a strategic plan, Operation Fresh Start, designed to sharpen our focus and provide a strong platform to support growth initiatives. Our strategic plan is built upon extensive knowledge of current industry, consumer and market trends, and formulated to differentiate the Company. The strategic plan includes long-term initiatives to increase revenues and earnings, improve productivity and cost efficiencies of our Food Distribution, Retail, and Military business segments, and leveraging our corporate support services. The Company has strategic initiatives to improve working capital, manage debt, and increase shareholder value through capital expenditures with acceptable returns on investment. Several important elements of the strategic plan include:
 
  •  Supply chain services focused on supporting our businesses with warehouse management, inbound and outbound transportation management and customized solutions for each business;
 
  •  Growing the Military business segment through acquisition and expansion of products and services, as well as creating warehousing and transportation cost efficiencies with a long-term distribution center strategic plan;
 
  •  Providing our independent retail customers with high level of order fulfillment, broad product selection including leveraging the Our Family brand , support services emphasizing best-in-class offerings in marketing, advertising, merchandising, store design and construction, market research, retail store support, retail pricing and license agreement opportunities; and
 
  •  Emphasis on a suite of retail formats designed to appeal to the needs of today’s consumers.
 
The strategic plan includes the following long-term financial targets:
 
  •  2% organic revenue growth
 
  •  4% Consolidated EBITDA1 margin as a percentage of sales
 
 
1 Consolidated EBITDA is a measurement not recognized by accounting principals generally accepted in the United States. Please refer to Part II, Item 7 of this report under the caption “Consolidated EBITDA (Non-GAAP Measurement)” for the definition of Consolidated EBITDA.


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  •  10% trailing four quarters Free Cash Flow as a percentage of Net Assets2
 
  •  2.5 to 3.0x total leverage ratio (i.e., total debt divided by trailing four quarters Consolidated EBITDA)
 
We have made significant progress towards achieving our long-term financial targets. From Fiscal 2006 to the end of Fiscal 2009, our Consolidated EBITDA margin improved from 2.2% of sales to 2.7% of sales and the debt leverage ratio has improved by more than one full turn of Consolidated EBITDA from 3.11x to 2.02x. The organic revenue growth metric has been negatively affected by the uncertain economic environment in fiscal 2009 when our sales turned negative 0.6%. The ratio of free cash flow to net assets metric improved to 10.6% in fiscal 2009.
 
During fiscal 2009, we acquired and substantially integrated three distribution facilities acquired from GSC Enterprises, Inc. into our military segment, implemented cost reduction and working capital initiatives that reduced debt and strengthened our financial position during a challenging business environment. In addition to the strategic initiatives already in progress, our 2010 initiatives include the following:
 
  •  Implement our military distribution center network expansion including opening a new distribution center, completing the integration of three distribution facilities acquired from GSC Enterprises, and identifying alternative locations for future expansion.
 
  •  Complete supply chain and center store initiatives within our food distribution segment.
 
  •  Implement new cost reduction and profit improvement initiatives.
 
  •  Identify acquisitions that support our strategic plan.
 
Additional description of our business is found in Part II, Item 7 of this report.
 
Food Distribution Segment
 
Our food distribution segment sells and distributes a wide variety of nationally branded and private label grocery products and perishable food products from 15 distribution centers to approximately 1,700 independent retail locations located in 28 states across the United States. Our customers are relatively diverse with the largest customer, excluding our corporate-owned stores, consisting of a consortium of stores representing 9.6%, and two others representing 4.5% and 3.0%, of our fiscal 2009 food distribution sales. No other customer represents greater than 3.0% of our food distribution business. Several of our distribution centers also distribute products to military commissaries and exchanges located in their respective geographic areas.
 
Our distribution centers are strategically located to efficiently serve our independent customer stores and our corporate-owned stores. The distribution centers are equipped with modern materials handling equipment for receiving, storing and shipping merchandise and are designed for high volume operations at low unit costs. We continue to implement operating initiatives to enhance productivity and expand profitability while providing a higher level of service to our distribution customers. Our distribution centers have varying levels of available capacity giving us enough flexibility to service additional customers by leveraging our existing fixed cost base, which can enhance our profitability.
 
Depending upon the size of the distribution center and the profile of the customers served, our distribution centers typically carry a full line of national brand and private label grocery products and perishable food products. Non-food items and specialty grocery products are distributed from two distribution centers located in Bellefontaine, Ohio and Sioux Falls, South Dakota. We currently operate a fleet of tractors and semi-trailers that deliver the majority of our products to our customers. Approximately 24% of deliveries are made through contract carriers.
 
 
2 Defined as cash provided from operations less capital expenditures for property, plant and equipment during the trailing four quarters divided by the average net assets for the current period and prior year comparable period (total assets less current liabilities plus current portion of long-term debt and capital leases).


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Our retailers order their inventory at regular intervals through direct linkage with our information systems. Our food distribution sales are made on a market price plus fee and freight basis, with the fee based on the type of commodity and quantity purchased. We adjust our selling prices based on the latest market information, and our freight policy contains a fuel surcharge clause that allows us to partially mitigate the impact of rising fuel costs.
 
Products
 
We primarily sell and distribute nationally branded products and a number of unbranded products, principally meat and produce, which we purchase directly from various manufacturers, processors and suppliers or through manufacturers’ representatives and brokers. We also sell and distribute high quality private label products under the proprietary trademark Our Family3, a long-standing brand of Nash Finch that offers an alternative to national brands. In addition, we sell and distribute a premium line of branded products under the Nash Brothers Trading Company trademark and a lower priced line of private label products under the Value Choice trademark. Under our branded products, we offer over 2,600 stock-keeping units of competitively priced, high quality grocery products and perishable food products which compete with national branded and other value brand products.
 
Services
 
To further strengthen our relationships with our food distribution customers, we offer, either directly or through third parties, a wide variety of support services to help them develop and operate stores, as well as compete more effectively. These services include:
 
  •  promotional, advertising and merchandising programs;
 
  •  installation of computerized ordering, receiving and scanning systems;
 
  •  retail equipment procurement assistance;
 
  •  providing contacts for accounting, budgeting and payroll services;
 
  •  consumer and market research;
 
  •  remodeling and store development services;
 
  •  securing existing grocery stores that are for sale or lease in the market areas we serve and occasionally acquiring or leasing existing stores for resale or sublease to these customers; and
 
  •  NashNet, which provides supply chain efficiencies through internet services.
 
In fiscal 2009, 44% of food distribution revenues were from customers with whom we had entered into long-term supply agreements as compared to 39% in fiscal 2008. The long-term supply agreements range from 2 to 20 years. These agreements also may contain provisions that give us the opportunity to purchase customers’ independent retail businesses before any third party.
 
We also provide financial assistance to our food distribution customers, primarily in connection with new store development or the upgrading and expansion of existing stores. As of January 2, 2010, we had loans, net of reserves, of $30.4 million outstanding to 32 of our food distribution customers, and had guaranteed outstanding debt and lease obligations of certain food distribution customers in the amount of $13.5 million. We also, in the normal course of business, sublease retail properties and assign retail property leases to third parties. As of January 2, 2010, the present value of our maximum contingent liability exposure, net of reserves, with respect to the subleases and assigned leases was $24.9 million and $8.0 million, respectively.
 
 
3 We own or have the rights to various trademarks, tradenames and service marks, including the following referred to in this report: AVANZA®, Econofoods®, Sun Mart®, Family Thrift Center®, Family Fresh Market®, Our Family®, Value Choicetm, Food Pride®, Fresh Place® and Nash Brothers Trading Company®. The trademark IGA®, referred to in this report, is the registered trademark of IGA, Inc.


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We distribute products to independent stores that carry the IGA banner and our proprietary Food Pride banner. We encourage our independent customers to join one of these banner groups to receive many of the same marketing programs and procurement efficiencies available to grocery store chains while allowing them to maintain their flexibility and autonomy as independents. To use either of these banners, these independents must comply with applicable program standards. As of January 2, 2010, we served 115 retail stores under the IGA banner and 75 retail stores under our Food Pride banner.
 
Military Segment
 
Our military segment is one of the largest distributors, by revenue, of grocery products to U.S. military commissaries and exchanges. On January 31, 2009, the Company completed the purchase from GSC Enterprises, Inc., of substantially all of the assets relating to three wholesale food distribution centers located in San Antonio, Texas, Pensacola, Florida and Junction City, Kansas, including all inventory and customer contracts related to the purchased facilities. On December 1, 2009, we announced our purchase of a facility in Columbus, Georgia which is scheduled to begin servicing military commissaries and exchanges in the late third or fourth fiscal quarter of 2010.
 
We serve 356 military commissaries and exchanges located in 33 states across the United States and the District of Columbia, Europe, Puerto Rico, Cuba, the Azores and Egypt. Our distribution centers are exclusively dedicated to supplying products to military commissaries and exchanges. These distribution centers are strategically located among the largest concentration of military bases in the areas we serve and near Atlantic ports used to ship grocery products to overseas commissaries and exchanges. We have an outstanding reputation as a supplier focused exclusively on U.S. military commissaries and exchanges, based in large measure on our excellent service metrics, which include fill rate, on-time delivery and shipping accuracy.
 
The Defense Commissary Agency, also known as DeCA, operates a chain of commissaries on U.S. military installations throughout the world. DeCA contracts with manufacturers to obtain grocery and related products for the commissary system. Manufacturers either deliver the products to the commissaries themselves or, more commonly, contract with distributors such as us to deliver the products. These distributors act as drayage agents for the manufacturers by purchasing and maintaining inventories of products DeCA purchases from the manufacturers, and providing handling, distribution and transportation services for the manufacturers. Manufacturers must authorize the distributors as their official representatives to DeCA, and the distributors must adhere to DeCA’s frequent delivery system procedures governing matters such as product identification, ordering and processing, information exchange and resolution of discrepancies. We obtain distribution contracts with manufacturers through competitive bidding processes and direct negotiations.
 
As commissaries need to be restocked, DeCA identifies each manufacturer with which an order is to be placed for additional products, determines which distributor is the manufacturer’s official representative in a particular region, and places a product order with that distributor under the auspices of DeCA’s master contract with the applicable manufacturer. The distributor selects that product from its existing inventory, delivers it to the commissary or commissaries designated by DeCA, and bills the manufacturer for the product shipped. The manufacturer then bills DeCA under the terms of its master contract. Overseas commissaries are serviced in a similar fashion, except that a distributor’s responsibility is to deliver products as and when needed to the port designated by DeCA, which in turn bears the responsibility for shipping the product to the applicable commissary or overseas warehouse.
 
After we ship a particular manufacturer’s products to commissaries in response to an order from DeCA, we invoice the manufacturer for the same purchase price previously paid by us plus a service and or drayage fee that is typically based on a percentage of the purchase price, but may in some cases be based on a dollar amount per case or pound of product handled. Our order handling and invoicing activities are facilitated by a procurement and billing system developed specifically for MDV, addresses the unique aspects of its business, and provides our manufacturer customers with a web-based, interactive means of accessing critical order, inventory and delivery information.
 
We have approximately 600 distribution contracts with manufacturers that supply products to the DeCA commissary system and various exchange systems. These contracts generally have an indefinite term, but may


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be terminated by either party without cause upon 30 days prior written notice to the other party. The contracts typically specify the commissaries and exchanges we are to supply on behalf of the manufacturer, the manufacturer’s products to be supplied, service and delivery requirements and pricing and payment terms. Our ten largest manufacturer customers represented approximately 46% of the military segment’s fiscal 2009 sales.
 
Retail Segment
 
Our retail segment is made up of 54 corporate-owned stores, located primarily in the Upper Midwest, in the states of Colorado, Iowa, Minnesota, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. Our corporate-owned stores principally operate under the Sun Mart, Econofoods, AVANZA, Family Thrift Center, Pick‘n Save, Family Fresh Market, Prairie Market, and Wholesale Food Outlet banners. Our stores are typically located close to our distribution centers in order to create certain operating and logistical efficiencies. As of January 2, 2010, we operated 47 conventional supermarkets, five AVANZA grocery stores, one Wholesale Food Outlet grocery store and one other retail store. Our retail segment also includes one corporate-owned pharmacy and one convenience store that are not included in our store count.
 
Our conventional grocery stores offer a wide variety of high quality grocery products and services. Many have specialty departments such as fresh meat counters, delicatessens, bakeries, eat-in cafes, pharmacies, dry cleaners, banks and floral departments. These stores also provide services such as check cashing, fax services and money transfers. We emphasize outstanding customer service and have created our G.R.E.A.T. (Greet, React, Escort, Anticipate and Thank) Customer Service Program to train every associate (employee) on the core elements of providing exceptional customer service. “The Fresh Place” concept within our conventional grocery stores is an umbrella banner that emphasizes our high quality perishable products, such as fresh produce, deli, meats, seafood, baked goods and takeout foods for today’s busy consumer. The AVANZA grocery stores offer products designed to meet the specific tastes and needs of Hispanic shoppers.
 
Competition
 
Food Distribution Segment
 
The food distribution segment is highly competitive as evidenced by the low margin nature of the business. Success in this segment is measured by the ability to leverage scale in order to gain pricing advantages and operating efficiencies, to provide superior merchandising programs and services to the independent customer base and to use technology to increase distribution efficiencies. We compete with local, regional and national food distributors, as well as with vertically integrated national and regional chains using a variety of formats, including supercenters, supermarkets and warehouse clubs that purchase directly from suppliers and self-distribute products to their stores. We face competition from these companies on the basis of price, quality, variety, availability of products, strength of private label brands, schedules and reliability of deliveries and the range and quality of customer services.
 
Continuing our quality service by focusing on key metrics such as our on-time delivery rate, fill rate, order accuracy and customer service is essential in maintaining our competitive advantage. During fiscal 2009, our distribution centers had an on-time delivery rate, defined as being within 1/2 hour of our committed delivery time, of 97.7%; and a fill rate, defined as the percentage of cases shipped relative to the number of cases ordered, of 96.7%. We believe we are an industry leader with respect to these key metrics.
 
Military Segment
 
We are one of five distributors with annual sales to the DeCA commissary system in excess of $100 million that distributes products via the frequent delivery system. The remaining distributors that supply DeCA tend to be smaller, regional and local providers. In addition, manufacturers contract with others to deliver certain products, such as baking supplies, produce, deli items, soft drinks and snack items, directly to DeCA commissaries and service exchanges. Because of the narrow margins in this industry, it is of critical importance for distributors to achieve economies of scale, which is typically a function of the density or concentration of military bases within the geographic market(s) a distributor serves, and the distributor’s share of that market. As a result, no distributor in this industry has a nationwide presence. Rather, distributors tend


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to concentrate on specific regions, or areas within specific regions, where they can achieve critical mass and utilize warehouse and distribution facilities efficiently. In addition, distributors that operate larger civilian distribution businesses tend to compete for DeCA commissary business in areas where such business would enable them to more efficiently utilize the capacity of their existing civilian distribution centers. We believe the principal competitive factors among distributors within this industry are customer service, price, operating efficiencies, reputation with DeCA and location of distribution centers. We believe our competitive position is very strong with respect to all these factors within the geographic areas where we compete.
 
Retail Segment
 
Our retail segment is also highly competitive. We compete with many organizations of various sizes, ranging from national and regional chains that operate a variety of formats (such as supercenters, supermarkets, extreme value food stores and membership warehouse club stores) to local grocery store chains and privately owned unaffiliated grocery stores. Although our target geographic areas have a relatively low presence of national and multi-regional grocery store chains, we are facing increasing competitive pressure from the expansion of supercenters and regional chains. In 2009 and 2008, there were two and four, respectively, of our stores that were impacted by the opening of new supercenters in their markets and a total of 42 stores as of January 2, 2010, now compete with supercenters. Depending upon the market, we compete based on price, quality and assortment, store appeal (including store location and format), sales promotions, advertising, service and convenience. We believe our ability to provide convenience, outstanding perishable execution and exceptional customer service are particularly important factors in achieving competitive success.
 
Vendor Allowances and Credits
 
We participate with our 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, and are often subject to negotiation with our vendors. In the case of off-invoice allowances, discounts are typically offered by vendors with respect to certain merchandise purchased by us during a specified period of time. We use 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 we are 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 our 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 promotions, tracking specific shipments of goods to retailers (or to customers in the case of our own retail stores) during a specified period (retail performance allowances), slotting (adding a new item to the system in one or more of our distribution centers) 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 we are invoiced at the regular price with the understanding that we may bill back the vendor for the requisite allowance when the performance is satisfied. We also assess an administrative fee, reflected on the invoices sent to vendors, to recoup our reasonable costs of performing the tasks associated with administering retail performance allowances.
 
We collectively plan promotions with our vendors and arrive at the amount the respective vendor plans to spend on promotions with us. Each vendor has its own method for determining the amount of promotional funds to be spent with us. In most situations, the vendor allowances are based on units we purchased from the vendor. In other situations, the allowances are based on our past or anticipated purchases and/or the anticipated performance of the planned promotions. Forecasting promotional expenditures is a critical part of our frequently scheduled planning sessions with our vendors. As individual promotions are completed and the associated billing is processed, the vendors track our promotional program execution and spend rate, and discuss the tracking, performance and spend rate with us on a regular basis throughout the year. These communications include discussions with respect to future promotions, product cost, targeted retails and price


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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 us. In the future, the nature and menu of promotional programs and the allocation of dollars among them may change as a result of our ongoing negotiations and commercial relationships with our vendors.
 
Trademarks and Servicemarks
 
We own or license a number of trademarks, tradenames and servicemarks that relate to our products and services, including those mentioned in this report. We consider certain of these trademarks, tradenames and servicemarks, such as Our Family, Value Choice and Nash Brothers Trading Company, to be of material value to the business conducted by our food distribution and retail segments, and we actively defend and enforce such trademarks, tradenames and servicemarks.
 
Employees
 
As of January 2, 2010, we employed 7,563 persons, of whom 5,030 were employed on a full-time basis and 2,533 employed on a part-time basis. Of our total number of employees, 721 were represented by unions (9.5% of all employees) and consisted primarily of warehouse personnel and drivers in our Ohio, Indiana and Michigan distribution centers. We consider our employee relations to be good.
 
Available Information
 
Our internet website is www.nashfinch.com. The references to our website in this report are inactive references only, and the information on our website is not incorporated by reference in this report. Through the Investor Relations portion of our website and a link to a third-party content provider (under the tab “SEC Filings”), you may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We have also posted on the Investor Relations portion of our website, under the caption “Corporate Governance,” our Code of Business Conduct that is applicable to all our directors and employees, as well as our Code of Ethics for Senior Financial Management that is applicable to our Chief Executive Officer, Chief Financial Officer and Corporate Controller. Any amendment to or waiver from the provisions of either of these Codes that is applicable to any of these three executive officers will be disclosed on the Investor Relations portion of our website under the “Corporate Governance” caption.
 
ITEM 1A.   RISK FACTORS
 
In addition to the other information in this Form 10-K, you should carefully consider the specific risk factors set forth below in evaluating Nash Finch because any of the following risks could materially affect our business, financial condition, results of operations and future prospects. The risks described below are not the only ones we face. Additional risks and uncertainties not currently known to us may also materially and adversely affect us.
 
We face substantial competition and our competitors may have superior resources, which could place us at a competitive disadvantage and adversely affect our financial performance.
 
Our businesses are highly competitive and are characterized by high inventory turnover, narrow profit margins and increasing consolidation. Our food distribution and military businesses compete not only with local, regional and national food distributors, but also with vertically integrated national and regional chains that employ a variety of formats, including supercenters, supermarkets and warehouse clubs. Our retail business, focused in the Upper Midwest, has historically competed with traditional grocery stores and is increasingly competing with alternative store formats such as supercenters, warehouse clubs, dollar stores and extreme value food stores.


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Some of our food distribution and retail competitors are substantially larger and may have greater financial resources and geographic scope, lower merchandise acquisition costs and lower operating expenses than we do, intensifying price competition at the wholesale and retail levels. Industry consolidation and the expansion of alternative store formats, which have gained and continue to gain market share at the expense of traditional grocery stores, tend to produce even stronger competition for our retail business and for the independent customers of our distribution business. To the extent our independent customers are acquired by our competitors or are not successful in competing with other retail chains and non-traditional competitors, sales by our distribution business will also be affected. If we fail to effectively implement strategies to respond to these competitive pressures, our operating results could be adversely affected by price reductions, decreased sales or margins, or loss of market share.
 
In the military food distribution business we face competition from large national and regional food distributors as well as smaller food distributors. Due to the narrow margins in the military food distribution industry, it is of critical importance for distributors to achieve economies of scale, which are typically a function of the density or concentration of military bases in the geographic markets a distributor serves and a distributor’s share of that market. As a result, no distributor in this industry has a nationwide presence and it is very difficult, other than through acquisitions, to expand operations in this industry beyond the geographic regions where we currently can utilize our warehouse and distribution capacity.
 
Our business is sensitive to economic conditions that impact consumer spending
 
Our business is sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending and buying habits. Economic downturns or uncertainty has adversely affected overall demand and intensified price competition, but also has caused consumers to “trade down” by purchasing lower margin items and to make fewer purchases in traditional supermarket channels. Continued negative economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, the availability of credit, interest rates, volatility in fuel and energy costs, food price inflation or deflation, employment trends in our markets and labor costs, the impact of natural disasters or acts of terrorism, and other matters affecting consumer spending could cause consumers to continue shifting even more of their spending to lower-priced competitors. The continued general reductions in the level of discretionary spending or shifts in consumer discretionary spending to our competitors could continue to adversely affect our growth and profitability.
 
The continued worldwide financial and credit market disruptions have reduced the availability of liquidity and credit generally necessary to fund a continuation and expansion of global economic activity. The shortage of liquidity and credit combined with substantial losses in equity markets has led to a worldwide economic recession that could be prolonged. The general slowdown in economic activity caused by an extended recession could adversely affect our business. A continuation or worsening of the current difficult financial and economic conditions could adversely affect our customers’ ability to meet the terms of sale or our suppliers’ ability to fully perform their commitments to us.
 
Our businesses could be negatively affected if we fail to retain existing customers or attract significant numbers of new customers.
 
Growing and increasing the profitability of our distribution businesses is dependent in large measure upon our ability to retain existing customers and capture additional distribution customers through our existing network of distribution centers, enabling us to more effectively utilize the fixed assets in those businesses. Our ability to achieve these goals is dependent, in part, upon our ability to continue to provide a high level of customer service, offer competitive products at low prices, maintain high levels of productivity and efficiency, particularly in the process of integrating new customers into our distribution system, and offer marketing, merchandising and ancillary services that provide value to our independent customers. If we are unable to execute these tasks effectively, we may not be able to attract significant numbers of new customers and attrition among our existing customer base could increase, either or both of which could have an adverse impact on our revenue and profitability.


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Growing and increasing the profitability of our retail business is dependent on increasing our market share in the markets our retail stores are located. We plan to invest in redesigning some of our retail stores into other formats in order to attract new customers and increase our market share. Our results of operations may be adversely impacted if we are unable to attract significant numbers of new retail customers.
 
Our military segment operations are dependant upon domestic and international military distribution, and a change in the military commissary system could negatively impact our results of operations and financial condition.
 
Because our military segment sells and distributes grocery products to military commissaries and exchanges in the U.S. and overseas, any material changes in the commissary system, in military staffing levels or in locations of bases may have a corresponding impact on the sales and operating performance of this segment. These changes could include privatization of some or all of the military commissary system, relocation or consolidation in the number of commissaries and exchanges, base closings, troop redeployments or consolidations in the geographic areas containing commissaries and exchanges served by us, or a reduction in the number of persons having access to the commissaries and exchanges.
 
Our results of operations and financial condition could be adversely affected if we are unable to improve the competitive position of our retail operations.
 
Our retail food business faces competition from regional and national chains operating under a variety of formats that devote square footage to selling food (i.e., supercenters, supermarkets, extreme value stores, membership warehouse clubs, dollar stores, drug stores, convenience stores, various formats selling prepared foods, and other specialty and discount retailers), as well as from independent food store operators in the markets where we have retail operations. During fiscal 2006, we announced new strategic initiatives designed to create value within our organization. These initiatives include designing and reformatting our base of retail stores to increase overall retail sales performance. In connection with these efforts, there are numerous risks and uncertainties, including our ability to successfully identify which course of action will be most financially advantageous for each retail store, our ability to identify those initiatives that will be the most effective in improving the competitive position of the retail stores we retain, our ability to efficiently and timely implement these initiatives, and the response of competitors to these initiatives. If we are unable to improve the overall competitive position of our remaining retail stores the operating performance of that segment may continue to decline and we may need to recognize additional impairments of our long-lived assets and goodwill, be compelled to close or dispose of additional stores and may incur restructuring or other charges to our earnings associated with such closure and disposition activities. In addition, we cannot assure you that we will be able to replace any of the revenue lost from these closed or sold stores from our other operations.
 
We may not be able to achieve the expected benefits from the implementation of new strategic initiatives.
 
We have begun taking action to improve our competitive performance through a series of strategic initiatives. The goal of this effort is to develop and implement a comprehensive and competitive business strategy, addressing the food distribution industry environment and our position within the industry and ultimately create increased shareholder value.
 
We may not be able to successfully execute our strategic initiatives and realize the intended synergies, business opportunities and growth prospects. Many of the other risk factors mentioned may limit our ability to capitalize on business opportunities and expand our business. Our efforts to capitalize on business opportunities may not bring the intended results. Assumptions underlying estimates of expected revenue growth or overall cost savings may not be met or economic conditions may deteriorate. Customer acceptance of new retail formats developed may not be as anticipated, hampering our ability to attract new retail customers or maintain our existing retail customer base. Additionally, our management may have its attention diverted from other important activities while trying to execute new strategic initiatives. If these or other factors limit our ability to execute our strategic initiatives, our expectations of future results of operations, including expected revenue growth and cost savings, may not be met.


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Our ability to operate effectively could be impaired by the risks and costs associated with the current and future efforts to grow our business through acquisitions.
 
Efforts to grow our business may include acquisitions. Acquisitions entail various risks such as identifying suitable candidates, effecting acquisitions at acceptable rates of return, obtaining adequate financing and acceptable terms and conditions. Our success depends in a large part on factors such as our ability to locate suitable acquisition candidates and successfully integrate such operations and personnel in a timely and efficient manner while retaining the customer base of the acquired operations. If we cannot locate suitable acquisition candidates, successfully integrate these operations and retain the customer base, we may experience material adverse consequences to our results of operations and financial condition. The integration of separately managed businesses operating in different markets involves a number of risks, including the following:
 
  •  demands on management related to the significant increase in our size after the acquisition of operations;
 
  •  difficulties in the assimilation of different corporate cultures and business practices, such as those involving vendor promotions, and of geographically dispersed personnel and operations;
 
  •  difficulties in the integration of departments, information technology systems, operating methods, technologies, books and records and procedures, as well as in maintaining uniform standards and controls, including internal accounting controls, procedures and policies; and
 
  •  expenses of any undisclosed liabilities, such as those involving environmental or legal matters.
 
Successful integration of new operations, including the previously announced acquisition of three distribution facilities from GSC Enterprises Inc. on January 31, 2009 and our December 1, 2009 purchase of a facility in Columbus, Georgia, will depend on our ability to manage those operations, fully assimilate the operations into our distribution network, realize opportunities for revenue growth presented by strengthened product offerings and expanded geographic market coverage, maintain the customer base and eliminate redundant and excess costs. We may not realize the anticipated benefits or savings from an acquisition in the time frame anticipated, if at all, or such benefits and savings may include higher costs than anticipated.
 
Substantial operating losses may occur if the customers to whom we extend credit or for whom we guarantee loan or lease obligations fail to repay us.
 
In the ordinary course of business, we extend credit, including loans, to our food distribution customers, and provide financial assistance to some customers by guaranteeing their loan or lease obligations. We also lease store sites for sublease to independent retailers. Generally, our loans and other financial accommodations are extended to small businesses that are unrated and may have limited access to conventional financing. As of January 2, 2010, we had loans, net of reserves, of $30.4 million outstanding to 32 of our food distribution customers and had guaranteed outstanding debt and lease obligations of food distribution customers totaling $13.5 million. In the normal course of business, we also sublease retail properties and assign retail property leases to third parties. As of January 2, 2010, the present value of our maximum contingent liability exposure, net of reserves, with respect to subleases and assigned leases was $24.9 million and $8.0 million, respectively. While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such collateral may not be sufficient to cover our exposure. Greater than expected losses from existing or future credit extensions, loans, guarantee commitments or sublease arrangements could negatively and potentially materially impact our operating results and financial condition.
 
Changes in vendor promotions or allowances, including the way vendors target their promotional spending, and our ability to effectively manage these programs could significantly impact our margins and profitability.
 
We engage in a wide variety of promotional programs cooperatively with our vendors. The nature of these programs and the allocation of dollars among them evolve over time as the parties assess the results of specific promotions and plan for future promotions. These programs require careful management in order for us to


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maintain or improve margins while at the same time driving sales for us and for the vendors. A reduction in overall promotional spending or a shift in promotional spending away from certain types of promotions that we have historically utilized could have a significant impact on our gross profit margin and profitability. Our ability to anticipate and react to changes in promotional spending by, among other things, planning and implementing alternative programs that are expected to be mutually beneficial to the manufacturers and us, will be an important factor in maintaining or improving margins and profitability. If we are unable to effectively manage these programs, it could have a material adverse effect on our results of operations and financial condition.
 
Our debt instruments include financial and other covenants that limit our operating flexibility and may affect our future business strategies and operating results.
 
Covenants in the documents governing our outstanding or future debt, or our future debt levels, could limit our operating and financial flexibility. Our ability to respond to market conditions and opportunities as well as capital needs could be constrained by the degree to which we are leveraged, by changes in the availability or cost of capital, and by contractual limitations on the degree to which we may, without the consent of our lenders, take actions such as engaging in mergers, acquisitions or divestitures, incurring additional debt, making capital expenditures, repurchasing shares of our stock and making investments, loans or advances. If needs or opportunities were identified that would require financial resources beyond existing resources, obtaining those resources could increase our borrowing costs, further reduce financial flexibility, require alterations in strategies and affect future operating results.
 
Legal, governmental, legislative or administrative proceedings, disputes or actions that result in adverse outcomes or unfavorable changes in government regulations may affect our businesses and operating results.
 
Adverse outcomes in litigation, governmental, legislative or administrative proceedings and/or other disputes may result in significant liability to the Company and affect our profitability or impose restrictions on the manner in which we conduct our business. Our businesses are also subject to various federal, state and local laws and regulations with which we must comply. Changes in applicable laws and regulations that impose additional requirements or restrictions on the manner in which we operate our businesses could increase our operating costs.
 
Failure of our internal control over financial reporting could materially impact our business and results.
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all internal control systems, internal control over financial reporting may not prevent or detect misstatements. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud, and could expose us to litigation or adversely affect the market price of our common stock.
 
Changes in accounting standards could materially impact our results.
 
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as accounting for insurance and self-insurance, inventories, goodwill and intangible assets, store closures, leases, income taxes and share-based payments, are highly complex and involve subjective judgments. Changes in these rules or their interpretation could significantly change or add significant volatility to our reported earnings without a comparable underlying change in cash flow from operations.


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We may experience technology failures which could have a material adverse effect on our business.
 
We have large, complex information technology systems that are important to our business operations. Although we have an off-site disaster recovery center and have installed security programs and procedures, security could be compromised and technology failures and systems disruptions could occur. This could result in a loss of sales or profits or cause us to incur significant costs, including payments to third parties for damages.
 
Severe weather and natural disasters can adversely impact our operations, our suppliers or the availability and cost of products we purchase.
 
Severe weather conditions and natural disasters could damage our properties and adversely impact the geographic areas where we conduct our business. Severe weather and natural disasters could also affect the suppliers from whom we procure products and could cause disruptions in our operations and affect our supply chain efficiencies. In addition, unseasonably adverse climatic conditions that impact growing conditions and the crops of food producers may adversely affect the availability or cost of certain products.
 
Unions may attempt to organize our employees.
 
While our management believes that our employee relations are good, we cannot be assured that we will not experience pressure from labor unions or become the target of campaigns similar to those faced by our competitors. The potential for unionization could increase if the United States Congress passes the Federal Employee Free Choice Act legislation. We have always respected our employees’ right to unionize or not to unionize. However, the unionization of a significant portion of our workforce could increase our overall costs at the affected locations and adversely affect our flexibility to run our business in the most efficient manner to remain competitive or acquire new business. In addition, significant union representation would require us to negotiate wages, salaries, benefits and other terms with many of our employees collectively and could adversely affect our results of operations by increasing our labor costs or otherwise restricting our ability to maximize the efficiency of our operations.
 
Costs related to a multi-employer pension plan may have a material adverse effect on the Company’s financial condition and results of operations.
 
The Company participates in the Central States Southeast and Southwest Areas Pension Funds (“CSS” or “the plan”), a multi-employer pension plan, for certain unionized employees. The Company’s contributions to the plan may escalate in future years should we withdrawal from the plan or factors outside the Company’s control, including the bankruptcy or insolvency of other participating employers, actions taken by trustees who manage the plan, government regulations, a funding deficiency in the plan. Escalating costs associated with the plan may have a material adverse effect on the Company’s financial condition and results of operations.
 
Effective July 9, 2009, the trustees of CSS formalized a decision to terminate the participation of YRC Worldwide, Inc. (formerly Yellow Freight and Roadway Express) and USF Holland, Inc. from the pension fund. At this time, there is no change to the funding obligations due from other participating employers in the fund as a result of this termination; however, further developments may necessitate a reevaluation of the funding obligations at some point in the future.
 
Increases in employee benefit costs and other labor relations issues may lead to labor disputes and disruption of our businesses.
 
If we are unable to control health care, pension and wage costs, or gain operational flexibility under our collective bargaining agreements, we may experience increased operating costs and an adverse impact on future results of operations. There can be no assurance that the Company will be able to negotiate the terms of any expiring or expired agreement in a manner that is favorable to the Company. Therefore, potential work disruptions from labor disputes could result, which may affect future revenues and profitability.


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We are subject to the risk of product liability claims, including claims concerning food and prepared food products.
 
The sale of food and prepared food products for human consumption may involve the risk of injury. Injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. We cannot be sure that consumption of products we distribute and sell will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters.
 
Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, might negatively impact demand for products we distribute and sell, or cause production and delivery disruptions. We may need to recall products if any of these products become unfit for consumption. Costs associated with these potential actions could adversely affect our operating results.
 
Threats or potential threats to security may adversely affect our business.
 
Threats or acts of terror, data theft, information espionage, or other criminal activity directed at the food industry, the transportation industry, or computer or communications systems, including security measures implemented in recognition of actual or potential threats, could increase security costs and adversely affect our operations.
 
We depend upon vendors to supply us with quality merchandise at the right time and at the right price.
 
We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. We have no assurances of continued supply, pricing, or access to new products and any vendor could at any time change the terms upon which it sells to us or discontinue selling to us. Sales demands may lead to insufficient in-stock positions of our merchandise.
 
Significant changes in our ability to obtain adequate product supplies due to weather, food contamination, regulatory actions, labor supply, or product vendor defaults or disputes that limit our ability to procure products for sale to customers could have an adverse effect on our operating results.
 
The foregoing discussion of risk factors is not exhaustive and we do not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2.   PROPERTIES
 
Our principal executive offices are located in Minneapolis, Minnesota and consist of approximately 126,000 square feet of office space in a building that we own.
 
Food Distribution Segment
 
The table below lists, as of January 2, 2010, the locations and sizes of our distribution centers primarily used in our food distribution operations. Unless otherwise indicated, we own each of these distribution centers.
 


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    Approx. Size
Location
  (Square Feet)
 
Midwest Region:
       
Omaha, Nebraska
    626,900  
Cedar Rapids, Iowa
    351,900  
St. Cloud, Minnesota
    329,000  
Sioux Falls, South Dakota(2)
    275,400  
Fargo, North Dakota
    288,800  
Rapid City, South Dakota(3)
    195,100  
Minot, North Dakota
    185,200  
Southeast Region:
       
Lumberton, North Carolina(1)
    336,500  
Statesboro, Georgia(1)
    230,500  
Bluefield, Virginia
    187,500  
Great Lakes Region:
       
Bellefontaine, Ohio
    666,000  
Lima, Ohio(4)
    608,300  
Bridgeport, Michigan(1)
    604,500  
Westville, Indiana
    631,900  
Cincinnati, Ohio
    403,300  
         
Total Square Footage
    5,920,800  
         
 
 
(1) Leased facility.
 
(2) Includes 79,300 square feet that we lease.
 
(3) Includes 8,000 square feet that we lease.
 
(4) Includes 94,000 square feet that we lease.
 
Military Segment
 
The table below lists the locations and sizes of our facilities exclusively used in our military distribution business as of January 2, 2010. Unless otherwise indicated, we own each of these distribution centers.
 
         
    Approx. Size
Location
  (Square Feet)
 
Norfolk, Virginia(1)
    756,200  
Jessup, Maryland(1)
    115,200  
Junction City, Kansas(1)
    132,000  
Pensacola, Florida(1)
    355,900  
San Antonio, Texas
    486,800  
Columbus, Georgia(1)(2)
    432,400  
         
Total Square Footage
    2,278,500  
         
 
 
(1) Leased facility.
 
(2) Purchased on December 1, 2009 and scheduled to begin making deliveries in the late third or fourth fiscal quarter of 2010.

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Retail Segment
 
The table below contains selected information regarding our 54 corporate-owned stores as of January 2, 2010. We own the facilities of 24 of these stores and lease the facilities of 30 of these stores.
 
                     
    Number
  Areas
  Average
Banner
  of Stores   of Operation   Square Feet
 
Sun Mart
    21     CO, MN, ND, NE     32,855  
Econofoods
    16     IA, MN, SD, WI     32,711  
AVANZA
    5     CO, NE     34,945  
Family Thrift Center
    5     NE, SD     48,082  
Family Fresh Market
    2     WI     48,776  
Pick ’n Save
    2     OH     49,588  
Prairie Market
    1     SD     29,480  
Wholesale Food Outlet
    1     IA     19,620  
Other Stores
    1     MN     3,500  
                     
Total
    54              
                     
 
The table excludes one corporate-owned pharmacy and one convenience store. As of January 2, 2010, the aggregate square footage of our 54 retail grocery stores totaled 1,877,783 square feet.
 
ITEM 3.   LEGAL PROCEEDINGS
 
Roundy’s Supermarkets, Inc. v. Nash Finch
 
On February 11, 2008, Roundy’s Supermarkets, Inc. (“Roundy’s”) filed suit against us claiming we breached the Asset Purchase Agreement (“APA”), entered into in connection with our acquisition of certain distribution centers and other assets from Roundy’s, by not paying approximately $7.9 million that Roundy’s claims is due under the APA as a purchase price adjustment. We answered the complaint denying any payment was due to Roundy’s and asserted counterclaims against Roundy’s for, among other things, breach of contract, misrepresentation, and breach of the duty of good faith and fair dealing. In our counterclaim we demand damages from Roundy’s in excess of $18.0 million.
 
On or about March 25, 2008, Roundy’s filed a motion for judgment on the pleadings with respect to some, but not all, of the claims, asserted in our counterclaim. On May 27, 2008, we filed an amended counterclaim which rendered Roundy’s motion moot. The amended counterclaim asserts claims against Roundy’s for, among other things, breach of contract, fraud, and breach of the duty of good faith and fair dealing. Our counterclaim demands damages from Roundy’s in excess of $18.0 million. Roundy’s filed an answer to the counterclaims denying liability, and subsequently moved to dismiss our counterclaims. The Court denied the motion in part and granted the motion in part.
 
On September 14, 2009, we entered into a settlement agreement with Roundy’s that fully resolves all claims brought in the lawsuit. Under the terms of the settlement agreement, both parties agreed to dismiss their claims against the other in exchange for a release of claims. Neither party was required to pay any money to the other. Subsequently, we have recorded a $7.6 million gain in fiscal 2009 which represent the reversal of the liability we had recorded in conjunction with the disputed APA purchase price adjustment.
 
Other
 
We are also engaged from time-to-time in routine legal proceedings incidental to our business. We do not believe that these routine legal proceedings, taken as a whole, will have a material impact on our business or financial condition.
 
ITEM 4.   RESERVED


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is quoted on the NASDAQ Global Select Market and currently trades under the symbol NAFC. The following table sets forth, for each of the calendar periods indicated, the range of high and low closing sales prices for our common stock as reported by the NASDAQ Global Select Market, and the quarterly cash dividends paid per share of common stock. At February 24, 2010, there were 1,937 stockholders of record.
 
                                                 
            Dividends
    2009   2008   Per Share
    High   Low   High   Low   2009   2008
 
First Quarter
  $ 45.70     $ 27.16     $ 37.35     $ 32.50     $ 0.18     $ 0.18  
Second Quarter
    34.36       27.69       38.60       30.97       0.18       0.18  
Third Quarter
    30.75       26.28       46.33       33.53       0.18       0.18  
Fourth Quarter
    37.49       28.00       45.94       35.83       0.18       0.18  
 
On March 2, 2010, the Nash Finch Board of Directors declared a cash dividend of $0.18 per common share, payable on March 26, 2010, to stockholders of record as of March 12, 2010.
 
Issuer Purchases of Equity Securities
 
The following table provides information about shares of common stock the Company acquired during the fourth quarter of fiscal 2009:
 
                                 
                (c)
       
                Total number of
    (d)
 
    (a)
          shares purchased as
    Maximum amount
 
    Total number
    (b)
    part of publicly
    that may be spent
 
    of shares
    Average price
    announced plans or
    under plans or
 
Period
  purchased (1)     paid per share (1)     programs (1)     programs (1)  
 
Period 12 (November 8, 2009 to December 5, 2009)
    23,844     $ 32.90       23,844     $ 24,215,625  
Period 13 (December 6, 2009 to January 2, 2010)
    6,876     $ 33.83       6,876     $ 23,983,034  
                                 
Total
    30,720     $ 33.10       30,720          
                                 
 
 
(1) On November 10, 2009, our Board of Directors approved a share repurchase program to spend up to $25.0 million to purchase shares of the Company’s common stock. The program took effect on November 16, 2009 and will continue until December 31, 2010.


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Total Shareholder Return Graph
 
The line graph below compares the cumulative total shareholder return on the Company’s common stock for the last five fiscal years with cumulative total return on the S&P SmallCap 600 Index and the peer group index described below. This graph assumes a $100 investment in each of Nash Finch Company, the S&P SmallCap 600 Index and the peer group index at the close of trading on January 3, 2005, and also assumes the reinvestment of all dividends. The stock price performance shown below is not necessarily indicative of future performance.
 
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
January 2, 2010
 
(COMPARISON GRAPH)
 
The peer group represented in the line graph above includes the following nine publicly traded companies: SuperValu Inc., Arden Group, Inc., The Great Atlantic & Pacific Tea Company, Inc., Ingles Markets, Incorporated, Ruddick Corporation, Spartan Stores, Inc., United Natural Foods, Inc., Weis Markets, Inc. and Core-Mark Holding Company, Inc.
 
From time-to-time, the peer group companies have changed due to merger and acquisition activity, bankruptcy filings, company delistings and other similar occurrences. There were no changes to the peer group during fiscal 2009.
 
The performance graph above is being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


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ITEM 6.   SELECTED FINANCIAL DATA
 
NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Summary of Operations
Five years ended January 2, 2010 (not covered by Independent Auditors’ Report)
(Dollar amounts in thousands except per share amounts)
 
                                         
    2009 (1)
    2008 (6)
    2007 (6)
    2006 (6)
    2005 (6)
 
    (52 Weeks)     (53 Weeks)     (52 Weeks)     (52 Weeks)     (52 Weeks)  
 
Results of Operations
                                       
Sales
  $ 5,212,655     $ 4,633,494     $ 4,464,035     $ 4,581,563     $ 4,514,687  
Cost of sales
    4,793,967       4,226,545       4,066,381       4,179,741       4,083,524  
                                         
Gross profit
    418,688       406,949       397,654       401,822       431,163  
Selling, general and administrative
    287,328       288,263       280,818       319,678       300,837  
Gains on sale of real estate
                (1,867 )     (1,130 )     (3,697 )
Special charges
    6,020             (1,282 )     6,253       (1,296 )
Gain on acquisition of a business
    (6,682 )                        
Gain on litigation settlement
    (7,630 )                        
Goodwill impairment
    50,927                   26,419        
Depreciation and amortization
    40,603       38,429       38,882       41,451       43,721  
Interest expense
    24,372       26,466       28,088       30,840       27,877  
Income tax expense
    20,972       20,646       16,984       4,198       24,443  
                                         
Earnings (loss) from continuing operations
    2,778       33,145       36,031       (25,887 )     39,278  
Net earnings from discontinued operations
                      160       56  
Cumulative effect of change in accounting principle, net of income tax (2)
                      169        
                                         
Net earnings (loss)
  $ 2,778     $ 33,145     $ 36,031     $ (25,558 )   $ 39,334  
                                         
Basic earnings (loss) per share
  $ 0.21     $ 2.57     $ 2.67     $ (1.91 )   $ 3.04  
Diluted earnings (loss) per share
  $ 0.21     $ 2.52     $ 2.64     $ (1.91 )   $ 2.98  
Cash dividends declared per common share
  $ 0.72     $ 0.72     $ 0.72     $ 0.72     $ 0.675  
Selected Data
                                       
Pretax earnings (loss) from continuing operations as a percent of sales
    0.46 %     1.16 %     1.19 %     (0.47 )%     1.41 %
Net earnings (loss) as a percent of sales
    0.05 %     0.72 %     0.81 %     (0.56 )%     0.87 %
Effective income tax rate
    88.3 %     38.4 %     32.0 %     19.4 %     38.4 %
Current assets
  $ 557,816     $ 467,951     $ 477,934     $ 457,053     $ 512,207  
Current liabilities
  $ 308,509     $ 297,729     $ 282,357     $ 278,222     $ 325,859  
Net working capital
  $ 249,307     $ 170,222     $ 195,577     $ 178,831     $ 186,348  
Ratio of current assets to current liabilities
    1.81       1.57       1.69       1.64       1.57  
Total assets
  $ 999,536     $ 952,546     $ 949,267     $ 952,480     $ 1,075,892  
Capital expenditures
  $ 30,402     $ 31,955     $ 21,419     $ 27,469     $ 24,638  
Long-term obligations (long-term debt and capitalized lease obligations)
  $ 279,032     $ 248,026     $ 280,010     $ 315,321     $ 371,221  
Stockholders’ equity
  $ 350,559     $ 349,019     $ 331,600     $ 313,113     $ 343,871  
Stockholders’ equity per share (3)
  $ 27.36     $ 27.23     $ 25.26     $ 23.39     $ 25.84  
Return on stockholders’ equity (4)
    0.79 %     9.50 %     10.87 %     (8.27 )%     11.42 %
Common stock high price (5)
  $ 45.70     $ 46.33     $ 51.29     $ 31.74     $ 44.00  
Common stock low price (5)
  $ 26.28     $ 30.97     $ 26.89     $ 19.42     $ 24.83  
 
 
(1) Information presented for fiscal 2009 reflects our acquisition on January 31, 2009, from GSC Enterprises, Inc., of three wholesale food distribution centers which service military commissaries and exchanges. More generally, discussion regarding the comparability of information presented in the table above or material uncertainties that could cause the selected financial data not to be indicative of future financial condition or results of operations can be found in Part 1, Item 1A of this report, “Risk Factors,” Part II, Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8 of this report in our Consolidated Financial Statements and notes thereto.
 
(2) Effect of adoption of Financial Accounting Standards Board ASC Topic 718 (originally issued as SFAS No. 123(R), “Share-Based Payment — Revised”) in fiscal 2006.
 
(3) Based on outstanding shares at year-end.
 
(4) Return based on continuing operations.
 
(5) High and low closing sales price on NASDAQ.
 
(6) Prior year amounts have been restated to reflect the adoption of ASC Subtopic 470-20 and the revised treatment of consigned inventory sales in our military segment. Please refer to Note 1 and Note 3 of the Notes to Consolidated Financial Statements of this Form 10-K for a further discussion of these items.


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
In terms of revenue, we are the second largest publicly traded wholesale food distributor in the United States serving the retail grocery industry and the military commissary and exchange systems. Our business consists of three primary operating segments: food distribution, military food distribution and retail.
 
Our food distribution segment sells and distributes a wide variety of nationally branded and private label products to independent grocery stores and other customers primarily in the Midwest and Southeast regions of the United States.
 
Our military segment contracts with manufacturers to distribute a wide variety of grocery products to military commissaries and exchanges located in the United States and the District of Columbia, and in Europe, Puerto Rico, Cuba, the Azores and Egypt. We have over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges. On January 31, 2009, we completed the purchase from GSC Enterprises, Inc., of substantially all of the assets relating to three wholesale food distribution centers located in San Antonio, Texas, Pensacola, Florida and Junction City, Kansas, including all inventory and customer contracts related to the purchased facilities (“GSC acquisition”). On December 1, 2009, we announced our purchase of a facility in Columbus, Georgia which is scheduled to begin servicing military commissaries and exchanges in the late third or fourth fiscal quarter of 2010.
 
Our retail segment operated 54 corporate-owned stores primarily in the Upper Midwest as of January 2, 2010. On April 1, 2008, we completed the acquisition of two stores located in Rapid City, SD and Scottsbluff, NE and on May 1, 2009 we opened an AVANZA® store in Aurora, CO. Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed or sold three retail stores in 2007, four retail stores in 2008 and four retail stores in 2009. We are implementing initiatives of varying scope and duration with a view toward improving our response to and performance under these highly competitive conditions. These initiatives include designing and reformatting some of our retail stores into alternative formats to increase overall retail sales performance. As we continue to assess the impact of performance improvement initiatives and the operating results of individual stores, we may need to recognize additional impairments of long-lived assets and goodwill associated with our retail segment, and may incur restructuring or other charges in connection with closure or sales activities. The retail segment yields a higher gross profit percent of sales and higher selling, general and administrative (“SG&A”) expenses as a percent of sales compared to our food distribution and military segments. Thus, changes in sales of the retail segment can have a disproportionate impact on consolidated gross profit and SG&A as compared to similar changes in sales in our food distribution and military segments.
 
Results of Operations
 
The following discussion summarizes our operating results for fiscal 2009 compared to fiscal 2008 and fiscal 2008 compared to fiscal 2007. However, fiscal 2008 results are not directly comparable to fiscal 2009 or 2007 because fiscal 2008 contained an additional week.
 
Sales
 
The following tables summarize our sales activity for fiscal 2009, 2008 and 2007:
 
                                                                 
    2009     2008     2007  
          Percent
    Percent
          Percent
    Percent
          Percent
 
Segment Sales:   Sales     of Sales     Change     Sales     of Sales     Change     Sales     of Sales  
    (In millions)  
 
Food Distribution
  $ 2,655.0       50.9 %     (3.1 )%   $ 2,740.5       59.1 %     1.8 %   $ 2,693.3       60.3 %
Military
    1,985.3       38.1 %     53.8 %     1,290.5       27.9 %     9.5 %     1,179.0       26.4 %
Retail
    572.3       11.0 %     (5.0 )%     602.5       13.0 %     1.8 %     591.7       13.3 %
                                                                 
Total Sales
  $ 5,212.6       100.0 %     12.5 %   $ 4,633.5       100.0 %     3.8 %   $ 4,464.0       100.0 %
                                                                 


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The following table provides comparable sales for fiscal 2009 in comparison to fiscal 2008 by excluding the first week of sales from fiscal 2008:
 
                                 
                Fiscal 2008
       
          Fiscal 2008
    Comparable
    Comparable
 
(in millions)
  Fiscal 2008
    Week 1
    52 Weeks of
    Percent Change
 
Segment Sales:
  Sales     Sales     Sales     2009 to 2008  
 
Food Distribution
  $ 2,740.5     $ 45.4     $ 2,695.1       (1.5 )%
Military
    1,290.5       20.9       1,269.6       56.4 %
Retail
    602.5       11.2       591.3       (3.2 )%
                                 
Total Sales
  $ 4,633.5     $ 77.5     $ 4,556.0       14.4 %
                                 
 
The following table provides comparable sales for fiscal 2008 in comparison to fiscal 2007 by excluding the week 53 sales from fiscal 2008:
 
                                 
                Fiscal 2008
       
          Fiscal 2008
    Comparable
    Comparable
 
(in millions)
  Fiscal 2008
    Week 53
    52 Weeks of
    Percent Change
 
Segment Sales:
  Sales     Sales     Sales     2008 to 2007  
 
Food Distribution
  $ 2,740.5     $ 45.3     $ 2,695.2       0.1 %
Military
    1,290.5       19.6       1,270.9       7.8 %
Retail
    602.5       11.3       591.2       (0.1 )%
                                 
Total Sales
  $ 4,633.5     $ 76.2     $ 4,557.3       2.1 %
                                 
 
Fiscal 2009 food distribution sales decreased 3.1% in comparison to fiscal 2008 and decreased 1.5% in comparison to fiscal 2008 after excluding the additional week of sales in fiscal 2008. This decrease was due primarily to a decrease in sales to existing customers which was driven by deflation in certain perishable categories.
 
Fiscal 2008 food distribution sales increased 1.8% in comparison to fiscal 2007 but remained relatively flat in comparison to fiscal 2007 after adjusting for the additional week of sales. However, fiscal 2007 sales included $72.8 million of additional sales from a significant customer that transitioned to a different supplier during fiscal 2007. Excluding the impact of this customer and the additional week of sales in fiscal 2008, food distribution sales increased 2.9% as compared to fiscal 2007, primarily due to new account gains and an increase in sales to existing customers.
 
Fiscal 2009 military sales increased 53.8% in comparison to fiscal 2008 and increased 56.4% in comparison to fiscal 2008 after excluding the additional week of sales in fiscal 2008 which is primarily attributable to the GSC acquisition. However, after excluding the sales attributable to the acquired locations and the additional week of sales in fiscal 2008, comparable military segment sales increased by 2.6% in comparison to the prior year. The comparable increase in military segment sales is due to 3.6% stronger sales domestically.
 
Fiscal 2008 military sales increased 9.5% as compared to fiscal 2007. However, after excluding the additional week of sales in fiscal 2008, military sales increased 7.8% as compared to fiscal 2007. The sales increase reflected 7.2% stronger sales domestically and 7.9% stronger sales overseas as compared to fiscal 2007, after adjusting for the additional week of sales in fiscal 2008.
 
Domestic and overseas sales represented the following percentages of military segment sales. Note that the business acquired through the GSC acquisition services domestic military bases only.
 
                         
    2009   2008   2007
 
Domestic
    80.9 %     70.1 %     70.2 %
Overseas
    19.1 %     29.9 %     29.8 %


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Retail sales for fiscal 2009 decreased 5.0% in comparison to fiscal 2008 and decreased 3.2% in comparison to fiscal 2008 after excluding the additional week of sales in fiscal 2008. The decrease in retail sales for fiscal 2009 was primarily attributable to a 2.4% decrease in same store sales, which compare retail sales for stores which were in operation for the same number of weeks in the comparative periods, and the closure of four stores during the year.
 
Retail sales for fiscal 2008 increased 1.8% in comparison to fiscal 2007. However, after excluding the additional week of sales in fiscal 2008, retail sales decreased 0.1% as compared to fiscal 2007. The decrease in retail sales for fiscal 2008 was attributable to a 0.8% decrease in same store sales, which compare retail sales for stores which were in operation for the same number of weeks in the comparative periods, and the closure of four stores during the year. However, this was partially offset by the acquisition of two stores in fiscal 2008.
 
During fiscal 2009, 2008 and 2007, our corporate store count changed as follows:
 
                         
    Fiscal Year
  Fiscal Year
  Fiscal Year
    2009   2008   2007
 
Number of stores at beginning of year(1)(2)
    57       59       62  
New stores
    1              
Acquired stores
          2        
Closed or sold stores
    (4 )     (4 )     (3 )
                         
Number of stores at end of year(3)(4)(5)
    54       57       59  
                         
 
 
(1) Store count for fiscal 2009 excludes three corporate-owned pharmacies and one convenience store.
 
(2) Store counts for fiscal 2008 and 2007 exclude four corporate-owned pharmacies.
 
(3) Store count for fiscal 2009 excludes one corporate-owned pharmacy and one convenience store.
 
(4) Store count for fiscal 2008 excludes three corporate-owned pharmacies and one convenience store.
 
(5) Store count for fiscal 2007 excludes four corporate-owned pharmacies.
 
Gross Profit
 
Consolidated gross profit for fiscal 2009 was 8.0% of sales compared to 8.8% for fiscal 2008 and 8.9% for fiscal 2007. Our fiscal 2009 gross profit margin was negatively affected by 0.6% of sales in comparison to fiscal 2008 due to a sales mix shift between our business segments between the years. This was due to a higher percentage of 2009 sales occurring in the military segment due to the GSC acquisition and a lower percentage in the retail and food distribution segments which have a higher gross profit margin. In addition, high levels of inflation resulted in higher than normal prior year gross profit margin performance while declines in commodity prices during the current year have had a negative impact on gross profit performance.
 
Fiscal 2008 consolidated gross profit was negatively impacted by additional year-over-year LIFO charges of 0.3% of sales, or $14.6 million, and a sales mix shift between our business segments of 0.1% of sales. The negative impact of the sales mix shift was due to a higher percentage of 2008 sales occurring in the military segment, which has a lower gross profit margin than the retail or food distribution segments. However, our gross profit margin increased 0.3% of sales in fiscal 2008 relative to fiscal 2007 as a result of gains achieved from initiatives that focused on better management of inventories and vendor relationships.
 
Inventory markdown and wind down costs related to retail store closings and retail markdown adjustments are included in cost of sales and were $0.2 million, $0.4 million and $3.1 million in fiscal 2009, 2008 and 2007, respectively.


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Selling, General and Administrative Expense
 
The following table outlines consolidated SG&A and the significant factors affecting consolidated SG&A:
 
                                                     
        2009   2008   2007
            % of
      % of
      % of
   
Segment
  $   sales   $   sales   $   sales
        (In millions except percentages)
 
SG&A
        287.3       5.5 %     288.3       6.2 %     280.8       6.3 %
                                                     
Significant factors affecting SG&A:
                                                   
Retail store impairments and lease reserves
  Corporate overhead     5.3       0.1 %     0.9       0.0 %     2.6       0.1 %
Charges related to food distribution customers
  Corporate overhead           0.0 %     (3.3 )     (0.1 )%     (0.1 )     0.0 %
Gain on sale of assets
  Retail     (0.7 )     0.0 %     (0.6 )     0.0 %     (0.7 )     0.0 %
Acquisition and conversion costs
  Military     1.9       0.0 %     0.5       0.0 %           0.0 %
Share-based compensation over prior year
  Corporate overhead     1.4       0.0 %           0.0 %           0.0 %
Store opening expenses
  Retail     0.7       0.0 %           0.0 %           0.0 %
Tax consulting fees
  Corporate overhead     0.4       0.0 %           0.0 %           0.0 %
                                                     
Total significant factors affecting SG&A
        9.0       0.2 %     (2.5 )     (0.1 )%     1.8       0.0 %
                                                     
 
Consolidated SG&A for fiscal 2009 was 5.5% of sales as compared to 6.2% of sales in fiscal 2008. Our SG&A margin benefited by 0.6% of sales in fiscal 2009 due to the sales mix shift between our business segments due to the higher level of military sales due to the GSC acquisition relative to the other business segments in 2009. In addition, certain variable employee compensation and benefit expenses were $11.4 million lower than those incurred during fiscal 2008 which contributed to a lower SG&A margin during fiscal 2009.
 
Consolidated SG&A for fiscal 2008 was 6.2% of sales as compared to 6.3% of sales in fiscal 2007. A portion of the change in SG&A as a percentage of sales was because our retail segment, which has higher SG&A than our food distribution and military segments as a percentage of sales, represented a smaller percentage of our total sales in each of these periods. The decrease in SG&A attributable to this shift in revenues was approximately 0.1% of sales in 2008.
 
Gain on Sale of Real Estate
 
The gain on sale of real estate for fiscal 2007 was $1.9 million and was primarily related to the sale of unoccupied properties.
 
Special Charge
 
A special charge of $6.0 million was recognized in fiscal 2009 due to an asset impairment in our food distribution segment. The charge was comprised of the write-downs of $5.5 million of leasehold improvements and $0.5 million of fixtures and equipment. In fiscal 2007, we recorded a reversal of $1.6 million of previously established lease reserves for one location after subleasing the property earlier than anticipated. This reversal was partially offset by a charge of $0.3 million due to revised lease commitment estimates.
 
Gain on Acquisition of a Business
 
A gain on the acquisition of a business of $6.7 million (net of tax) was recognized during fiscal 2009 related to the GSC acquisition. The fair value of the identifiable assets acquired and liabilities assumed of $84.8 million exceeded the fair value of the purchase price of the business of $78.1 million. Consequently, we reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate.


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Gain on Litigation Settlement
 
A gain of $7.6 million was recognized in fiscal 2009 related to the settlement of litigation in connection with our 2005 acquisition of certain distribution centers and other assets from Roundy’s Supermarkets, Inc (“Roundy’s”). This gain represented the reversal of the liability we had recorded in connection with this litigation. Please refer to Part II, Item 8 in this report under Note (16) — “Commitments and Contingencies” of this Form 10-K for additional information.
 
Goodwill Impairment
 
Annually, we perform an impairment test of goodwill during the fourth quarter based on conditions as of the end of our third fiscal quarter in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350 (“ASC 350”, originally issued as Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”). We recorded a goodwill impairment charge of $50.9 million in fiscal 2009 that related to our retail reporting unit. Please refer to Part II, Item 8 in this report under Note (1) — “Summary of Significant Accounting Policies” under the caption “Goodwill and Intangible Assets” of this Form 10-K for additional information pertaining to our fiscal 2009 goodwill impairment analysis.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense for fiscal 2009, 2008 and 2007 was $40.6 million, $38.4 million and $38.9 million, respectively. The increase in depreciation and amortization expense for fiscal 2009 in comparison to fiscal 2008 was primarily attributable to the GSC acquisition. The decrease in depreciation and amortization expense for fiscal 2008 in comparison to fiscal 2007 was primarily due to reduced capital lease amortization and reduced depreciation on fixtures and equipment.
 
Interest Expense
 
Interest expense decreased $2.1 million to $24.4 million in fiscal 2009 as compared to $26.5 million in fiscal 2008. Fiscal 2008 interest expense includes the write-off of deferred financing costs of $1.0 million associated with the refinancing of our senior secured bank credit facility. Average borrowing levels increased by $21.1 million from $341.6 million during fiscal 2008 to $362.7 million during fiscal 2009. The effective interest rate was 4.6% for fiscal 2009 as compared to 5.4% for fiscal 2008. However, excluding the impact of the write-off of deferred financing costs, the effective interest rate was 5.1% for fiscal 2008.
 
Interest expense decreased $1.6 million to $26.5 million in fiscal 2008 as compared to $28.1 million in fiscal 2007. Fiscal 2008 interest expense includes the write-off of deferred financing costs of $1.0 million associated with the refinancing of our senior secured bank credit facility. Average borrowing levels decreased by $6.4 million from $348.0 million during fiscal 2007 to $341.6 million during fiscal 2008. The effective interest rate was 5.4% for fiscal 2008 as compared to 6.2% for fiscal 2007. However, excluding the impact of the write-off of deferred financing costs, the effective interest rate was 5.1% for fiscal 2008.
 
The calculation of our effective interest rates excludes non-cash interest required to be recognized on our senior subordinated convertible notes under ASC Subtopic 470-20 (“ASC 470-20”, originally issued as FASB Staff Position APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). Non-cash interest expense recognized under ASC 470-20 was $4.9 million, $4.7 million and $4.2 million during fiscal 2009, 2008 and 2007, respectively. Additionally, the calculation of our average borrowing levels includes the unamortized equity component of our senior subordinated convertible notes that is required to be recognized under ASC 470-20. The inclusion of the unamortized equity component brings the basis in our senior subordinated convertible notes to $150.1 million for purposes of calculating our average borrowing levels, or their aggregate issue price, which we are required to pay semi-annual cash interest on at a rate of 3.50% until March 15, 2013.


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Income Tax Expense
 
The effective tax rate for income from continuing operations was 88.3%, 38.4% and 32.0% for fiscal 2009, 2008 and 2007, respectively. Income tax expense from continuing operations differed from amounts computed by applying the federal income tax rate to pre-tax income as a result of the following:
 
                         
    2009   2008   2007
 
Federal statutory tax rate
    35.0 %     35.0 %     35.0 %
State taxes, net of federal income tax benefit
    4.7 %     4.0 %     3.9 %
Non-deductible goodwill
    73.6 %     0.0 %     0.0 %
Change in tax contingencies
    4.4 %     1.1 %     (5.1 )%
Gain on litigation settlement
    (12.7 )%     0.0 %     0.0 %
Gain on acquisition of a business
    (11.2 )%     0.0 %     0.0 %
Federal refund claim
    (6.8 )%     0.0 %     0.0 %
Other net
    1.3 %     (1.7 )%     (1.8 )%
                         
Effective tax rate
    88.3 %     38.4 %     32.0 %
                         
 
The effective tax rate for fiscal 2009 was impacted by several nonrecurring items and large non-deductible goodwill charges. In fiscal 2009, we increased tax reserves by $2.7 million and reversed previously unrecognized tax benefits of $0.2 million primarily due to state statute of limitation expirations and audit resolutions. Other items impacting the rate include the litigation settlement related to Roundy’s of $3.0 million, the gain on the acquisition of the GSC assets of $2.7 million, and a refund on a claim made with the Internal Revenue Service of $1.7 million. The effective tax rate for fiscal 2008 was impacted by the reversal of previously unrecognized tax benefits of $2.6 million, primarily due to the filing of reports with various taxing authorities which resulted in the settlement of uncertain tax positions, a refund on a claim made with the Internal Revenue Service of $1.2 million and an increase in reserves of $2.7 million. The effective tax rate for fiscal 2007 was also impacted by the reversal of previously unrecognized tax benefits of $12.6 million, primarily due to statute of limitation expirations, audit resolutions, and the filing of reports with various taxing authorities which resulted in the settlement of uncertain tax positions.
 
Net Earnings
 
Net earnings for fiscal 2009 were $2.8 million, or $0.21 per diluted share, compared to net earnings of $33.1 million, or $2.52 per diluted share, for fiscal 2008, and net earnings of $36.0 million, or $2.64 per diluted share, for fiscal 2007. Net earnings in each of the three years were affected by a number of events included in the discussion above that affected the comparability of results.
 
Liquidity and Capital Resources
 
Historically, we have financed our capital needs through a combination of internal and external sources. We expect that cash flow from operations will be sufficient to meet our working capital needs and enable us to 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.


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The following table summarizes our cash flow activity for fiscal 2009, 2008 and 2007 and should be read in conjunction with the Consolidated Statements of Cash Flows:
 
                         
    2009     2008     2007  
    (In thousands)  
 
Net cash provided by operating activities
  $ 102,373     $ 111,999     $ 83,616  
Net cash used in investing activities
    (105,670 )     (60,414 )     (18,487 )
Net cash provided by (used in) financing activities
    3,303       (51,623 )     (65,225 )
                         
Net change in cash and cash equivalents
  $ 6     $ (38 )   $ (96 )
                         
 
Operating cash flows were $102.4 million for fiscal 2009, a decrease of $9.6 million from $112.0 million in fiscal 2008. The primary reason for the fiscal 2009 decrease in operating cash flows was our net earnings, after adjusting for reconciling items to convert it to net cash provided, were $12.2 million lower than in fiscal 2008, which included one additional week or earnings in comparison to fiscal 2009. In addition, significant changes in operating assets and liabilities consisted of a year-over year decrease in our investment in our inventories of $52.6 million which was offset by a year-over-year increase in our accounts receivable of $23.7 million, a year-over year decrease in our accrued expenses of $16.3 million, a year-over-year decrease in our accounts payable of $7.1 million and a year-over-year decrease in our income taxes payable of $6.2 million. The year-over year increase in our accounts receivable was due to a temporary timing difference related to our military accounts receivable billing cycle that accelerated collections into the last week of fiscal 2008 and the decrease in year-over-year accrued expense was primarily due to decreases in certain variable employee compensation and benefit expense accruals.
 
Operating cash flows were $112.0 million for fiscal 2008, an increase of $28.4 million from $83.6 million in fiscal 2007. The primary reasons for the fiscal 2008 increase in operating cash flows were due to year-over-year decreases in accounts and notes receivable of $28.7 million due to increased collections and a year-over-year increase in income taxes payable of $22.3 million. However, operating cash flows for fiscal 2008 were negatively impacted by a year-over-year increase in our investment in inventories due to inflationary increases of $21.5 million.
 
Cash used for investing activities were $105.7 million in fiscal 2009, which was primarily attributable to the GSC acquisition of $78.1 million and additions to property, plant and equipment of $30.4 million. Cash used for investing activities in fiscal 2008 were $60.4 million and consisted primarily of additions to property, plant and equipment of $32.0 million, loans to customers of $24.1 million and the acquisition of a business, net of cash, for $6.6 million. Fiscal 2007 cash used for investing activities were $18.5 million which were primarily attributable to additions to property, plant and equipment of $21.4 million and loans to customer of $3.9 million, which were partially offset by disposal of property, plant and equipment of $5.0 million.
 
Cash provided by financing activities were $3.3 million for fiscal 2009 which consisted primarily of proceeds of long-term debt of $29.9 million, a decrease in outstanding checks of $10.1 million and $9.2 million used to pay dividends on our common stock. Cash used by financing activities was $51.6 million for fiscal 2008 as $32.0 million was used to pay down revolving and other long-term debt, $14.3 million was used to repurchase shares of our common stock and $9.2 million was used to pay dividends on our common stock. Cash used by financing activities was $65.2 million for fiscal 2007 as $35.6 million was used to pay down revolving and other long-term debt, $15.0 million was used to repurchase shares of our common stock and $9.7 million was used to pay dividends on our common stock.
 
Share Repurchase
 
On November 10, 2009, our Board of Directors approved a share repurchase program authorizing the Company to spend up to $25.0 million to purchase shares of the Company’s common stock (“2009 Repurchase Program”). The 2009 Repurchase Program took effect on November 16, 2009 and will continue to December 31, 2010. As of January 2, 2010, we have repurchased a total of 30,720 shares under the 2009 Repurchase Program for $1.0 million, at an average price per share of $33.10. The average prices per share referenced above include commissions.


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On November 13, 2007, we announced that our Board of Directors had authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock (“2007 Repurchase Program”). The 2007 Repurchase Program took effect on November 19, 2007 and concluded on January 3, 2009. During fiscal 2008 we repurchased 429,082 shares at an average price per share of $33.44 under the 2007 Repurchase Program. Since the 2007 Repurchase Program’s inception, we repurchased a total of 842,038 shares at an average price per share of $34.83. The average prices per share referenced above include commissions.
 
Contractual Obligations and Commercial Commitments
 
The following table summarizes our significant contractual cash obligations as of January 2, 2010, and the expected timing of cash payments related to such obligations in future periods:
 
                                         
    Amount Committed By Period  
    Total
                         
    Amount
    Fiscal
    Fiscal
    Fiscal
       
Contractual Cash Obligations:
  Committed     2010     2011-2012     2013-2014     Thereafter  
    (In thousands)  
 
Long-Term Debt (1)
  $ 258,217     $ 627     $ 1,374     $ 124,852     $ 131,364  
Interest on Long-Term Debt (2)
    200,030       9,327       16,946       11,486       162,271  
Capital Lease Obligations (3)(4)
    39,868       6,200       9,583       7,591       16,494  
Operating Leases (3)
    95,321       21,591       33,326       19,075       21,329  
Benefit Obligations (5)
    29,468       3,303       6,018       5,719       14,428  
Purchase Obligations (6)
    14,001       3,949       3,289       2,842       3,921  
                                         
Total (7)
  $ 636,905     $ 44,997     $ 70,536     $ 171,565     $ 349,807  
                                         
 
 
(1) Refer to Part II, Item 8 in this report under Note (8) — “Long-term Debt and Bank Credit Facilities” for additional information regarding long-term debt.
 
(2) The interest on long-term debt for periods subsequent to fiscal 2014 reflects our Senior Subordinated Convertible Debt accreted interest for fiscal 2015 through 2035, should the convertible debt remain outstanding until maturity. Interest payments assume debt is held to maturity. For variable rate debt the current interest rates applicable as of January 2, 2010, were assumed for the remainder of the term.
 
(3) Lease obligations primarily relate to store locations for our retail segment, as well as store locations subleased to independent food distribution customers. A discussion of lease commitments can be found in Part II, Item 8 in this report under Note (13) — “Leases” in the Notes to Consolidated Financial Statements and under the caption “Lease Commitments” in the Critical Accounting Policies section below.
 
(4) Includes amounts classified as imputed interest.
 
(5) Our benefit obligations include obligations related to third-party sponsored defined benefit pension and post-retirement benefit plans. For a further discussion see Part II, Item 8 in this report under Note (18) — “Pension and Other Post-retirement Benefits” in the Notes to Consolidated Financial Statements.
 
(6) The amount of purchase obligations shown in the table represents the amount of product we are contractually obligated to purchase. The majority of our purchase obligations involve purchase orders made in the ordinary course of business, which are not included in the table above. Our purchase orders are based on our current needs and are fulfilled by our vendors within very short time horizons. The purchase obligations shown in this table also exclude agreements that are cancelable by us without significant penalty, which include contracts for routine outsourced services.
 
(7) Payments for reserved tax contingencies are not included as the timing of specific tax payments is not determinable.


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We have also made certain commercial commitments that extend beyond 2009. These commitments include standby letters of credit and guarantees of certain food distribution customer debt and lease obligations. The following summarizes these commitments as of January 2, 2010:
 
                                         
    Total
    Commitment Expiration Per Period  
Other Commercial
  Amount
    Fiscal
    Fiscal
    Fiscal
       
Commitments
  Committed     2010     2011-2012     2013-2014     Thereafter  
    (In thousands)  
 
Standby Letters of Credit(1)
  $ 12,635     $ 4,700     $ 7,935     $     $  
Guarantees(2)
    26,156       4,753       5,869       4,380       11,154  
                                         
Total Other Commercial
Commitments
  $ 38,791     $ 9,453     $ 13,804     $ 4,380     $ 11,154  
                                         
 
 
(1) Letters of credit relate primarily to supporting workers’ compensation obligations.
 
(2) Refer to Part II, Item 8 of this report under Note (14) — “Concentration of Credit Risk” in the Notes to Consolidated Financial Statements and under the caption “Guarantees of Debt and Lease Obligations of Others” in the Critical Accounting Policies section below for additional information regarding debt guarantees, lease guarantees and assigned leases.
 
Asset-backed Credit Agreement
 
On April 11, 2008, we entered into our credit agreement which is an asset-backed loan consisting of a $340.0 million revolving credit facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit Facility”). Provided no default is then existing or would arise, we may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $110.0 million.
 
The Revolving Credit Facility has a 5-year term and will be due and payable in full on April 11, 2013. We can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate or LIBOR plus a margin. The LIBOR interest rate margin currently is 2.00% and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions.
 
The credit agreement contains no financial covenants unless and until (i) the continuance of an event of default under the credit agreement, or (ii) the failure of us to maintain excess availability (A) greater than 10% of the borrowing base for more than two (2) consecutive business days or (B) greater than 7.5% of the borrowing base at any time, in which event, we must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability exceeds 10% of the borrowing base for ninety (90) consecutive days.
 
The credit agreement contains standard covenants requiring us, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve the corporate existence, maintain insurance, and pay taxes in a timely manner. Events of default under the credit agreement are usual and customary for transactions of this type including, among other things: (a) any failure to pay principal thereunder when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.
 
At January 2, 2010, $203.3 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $12.6 million of outstanding letters of credit primarily supporting workers’


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compensation obligations. We are currently in compliance with all covenants contained within the credit agreement.
 
Our Revolving Credit Facility represents one of our primary sources of liquidity, both short-term and long-term, and the continued availability of credit under that agreement is of material importance to our ability to fund our capital and working capital needs.
 
Senior Subordinated Convertible Debt
 
On March 15, 2005, we completed a private placement of $150.1 million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of senior subordinated convertible notes due 2035. The funds were used to finance a portion of the acquisition of the Lima and Westville divisions from Roundy’s. The notes are unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our senior secured credit facility.
 
Cash interest at the rate of 3.50% per year is payable semi-annually on the issue price of the notes until March 15, 2013. After that date, cash interest will not be payable, unless contingent cash interest becomes payable, and original issue discount for non-tax purposes will accrue on the notes at a daily rate of 3.50% per year until the maturity date of the notes. On the maturity date of the notes, a holder will receive $1,000 per note. Contingent cash interest will be paid on the notes during any six-month period, commencing March 16, 2013, if the average market price of a note for a ten trading day measurement period preceding the applicable six-month period equals 130% or more of the accreted principal amount of the note, plus accrued cash interest, if any. The contingent cash interest payable with respect to any six-month period will equal an annual rate of 0.25% of the average market price of the note for the ten trading day measurement period described above.
 
The notes will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.5652 shares (initially 9.3120) of our common stock per $1,000 principal amount at maturity of notes (equal to an adjusted conversion price of approximately $48.73 per share). Upon conversion, we will pay the holder the conversion value in cash up to the accreted principal amount of the note and the excess conversion value, if any, in cash, stock or a combination of both, at our option.
 
We may redeem all or a portion of the notes for cash at any time on or after the eighth anniversary of the issuance of the notes. Holders may require us to purchase for cash all or a portion of their notes on the 8th, 10th, 15th, 20th and 25th anniversaries of the issuance of the notes. In addition, upon specified change in control events, each holder will have the option, subject to certain limitations, to require us to purchase for cash all or any portion of such holder’s notes.
 
In connection with the closing of the sale of the notes, we entered into a registration rights agreement with the initial purchasers of the notes. In accordance with that agreement, we filed with the Securities and Exchange Commission on July 13, 2005, a shelf registration statement covering the resale by security holders of the notes and the common stock issuable upon conversion of the notes. The shelf registration statement was declared effective by the Securities and Exchange Commission on October 5, 2005. Our contractual obligation, however, to maintain the effectiveness of the shelf registration statement has expired. As a result, we removed from registration, by means of a post-effective amendment filed on July 24, 2007, all notes and common stock that remained unsold at such time.


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Debt Obligations
 
For debt obligations, the following table presents principal cash flows, related weighted average interest rates by expected maturity dates and fair value as of January 2, 2010:
 
                                                 
    Fixed Rate     Variable Rate  
    Fair Value     Amount     Rate     Fair Value     Amount     Rate  
    (In thousands)  
 
2010
          $ 627       6.0 %           $        
2011
            670       6.2 %                    
2012
            704       6.2 %                    
2013
            712       6.1 %             124,100       3.2 %
2014
            40       5.6 %                    
Thereafter
            131,364       3.5 %                    
                                                 
    $ 130,909     $ 134,117             $ 124,100     $ 124,100          
                                                 
 
Consolidated EBITDA (Non-GAAP Measurement)
 
The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for fiscal 2009, 2008 and 2007 (amounts in thousands):
 
                         
    2009     2008     2007  
 
Net earnings
  $ 2,778       33,145       36,031  
Income tax expense
    20,972       20,646       16,984  
Interest expense
    24,372       26,466       28,088  
Depreciation and amortization
    40,603       38,429       38,882  
                         
EBITDA
    88,725       118,686       119,985  
LIFO charge
    (3,033 )     19,740       5,091  
Lease reserves
    3,135       (1,832 )     551  
Goodwill impairment
    50,927              
Asset impairments
    2,460       2,555       1,868  
Gains on sale of real estate
    (54 )           (1,867 )
Gain on acquisition of a business
    (6,682 )            
Gain on litigation settlement
    (7,630 )            
Share-based compensation
    9,084       8,792       7,786  
Special charges
    6,020             (1,282 )
Subsequent cash payments on non-cash charges
    (2,815 )     (4,218 )     (3,292 )
                         
Total Consolidated EBITDA
  $ 140,137       143,723       128,840  
                         
 
EBITDA and Consolidated EBITDA are measures used by management to measure operating performance. EBITDA is defined as net earnings before interest, taxes, depreciation, and amortization. Consolidated EBITDA excludes certain non-cash charges and other items that management does not utilize in assessing operating performance and is a metric used to determine payout of performance units pursuant to our Short-Term and Long-Term Incentive Plans. The above table reconciles net earnings to EBITDA and Consolidated EBITDA. Not all companies utilize identical calculations; therefore, the presentation of EBITDA and Consolidated EBITDA may not be comparable to other identically titled measures of other companies. Neither EBITDA or Consolidated EBITDA are recognized terms under GAAP and do not purport to be an alternative to net earnings as an indicator of operating performance or any other GAAP measure. In addition, EBITDA and Consolidated EBITDA are not intended to be measures of free cash flow for management’s discretionary


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use since they do not consider certain cash requirements, such as interest payments, tax payments and capital expenditures.
 
Derivative Instruments
 
We have market risk exposure to changing interest rates primarily as a result of our borrowing activities and commodity price risk associated with anticipated purchases of diesel fuel. Our objective in managing our exposure to changes in interest rates and commodity prices is to reduce fluctuations in earnings and cash flows. From time-to-time we use derivative instruments, primarily interest rate and commodity 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 and 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 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 effective in accordance with ASC Topic 815 (“ASC 815”, originally issued as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”) 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.
 
As of January 2, 2010, we had two outstanding interest rate swap agreements with notional amounts totaling $35.0 million. The notional amounts of the two outstanding swaps are reduced annually as follows (amounts in thousands):
 
                         
Notional
  Effective Date   Termination Date   Fixed Rate
 
20,000
    10/15/2009       10/15/2010       3.49 %
10,000
    10/15/2010       10/15/2011       3.49 %
 
                         
Notional
  Effective Date   Termination Date   Fixed Rate
 
15,000
    10/15/2009       10/15/2010       3.38 %
7,500
    10/15/2010       10/15/2011       3.38 %
 
From time-to-time we use commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The agreements call for an exchange of payments with us making payments based on fixed price per gallon and receiving payments based on floating prices, without an exchange of the underlying commodity amount upon which the payments are made. Resulting gains and losses on the fair market value of the commodity swap agreement are immediately recognized as income or expense.
 
As of January 2, 2010, there were no commodity swap agreements in existence. Our only commodity swap agreement in place during fiscal 2008 expired during the first quarter and was settled for fair market value. Pre-tax gains of $0.4 million were recorded as a reduction to cost of sales during fiscal 2007.
 
In addition to the previously discussed interest rate and commodity swap agreements, from time-to-time we enter into fixed price fuel supply agreements to support our food distribution segment. On January 1, 2009, we entered into an agreement which required us to purchase a total of 252,000 gallons of diesel fuel per month at prices ranging from $1.90 to $1.98 per gallon. The term of the agreement was for one year and expired on December 31, 2009. During fiscal 2007 and 2008 we had a fixed price fuel supply agreement which required us to purchase a total of 168,000 gallons of diesel fuel per month at prices ranging from $2.28 to $2.49 per gallon. The term of the agreement began on February 1, 2007, and expired on December 31, 2007. These fixed price fuel agreements qualified for the “normal purchase” exception under ASC 815, therefore the fuel purchases under these contracts are expensed as incurred as an increase to cost of sales.


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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, often referred to as structured finance or special purpose entities, which are generally established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Critical Accounting Policies
 
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 and various other 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. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors and with our independent auditors.
 
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 following accounting policies to be critical and could result in materially different amounts being reported under different conditions or using different assumptions:
 
Customer Exposure and Credit Risk
 
Allowance for Doubtful Accounts — Methodology.  We evaluate the collectability of our accounts and notes receivable based on a combination of factors. In most circumstances when we become aware of factors that may indicate a deterioration in a specific customer’s ability to meet its financial obligations to us (e.g., reductions of product purchases, deteriorating store conditions, changes in payment patterns), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In determining the adequacy of the reserves, we analyze factors such as the value of any collateral, customer financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the collectability based on information considered and further deterioration of accounts. If circumstances change (i.e., further evidence of material adverse creditworthiness, additional accounts become credit risks, store closures), our estimates of the recoverability of amounts due us could be reduced by a material amount, including to zero.
 
Lease Commitments.  We have historically leased store sites for sublease to qualified independent retailers at rates that are at least as high as the rent paid by us. Under terms of the original lease agreements, we remain primarily liable for any commitments an independent retailer may no longer be financially able to satisfy. We also lease store sites for our retail segment. Should a retailer be unable to perform under a sublease or should we close underperforming corporate stores, we record a charge to earnings for costs of the remaining term of the lease, less any anticipated sublease income. Calculating the estimated losses requires that significant estimates and judgments be made by management. Our reserves for such properties can be materially affected by factors such as the extent of interested sub-lessees and their creditworthiness, our ability to negotiate early termination agreements with lessors, general economic conditions and the demand for commercial property. Should the number of defaults by sub-lessees or corporate store closures materially increase; the remaining lease commitments we must record could have a material adverse effect on operating results and cash flows. Refer to Part II, Item 8 of this report under Note (13) — “Leases” in the Notes to Consolidated Financial Statements for a discussion of Lease Commitments.
 
Guarantees of Debt and Lease Obligations of Others.  We have guaranteed the debt and lease obligations of certain food distribution customers. In the event these retailers are unable to meet their debt service


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payments or otherwise experience an event of default, we would be unconditionally liable for the outstanding balance of their debt and lease obligations ($13.5 million as of January 2, 2010 as compared to $15.1 million as of January 3, 2009), which would be due in accordance with the underlying agreements.
 
We have entered into loan and lease guarantees on behalf of certain food distribution customers that are accounted for under ASC Topic 460 (“ASC 460”, originally issued as FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”). ASC 460 provides that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee. The maximum undiscounted payments we would be required to make in the event of default under the guarantees is $10.3 million, which is included in the $13.5 million total referenced above. These guarantees are secured by certain business assets and personal guarantees of the respective customers. We believe these customers will be able to perform under the lease agreements and that no payments will be required and no loss will be incurred under the guarantees. As required by ASC 460, a liability representing the fair value of the obligations assumed under the guarantees of $1.1 million is included in the accompanying consolidated financial statements. All of the other guarantees were issued prior to December 31, 2002 and therefore not subject to the recognition and measurement provisions of ASC 460.
 
We have also assigned various leases to certain food distribution customers and other third parties. If the assignees were to become unable to continue making payments under the assigned leases, we estimate our maximum potential obligation with respect to the assigned leases, net of reserves, to be approximately $8.0 million as of January 2, 2010 as compared to $10.1 million as of January 3, 2009. In circumstances when we become aware of factors that indicate deterioration in a customer’s ability to meet its financial obligations guaranteed or assigned by us, we record a specific reserve in the amount we reasonably believe we will be obligated to pay on the customer’s behalf, net of any anticipated recoveries from the customer. In determining the adequacy of these reserves, we analyze factors such as those described above in “Allowance for Doubtful Accounts — Methodology” and “Lease Commitments.” It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the obligations based on information considered and further deterioration of accounts, with the potential for a corresponding adverse effect on operating results and cash flows. Triggering these guarantees or obligations under assigned leases would not, however, result in cross default of our debt, but could restrict resources available for general business initiatives. Refer to Part II, Item 8 of this report under Note (14) — “Concentration of Credit Risk” in the Notes to Consolidated Financial Statements for more information regarding customer exposure and credit risk.
 
Impairment of Long-Lived Assets
 
Property, plant and equipment are tested for impairment in accordance with ASC Subtopic 360-10-35 (originally issued as SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”) whenever events or changes in circumstances indicate that the carrying amounts of such long-lived assets may not be recoverable from future net pretax cash flows. Impairment testing requires significant management judgment including estimating future sales and costs, alternative uses for the assets and estimated proceeds from disposal of the assets. Estimates of future results are often influenced by assessments of changes in competition, merchandising strategies, human resources and general market conditions, which may result in not recognizing an impairment loss. Impairment testing is conducted at the lowest level where cash flows can be measured and are independent of cash flows of other assets. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying amount. We generally determine fair value by discounting expected future cash flows at a rate which management has determined to be consistent with assumptions used by market participants.
 
The estimates and assumptions used in the impairment analysis are consistent with the business plans and estimates we use to manage our business operations and to make acquisition and divestiture decisions. The use of different assumptions would increase or decrease the impairment charge. Actual outcomes may differ from the estimates. It is possible that the accuracy of the estimation of future results could be materially affected by


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different judgments as to competition, strategies and market conditions, with the potential for a corresponding adverse effect on financial condition and operating results.
 
Goodwill
 
We maintain three reporting units for purposes of our goodwill impairment testing, which are the same as our reporting segments disclosed in Part II, Item 8 of this report under Note (19) — “Segment Reporting”. Goodwill for each of our reporting units is tested for impairment in accordance with ASC 350 annually and/or when factors indicating impairment are present, which requires a significant amount of management’s judgment. Such indicators may include a decline in our expected future cash flows, unanticipated competition, the loss of a major customer, slower growth rates or a sustained significant decline in our share price and market capitalization, among others. Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and could have a material impact on our consolidated financial statements.
 
In fiscal 2009, we began applying the provision of ASC Topic 820 (originally issued as SFAS No. 157, “Fair Value Measurements”) in relation to our goodwill impairment testing by applying, to the extent possible, observable market inputs to arrive at the fair values of our reporting units.
 
Our fair value for each reporting unit is determined based on an income approach which incorporates a discounted cash flow analysis and a market approach that utilizes current earnings multiples for comparable publically-traded companies. Our income approach is based on an estimate of five years of future cash flows and a terminal value that factors in estimated long-term growth. The estimate of future cash flows are dependent on our knowledge and experience about past and current events and assumptions about conditions we expect to exist, including operating performance, economic conditions, long-term growth rates, capital expenditures, changes in working capital and effective tax rates. The discount rates applied to the income approach reflect a weighted average cost of capital for comparable publicly-traded companies which are adjusted for equity and size risk premiums based on market capitalization.
 
We have weighted the valuation of our reporting units at 70% based on the income approach and 30% based on the market approach. We believe that this weighting is appropriate since it is often difficult to find other appropriate publicly-traded companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units.
 
Our estimates could be materially impacted by factors such as competitive forces, customer behaviors, changes in growth trends and specific industry conditions, with the potential for a corresponding adverse effect on financial condition and operating results potentially resulting in impairment of the goodwill. None of the reporting units are more susceptible to economic conditions than others. The income approach and market approach used to determine fair value are sensitive to changes in discount rates and market trading multiples.
 
While we believe our estimates of fair value of our reporting units are reasonable, there can be no assurance that deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss. Please refer to Part II, Item 8 in this report under Note (1) — “Summary of Significant Accounting Policies” under the caption “Goodwill and Intangible Assets” of this Form 10-K for additional information pertaining to our fiscal 2009 goodwill impairment analysis.
 
Income Taxes
 
When preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process involves estimating our actual current tax obligations based on expected income, statutory tax rates and tax planning opportunities in the various jurisdictions in which we operate. In the event there is a significant unusual or one-time item recognized in our results of operations, the tax attributable to that item would be separately calculated and recorded in the period the unusual or one-time item occurred.
 
We utilize the liability method of accounting for income taxes as set forth in ASC Topic 740 (originally issued as SFAS 109, “Accounting for Income Taxes”). Under the liability method, deferred taxes are


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determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse or are settled. A valuation allowance is recorded when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change.
 
We establish reserves when, despite our belief that the tax return positions are fully supportable, certain positions could be challenged and we may ultimately not prevail in defending our positions. These reserves are adjusted in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of statutes of limitations. The effective tax rate includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as, related penalties and interest. These reserves relate to various tax years subject to audit by taxing authorities.
 
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. We recognize potential accrued interest and penalties related to the unrecognized tax benefits in income tax expense.
 
Reserves for Self Insurance
 
We are primarily self-insured for workers’ compensation, general and automobile liability and health insurance costs. It is our policy to record our self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported. Worker’s compensation, general and automobile liabilities are actuarially determined on a discounted basis. We have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. On a per claim basis, our exposure for workers compensation is $0.6 million, auto liability and general liability is $0.5 million and for health insurance our exposure is $0.5 million. Any projection of losses concerning workers’ compensation, general and automobile and health insurance liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, such changes could have a material impact on future claim costs and currently recorded liabilities. A 100 basis point change in discount rates would increase our liability by approximately $0.2 million.
 
Vendor Allowances and Credits
 
As is common in our industry, we use a third party service to undertake accounts payable audits on an ongoing basis. These audits examine vendor allowances offered to us during a given year as well as cash discounts, freight allowances and duplicate payments and establish a basis for us to recover overpayments made to vendors. We reduce future payments to vendors based on the results of these audits, at which time we also establish reserves for commissions payable to the third party service provider as well as for amounts that may not be collected. We also establish reserves for future repayments to vendors for disputed payment deductions related to accounts payable audits, promotional allowances and other items. Although our estimates of reserves do not anticipate changes in our historical payback rates, such changes could have a material impact on our currently recorded reserves.
 
Share-based Compensation
 
On January 1, 2006, we adopted ASC Topic 718 (“ASC 718”, originally issued as SFAS No. 123R, “Share-Based Payment — Revised”) using the modified prospective transition method. Beginning in 2006, our results of operations reflect compensation expense for newly issued stock options and other forms of share-based compensation granted under our stock incentive plans, for the unvested portion of previously issued stock options and other forms of share-based compensation granted, and for our employee stock purchase plan. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant. The Company uses the grant date closing price per share of Nash Finch common stock to estimate the fair value of Restricted Stock Units (RSUs) and performance units granted pursuant to its long-term incentive plan


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(LTIP). The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options. The Company uses a lattice model to estimate the fair value of stock appreciation rights (SARs) which contain market conditions. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period which is derived from the data in the lattice valuation model. Share-based compensation is based on awards ultimately expected to vest, and is reduced for estimated forfeitures. ASC 718 requires forfeitures be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ materially from those estimates. Significant judgment is required in selecting the assumptions used for estimating fair value of share-based compensation as well estimating forfeiture rates. Further, any awards with performance conditions that can affect vesting also add additional judgment in determining the amount expected to vest. There can be significant volatility in many of our assumptions and therefore our estimates of fair value, forfeitures, etc. are sensitive to changes in these assumptions.
 
New Accounting Standards
 
In May 2008, the FASB amended ASC 470-20 (originally issued as FASB Staff Position APB 14-1,Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”), which impacts the accounting associated with our existing $150.1 million senior convertible notes. ASC 470-20 requires us to recognize non-cash interest expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, it requires recognizing interest expense in prior periods pursuant to retrospective accounting treatment. Effective January 4, 2009, we adopted the provisions of ASC 470-20.
 
In December 2007, the FASB amended ASC Topic 805 (“ASC 805”, originally issued as SFAS No. 141R, “Business Combinations”). This standard establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. ASC 805 is effective for fiscal years beginning on or after December 15, 2008. Effective January 4, 2009, we adopted the provisions of ASC 805.
 
The Company adopted the amended disclosure requirements of ASC Topic 815 (“ASC 815”, originally issued as SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”) on January 4, 2009. The amendment to ASC 815 expands the disclosure requirements of derivative and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In May 2009, the FASB amended ASC Topic 855 (“ASC 855”, originally issued as SFAS No. 165, “Subsequent Events”), which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the amended guidance of ASC 855 during the second quarter 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued amendments to ASC Topic 810 (“ASC 810”, originally issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”), which addresses the elimination of the concept of a qualifying special purpose entity. The amended guidance also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, the amended guidance provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The amendment to ASC 810 will become effective during the first fiscal quarter of 2010. We do not expect this amendment will have a material impact on our consolidated financial statements.


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In June 2009, the FASB issued ASC Topic 105 (“ASC 105”, originally issued as SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. ASC 105 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. ASC 105 became effective in the third fiscal quarter of 2009 and did not have a material impact on our consolidated financial statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure in the financial markets consists of changes in interest rates relative to our investment in notes receivable, the balance of our debt obligations outstanding and derivatives employed from time to time to manage our exposure to changes in interest rates and diesel fuel prices. We do not use financial instruments or derivatives for any trading or other speculative purposes.
 
We carry notes receivable because, in the normal course of business, we make long-term loans to certain retail customers. Substantially all notes receivable are based on floating interest rates which adjust to changes in market rates. As a result, the carrying value of notes receivable approximates market value. Refer to Part II, Item 8 of this report under Note (7) — “Accounts and Notes Receivable” in the Notes to Consolidated Financial Statements for more information.
 
The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
 
                                                                 
    January 2,
                       
    2010                        
    Fair
                           
    Value   Total   2010   2011   2012   2013   2014   Thereafter
    (In millions, except rates)
 
Debt with variable interest rate:
                                                               
Principal payable
  $ 124.1     $ 124.1     $     $     $     $ 124.1     $     $  
Average variable rate payable
            3.2 %                             3.2 %                
Debt with fixed interest rates:
                                                               
Principal payable
  $ 130.9     $ 134.1     $ 0.6     $ 0.7     $ 0.7     $ 0.7     $ 0.1     $ 131.3  
Average fixed rate payable
            3.6 %     6.0 %     6.2 %     6.2 %     6.1 %     5.6 %     3.5 %


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Nash-Finch Company
 
We have audited the accompanying consolidated balance sheets of Nash Finch Company and subsidiaries (collectively, the Company) as of January 2, 2010 and January 3, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended January 2, 2010. Our audits also included the financial statement schedule referenced in Part IV, Item 15(2) of this report. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nash Finch Company and subsidiaries at January 2, 2010 and January 3, 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 2, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nash Finch Company’s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2010, expressed an unqualified opinion thereon.
 
As discussed in Note 3 of the consolidated financial statements, the Company adopted the provisions of Accounting Standards Codification (ASC) 470-20,Debt with Conversion and Other Options” in the fiscal year ending January 2, 2010.
 
/s/  Ernst & Young LLP
 
Minneapolis, Minnesota
March 4, 2010


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NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Income
(In thousands, except per share amounts)
 
                         
Fiscal Years Ended January 2, 2010,
                 
January 3, 2009 and December 29, 2007
  2009     2008     2007  
 
Sales
  $ 5,212,655     $ 4,633,494     $ 4,464,035  
Cost of sales
    4,793,967       4,226,545       4,066,381  
                         
Gross profit
    418,688       406,949       397,654  
                         
Other costs and expenses:
                       
Selling, general and administrative
    287,328       288,263       280,818  
Gains on sales of real estate
                (1,867 )
Special charges
    6,020             (1,282 )
Gain on acquisition of a business
    (6,682 )            
Gain on litigation settlement
    (7,630 )            
Goodwill impairment
    50,927              
Depreciation and amortization
    40,603       38,429       38,882  
Interest expense
    24,372       26,466       28,088  
                         
Total other costs and expenses
    394,938       353,158       344,639  
                         
Earnings from continuing operations before income taxes
    23,750       53,791       53,015  
Income tax expense
    20,972       20,646       16,984  
                         
Net earnings
  $ 2,778     $ 33,145     $ 36,031  
                         
Net earnings per share:
                       
Basic
  $ 0.21     $ 2.57     $ 2.67  
Diluted
    0.21       2.52       2.64  
                         
Declared dividends per common share
  $ 0.72     $ 0.72     $ 0.72  
 
See accompanying notes to consolidated financial statements.


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NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except per share amounts)
 
                 
    January 2,
    January 3,
 
    2010     2009  
 
ASSETS
Current Assets:
               
Cash
  $ 830     $ 824  
Accounts and notes receivable, net
    250,767       185,943  
Inventories
    285,443       261,491  
Prepaid expenses and other
    11,410       13,909  
Deferred tax assets
    9,366       5,784  
                 
Total current assets
    557,816       467,951  
Notes receivable, net
    23,343       28,353  
Property, plant and equipment:
               
Property, plant and equipment
    637,167       590,894  
Less accumulated depreciation and amortization
    (422,529 )     (392,807 )
                 
Net property, plant and equipment
    214,638       198,087  
Goodwill
    166,545       218,414  
Customer contracts & relationships, net
    21,062       24,762  
Investment in direct financing leases
    3,185       3,388  
Other assets
    12,947       11,591  
                 
Total assets
  $ 999,536     $ 952,546  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Outstanding checks
               
Current maturities of long-term debt and capitalized lease obligations
  $ 4,438     $ 4,032  
Accounts payable
    240,483       220,610  
Accrued expenses
    60,524       73,087  
Income taxes payable
    3,064        
                 
Total current liabilities
    308,509       297,729  
Long-term debt
    257,590       222,774  
Capitalized lease obligations
    21,442       25,252  
Deferred tax liability, net
    19,323       22,232  
Other liabilities
    42,113       35,539  
Commitments and contingencies
           
Stockholders’ equity:
               
Preferred stock — no par value Authorized 500 shares; none issued
           
Common stock of $1.662/3 par value Authorized 50,000 shares, issued 13,675 and 13,665 shares, respectively
    22,792       22,776  
Additional paid-in capital
    106,705       98,048  
Restricted stock
           
Common stock held in trust
    (2,342 )     (2,243 )
Deferred compensation obligations
    2,342       2,243  
Accumulated other comprehensive income
    (10,756 )     (10,876 )
Retained earnings
    261,821       268,562  
Common stock in treasury, 863 and 848 shares, respectively
    (30,003 )     (29,490 )
                 
Total stockholders’ equity
    350,559       349,020  
                 
Total liabilities and stockholders’ equity
  $ 999,536     $ 952,546  
                 
 
See accompanying notes to consolidated financial statements.


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NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(In thousands)
 
                         
    2009     2008     2007  
 
Operating activities:
                       
Net earnings
  $ 2,778     $ 33,145     $ 36,031  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Special charges — non cash portion
    6,020             (1,282 )
Impairment of retail goodwill
    50,927              
Gain on acquisition of a business
    (6,682 )            
Gain on litigation settlement
    (7,630 )            
Depreciation and amortization
    40,603       38,429       38,882  
Amortization of deferred financing costs
    1,779       2,142       1,109  
Non-cash convertible debt interest
    4,944       4,651       4,216  
Rebateable loans
    4,095       2,992       2,200  
Provision for bad debts
    1,411       (1,292 )     1,234  
Provision for lease reserves
    3,136       (1,832 )     551  
Deferred income tax expense
    (10,764 )     3,622       25,071  
Gain on sale of real estate and other
    (137 )     (187 )     (2,371 )
LIFO charge
    (3,033 )     19,740       5,092  
Asset impairments
    2,460       2,555       1,869  
Share-based compensation
    9,084       8,792       7,786  
Deferred compensation
    1,223       244       734  
Other
    (151 )     (742 )     20  
Changes in operating assets and liabilities, net of effects of acquisitions
                       
Accounts and notes receivable
    (6,250 )     17,430       (11,246 )
Inventories
    21,143       (31,489 )     (9,979 )
Prepaid expenses
    (1,081 )     839       2,813  
Accounts payable
    (8,178 )     (1,037 )     1,924  
Accrued expenses
    (12,367 )     3,970       1,782  
Income taxes payable
    6,854       13,048       (9,213 )
Other assets and liabilities
    2,189       (3,021 )     (13,607 )
                         
Net cash provided by operating activities
    102,373       111,999       83,616  
                         
Investing activities:
                       
Disposal of property, plant and equipment
    830       438       4,978  
Additions to property, plant and equipment
    (30,402 )     (31,955 )     (21,419 )
Business acquired, net of cash
    (78,056 )     (6,566 )      
Loans to customers
    (2,350 )     (24,050 )     (3,856 )
Payments from customers on loans
    4,769       1,588       1,854  
Corporate-owned life insurance, net
    (461 )     131       (46 )
Other
                2  
                         
Net cash used in investing activities
    (105,670 )     (60,414 )     (18,487 )
                         
Financing activities:
                       
Proceeds (payments) of revolving debt
    30,500       87,300       (35,000 )
Dividends paid
    (9,239 )     (9,229 )     (9,702 )
Proceeds from exercise of stock options
    196       329       2,002  
Proceeds from employee stock purchase plan
          238       498  
Repurchase of common stock
    (1,017 )     (14,348 )     (14,980 )
Payments of long-term debt
    (595 )     (119,255 )     (626 )
Payments of capitalized lease obligations
    (3,436 )     (3,639 )     (3,834 )
Increase (decrease) in outstanding checks
    (10,065 )     9,951       (4,441 )
Payments of deferred financing costs
    (2,874 )     (3,573 )      
Tax benefit from exercise of stock options
    (167 )     603       857  
Other
                1  
                         
Net cash provided by (used in) financing activities
    3,303       (51,623 )     (65,225 )
                         
Net increase (decrease) in cash
    6       (38 )     (96 )
Cash at beginning of year
    824       862       958  
                         
Cash at end of year
  $ 830     $ 824     $ 862  
                         
Supplemental disclosure of cash flow information:
                       
Non cash investing and financing activities
                       
Acquisition of minority interest
  $     $ 64     $  
 
See accompanying notes to consolidated financial statements.


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NASH FINCH COMPANY

Consolidated Statements of Stockholders’ Equity
(In thousands, except per share amounts)
 
                                                 
                      Accumulated
             
          Additional
          Other
          Total
 
Fiscal Years Ended January 2, 2010,
  Common
    Paid-in
    Retained
    Comprehensive
    Treasury
    Stockholders’
 
January 3, 2009 and December 29, 2007
  Stock     Capital     Earnings     Income (Loss)     Stock     Equity  
 
Balance at December 30, 2006
    22,348       76,909       218,938       (4,582 )     (499 )     313,114  
                                                 
Net earnings
                36,031                   36,031  
Other comprehensive income
                                               
Deferred loss on hedging activities, net of tax of ($295)
                      (461 )           (461 )
Minimum pension liability adjustment, net of tax of $180
                      281             281  
Minimum other post-retirement liability adjustment, net of tax of ($211)
                      (330 )           (330 )
                                                 
Comprehensive income
                                            35,521  
Dividends declared of $.72 per share
                (9,702 )                 (9,702 )
Share-based compensation
    2       4,641       (352 )                 4,291  
Common stock issued upon exercise of options
    125       1,878                         2,003  
Common stock issued for employee purchase plan
    40       457                         497  
Common stock issued for performance units
    84       (84 )                        
Repurchase of shares
                            (14,980 )     (14,980 )
Tax benefit associated with compensation plans
          857                         857  
                                                 
Balance at December 29, 2007
  $ 22,599     $ 84,658     $ 244,915     $ (5,092 )   $ (15,479 )   $ 331,601  
                                                 
Net earnings
                33,145                   33,145  
Other comprehensive income
                                               
Deferred loss on hedging activities, net of tax of ($745)
                      (1,165 )           (1,165 )
Minimum pension liability adjustment, net of tax of ($2,710)
                      (4,239 )           (4,239 )
Minimum other post-retirement liability adjustment, net of tax of ($243)
                      (380 )           (380 )
                                                 
Comprehensive income
                                            27,361  
Dividends declared of $.72 per share
                (9,229 )                 (9,229 )
Share-based compensation
    3       8,871       (269 )           338       8,943  
Share-based compensation modified from liability to equity based
          3,412                         3,412  
Common stock issued upon exercise of options
    26       415                         441  
Common stock issued for employee purchase plan
    13       224                         237  
Common stock issued for performance units
    135       (135 )                        
Repurchase of shares
                            (14,348 )     (14,348 )
Forfeiture of restricted stock
                            (1 )     (1 )
Tax benefit associated with compensation plans
          603                         603  
                                                 
Balance at January 3, 2009
  $ 22,776     $ 98,048     $ 268,562     $ (10,876 )   $ (29,490 )   $ 349,020  
                                                 
Net earnings
                2,778                   2,778  
Other comprehensive income
                                               
Deferred loss on hedging activities, net of tax of $304
                      475             475  
Minimum pension liability adjustment, net of tax of ($194)
                      (303 )           (303 )
Minimum other post-retirement liability adjustment, net of tax of ($33)
                      (52 )           (52 )
                                                 
Comprehensive income
                                            2,898  
Dividends declared of $.72 per share
                (9,239 )                 (9,239 )
Share-based compensation
          8,045       (280 )           504       8,269  
Stock appreciation rights
          599                         599  
Common stock issued upon exercise of options
    13       183                         196  
Common stock issued for performance units
    3       (3 )                        
Repurchase of shares
                            (1,017 )     (1,017 )
Tax benefit associated with compensation plans
          (167 )                       (167 )
                                                 
Balance at January 2, 2010
  $ 22,792     $ 106,705     $ 261,821     $ (10,756 )   $ (30,003 )   $ 350,559  
                                                 
 
See accompanying notes to consolidated financial statements.


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)   Summary of Significant Accounting Policies
 
Fiscal Year
 
The fiscal year of Nash-Finch Company (“Nash Finch”) ends on the Saturday nearest to December 31. Fiscal 2008 consisted of 53 weeks while fiscal years 2009 and 2007 each consisted of 52 weeks. Our interim quarters consist of 12 weeks except for the third quarter which consists of 16 weeks. For fiscal 2008, the Company’s fourth quarter consisted of 13 weeks.
 
Principles of Consolidation
 
The accompanying financial statements include our accounts and the accounts of our majority-owned subsidiaries. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements.
 
Cash and Cash Equivalents
 
In the accompanying financial statements and for purposes of the statements of cash flows, cash and cash equivalents include cash on hand and short-term investments with original maturities of three months or less which are carried at fair value.
 
Revenue Recognition
 
We recognize revenue when the sales price is fixed or determinable, collectability is reasonably assured and the customer takes possession of the merchandise.
 
Revenues for the food distribution segment are recognized upon delivery of the product which is typically the same day the product is shipped.
 
Revenues for the military segment are recognized upon the delivery of the product to the commissary or commissaries designated by the Defense Commissary Agency (DeCA), or in the case of overseas commissaries, when the product is delivered to the port designated by DeCA, which is when DeCA takes possession of the merchandise and bears the responsibility for shipping the product to the commissary or overseas warehouse.
 
Revenue is recognized for retail store sales when the customer receives and pays for the merchandise at the point of sale. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.
 
Based upon the nature of the products we sell, our customers have limited rights or return, which are immaterial.
 
In fiscal 2009, the Company revised its treatment of consigned inventory sales in our military segment. Prior to the revision, consigned sales were recorded on a gross basis as sales and a related amount recorded as a cost of sales. The Company has revised its presentation for sales of consigned inventory to be on a net basis. The revision reduced both sales and cost of sales but did not have an impact on gross profit, earnings from continuing operations before income taxes, net earnings, cash flows or financial position for any period or their respective trends. Certain prior year amounts shown below have been revised to conform to the current year presentation.
 


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    53 Weeks Ended
                         
    January 3,
                53 Weeks Ended
       
    2009
                January 3,
       
    As originally
    %
          2009
    %
 
(in 000’s)
  Reported     of Sales     Adjustments     As revised     of Sales  
 
Sales
  $ 4,703,660       100.0 %     (70,166 )     4,633,494       100.0 %
Cost of Sales
    4,296,711       91.3 %     (70,166 )     4,226,545       91.2 %
                                         
Gross Profit
  $ 406,949       8.7 %           406,949       8.8 %
                                         
 
                                         
    52 Weeks Ended
                         
    December 29,
                52 Weeks Ended
       
    2007
                December 29,
       
    As originally
    %
          2007
    %
 
(in 000’s)
  Reported     of Sales     Adjustments     As revised     of Sales  
 
Sales
  $ 4,532,635       100.0 %     (68,600 )     4,464,035       100.0 %
Cost of Sales
    4,134,981       91.2 %     (68,600 )     4,066,381       91.1 %
                                         
Gross Profit
  $ 397,654       8.8 %           397,654       8.9 %
                                         
 
Cost of sales
 
Cost of sales includes the cost of inventory sold during the period, including distribution costs, shipping and handling fees, and vendor allowances and credits (see below). Advertising costs, included in cost of goods sold, are expensed as incurred and were $59.9 million, $58.2 million and $53.7 million for fiscal 2009, 2008 and 2007, respectively. Advertising income, included in cost of goods sold, was approximately $55.8 million, $56.4 million and $55.8 million for fiscal 2009, 2008 and 2007, respectively.
 
Vendor Allowances and Credits
 
We reflect vendor allowances and credits, which include allowances and incentives similar to discounts, as a reduction of cost of sales when the related inventory has been sold, based on the underlying arrangement with the vendor. These allowances primarily consist of promotional allowances, quantity discounts and payments under merchandising arrangements. Amounts received under promotional or merchandising arrangements that require specific performance are recognized in the consolidated statements of income when the performance is satisfied and the related inventory has been sold. Discounts based on the quantity of purchases from our vendors or sales to customers are recognized in the consolidated statements of income as the product is sold. When payment is received prior to fulfillment of the terms, the amounts are deferred and recognized according to the terms of the arrangement.
 
Inventories
 
Inventories are stated at the lower of cost or market. Approximately 86% of our inventories were valued on the last-in, first-out (LIFO) method at January 2, 2010 as compared to approximately 84% at January 3, 2009. During fiscal 2009, we recorded a LIFO credit of $3.0 million compared to a $19.7 million charge in fiscal 2008 and a $5.1 million charge in fiscal 2007. The remaining inventories are valued on the first-in, first-out (FIFO) method. If the FIFO method of accounting for inventories had been used, inventories would have been $73.1 million, $76.1 million and $56.4 million higher at January 2, 2010, January 3, 2009 and December 29, 2007, respectively.

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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Capitalization, Depreciation and Amortization
 
Property, plant and equipment are stated at cost. Assets under capitalized leases are recorded at the present value of future lease payments or fair market value, whichever is lower. Expenditures which improve or extend the life of the respective assets are capitalized while maintenance and repairs are expensed as incurred.
 
Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets which generally range from 10-40 years for buildings and improvements and 3-10 years for furniture, fixtures and equipment. Capitalized leases and leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the useful life of the asset.
 
Net property, plant and equipment consisted of the following (in thousands):
 
                 
    January 2,
    January 3,
 
    2010     2009  
 
Land
  $ 18,876     $ 17,281  
Buildings and improvements
    214,959       196,954  
Furniture, fixtures and equipment
    289,713       275,888  
Leasehold improvements
    61,026       65,499  
Construction in progress
    5,928       4,453  
Assets under capitalized leases
    46,665       30,819  
                 
      637,167       590,894  
Accumulated depreciation and amortization
    (422,529 )     (392,807 )
                 
Net property, plant and equipment
  $ 214,638     $ 198,087  
                 
 
Impairment of Long-Lived Assets
 
An impairment loss is recognized whenever events or changes in circumstances indicate the carrying amount of an asset is not recoverable. In applying Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC Subtopic 360-10-35 (“ASC 360-10-35”, originally issued as Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”) assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We have generally identified this lowest level to be individual stores or distribution centers; however, there are limited circumstances where, for evaluation purposes, stores could be considered with the distribution center they support. We allocate the portion of the profit retained at the servicing distribution center to the individual store when performing the impairment analysis in order to determine the store’s total contribution to us. We consider historical performance and future estimated results in the impairment evaluation. If the carrying amount of the asset exceeds expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value as determined using an income approach. The inputs used in the income approach use significant unobservable inputs, or level 3 inputs, in the fair value hierarchy. In fiscal 2009, 2008 and 2007, we recorded impairment charges of $8.5 million, $2.6 million and $1.9 million, respectively, within the “selling, general and administrative” line of the consolidated statements of income.
 
Reserves for Self-Insurance
 
We are primarily self-insured for workers’ compensation, general and automobile liability and health insurance costs. It is our policy to record our self-insurance liabilities based on claims filed and an estimate of


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
claims incurred but not yet reported. Worker’s compensation, general and automobile liabilities are actuarially determined on a discounted basis. We have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. On a per claim basis, our exposure for workers compensation is $0.6 million, auto liability and general liability is $0.5 million and for health insurance our exposure is $0.5 million. Any projection of losses concerning workers’ compensation, general and automobile and health insurance liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, such changes could have a material impact on future claim costs and currently recorded liabilities. A 100 basis point change in discount rates would increase our liability by approximately $0.2 million.
 
Goodwill and Intangible Assets
 
Intangible assets, consisting primarily of goodwill and customer contracts resulting from business acquisitions, are carried at cost. Separate intangible assets that are not deemed to have an indefinite life are amortized over their useful lives. In accordance with ASC Topic 350 (“ASC 350”, originally issued as Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”) we test goodwill for impairment on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. Such indicators may include a decline in our expected future cash flows, unanticipated competition, slower growth rates or a sustained significant decline in our share price and market capitalization, among others. Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and could have a material impact on our consolidated financial statements.
 
The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.
 
Our fair value for each reporting unit is determined based on an income approach which incorporates a discounted cash flow analysis which uses significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy, and a market approach that utilizes current earnings multiples of comparable publicly-traded companies. The Company has weighted the valuation of its reporting units at 70% based on the income approach and 30% based on the market approach. The Company believes that this weighting is appropriate since it is often difficult to find other comparable publicly-traded companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units.
 
We performed our annual impairment test of goodwill during the fourth quarter of fiscal 2009 based on conditions as of the end of our third quarter of fiscal 2009 and determined that no indication of impairment existed in our food distribution and military segments. The fair value of the food distribution segment was approximately 24% higher than its carrying value, while the military segment’s fair value exceeded its carrying value by over 100%. We determined that an indication of impairment existed in our retail segment in the first step of the fiscal 2009 impairment analysis which required us to calculate our retail segment’s implied fair value in the second step of the impairment analysis. For the second step we obtained appraisals for our real estate, fixtures and equipment and assigned a fair value to any unrecognized intangible assets, which included above and below market rents based on appraisals for locations we lease, a fair value to our trade names and our pharmacy scripts. Certain asset and liabilities’ carrying values approximated fair value due to their short maturities which included accounts receivable, inventories and accounts payable. Based on its implied fair


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
value we were required to write-off $50.9 million of our retail goodwill in fiscal 2009. The decline in the fair value of our retail segment is reflective of a decline in long-term growth assumptions and lower comparable market multiples.
 
Discount rates applied in our income approach during fiscal 2009 ranged from 8.75% to 10.25% and were reflective of the weighted average cost of capital of comparable publically-trade companies with an adjustment for equity and size premiums based on market capitalization. Growth rates ranged from -2.5% to 2.0%. For the food distribution segment to have an indication of impairment the discount rate applied would need to increase over 300 basis points or the assumed long-term growth rate would need to decrease by 1% with a corresponding increase in the discount rate of over 200 basis points.
 
The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company’s stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole. Additional value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity’s individual common stock. In most industries, including ours, an acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. We have taken into consideration the current trends in our market capitalization and the current book value of our equity in relation to fair values arrived at in our fiscal 2009 goodwill impairment analysis, including the implied control premium, and have deemed the result to be reasonable.
 
During fiscal 2008 and 2007 we performed our annual impairment test of goodwill during the fourth quarter based on conditions as of the end of our third quarter in accordance with ASC 350, and determined that no impairment was necessary based on the conditions at that time.
 
Changes in the net carrying amount of goodwill were as follows:
 
                                 
    Food Distribution     Military     Retail     Total  
    (In thousands)  
 
Goodwill as of December 29, 2007
  $ 121,863     $ 25,754     $ 67,557     $ 215,174  
Acquisition of retail stores
                3,240       3,240  
Goodwill as of January 3, 2009
    121,863       25,754       70,797       218,414  
Retail store closures
                (942 )     (942 )
Retail goodwill impairment
                (50,927 )     (50,927 )
                                 
Goodwill as of January 2, 2010
  $ 121,863     $ 25,754     $ 18,928     $ 166,545  
                                 
 
Customer contracts & relationships intangibles were as follows (in thousands):
 
                                 
    January 2, 2010   Estimated
    Gross
  Accum.
  Net Carrying
  Life
    Carrying Value   Amort.   Amount   (years)
 
Customer contracts and relationships
  $ 42,798     $ (21,736 )   $ 21,062       10-20  
 
                                 
    January 3, 2009   Estimated
    Gross
  Accum.
  Net Carrying
  Life
    Carrying Value   Amort.   Amount   (years)
 
Customer contracts and relationships
  $ 43,082     $ (18,320 )   $ 24,762       5-20  


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Other intangible assets included in other assets on the consolidated balance sheets were as follows (in thousands):
 
                                 
    January 2, 2010   Estimated
    Gross
  Accum.
  Net Carrying
  Life
    Carrying Value   Amort.   Amount   (years)
 
Franchise agreements
  $ 2,754     $ (1,410 )   $ 1,344       5-25  
Non-compete agreements
    696       (453 )     243       4-10  
 
                                 
    January 3, 2009   Estimated
    Gross
  Accum.
  Net Carrying
  Life
    Carrying Value   Amort.   Amount   (years)
 
Franchise agreements
  $ 2,739     $ (1,291 )   $ 1,448       5-25  
Non-compete agreements
    416       (360 )     56       5-7  
 
Aggregate amortization expense recognized for fiscal 2009, 2008 and 2007 was $4.4 million, $4.0 million and $4.4 million, respectively. The aggregate amortization expense for the five succeeding fiscal years is expected to approximate $3.6 million, $2.9 million, $2.6 million, $2.2 million and $2.0 million for fiscal years 2010 through 2014, respectively.
 
Income Taxes
 
When preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process involves estimating our actual current tax obligations based on expected income, statutory tax rates and tax planning opportunities in the various jurisdictions in which we operate. In the event there is a significant, unusual or one-time item recognized in our results of operations, the tax attributable to that item would be separately calculated and recorded in the period the unusual or one-time item occurred.
 
We utilize the liability method of accounting for income taxes as set forth in ASC Topic 740 (originally issued as SFAS 109, “Accounting for Income Taxes”). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse or are settled. A valuation allowance is recorded when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change.
 
We establish reserves when, despite our belief that the tax return positions are fully supportable, certain positions could be challenged and we may ultimately not prevail in defending our positions. These reserves are adjusted in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of statutes of limitations. The effective tax rate includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as, related penalties and interest. These reserves relate to various tax years subject to audit by taxing authorities.
 
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. We recognize potential accrued interest and penalties related to the unrecognized tax benefits in income tax expense.
 
Financial Instruments
 
We account for derivative financial instruments pursuant to ASC Topic 815 (“ASC 815”, originally issued as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). ASC 815 requires


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met.
 
We have market risk exposure to changing interest rates primarily as a result of our borrowing activities and to the cost of fuel in our distribution operations. Our objective in managing our exposure to changes in interest rates and the cost of fuel is to reduce fluctuations in earnings and cash flows. To achieve these objectives, from time-to time we use derivative instruments, primarily interest rate swap agreements and fuel hedges, 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.
 
Share-based compensation
 
Our results of operations reflect compensation expense for newly issued stock options and other forms of share-based compensation granted under our stock incentive plans, for the unvested portion of previously issued stock options and other forms of share-based compensation granted, and for our employee stock purchase plan. We estimate the fair value of share-based payment awards on the date of the grant. We use the grant date closing price per share of Nash Finch common stock to estimate the fair value of Restricted Stock Units (RSUs) and performance units granted pursuant to our long-term incentive plan (LTIP). We use the Black-Scholes option-pricing model to estimate the fair value of stock options and a lattice model to estimate the fair value of stock appreciation rights (SARs) which contain certain market conditions. For all types of awards, the value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period.
 
Comprehensive Income
 
We report comprehensive income in accordance with ASC Topic 220 (originally issued as SFAS No. 130, “Reporting Comprehensive Income”). Other comprehensive income refers to revenues, expenses, gains and losses that are not included in net earnings such as minimum pension liability adjustments and unrealized gains or losses on hedging instruments, but rather are recorded directly in the consolidated statements of stockholders’ equity.
 
Use of Estimates
 
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.
 
New Accounting Standards
 
In May 2008, the FASB amended ASC 470-20 (originally issued as FASB Staff Position APB 14-1, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”), which impacts the accounting associated with our existing $150.1 million senior convertible notes. ASC 470-20 requires us to recognize non-cash interest expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, it requires recognizing interest expense in prior periods pursuant to retrospective accounting treatment. Effective January 4, 2009, we adopted the provisions of ASC 470-20.
 
In December 2007, the FASB amended ASC Topic 805 (“ASC 805”, originally issued as SFAS No. 141R, “Business Combinations”). This standard establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
effects of the business combination. ASC 805 is effective for fiscal years beginning on or after December 15, 2008. Effective January 4, 2009, we adopted the provisions of ASC 805. Please see Footnote 2 — “Acquisition”.
 
The Company adopted the amended disclosure requirements of ASC Topic 815 (“ASC 815”, originally issued as SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”) on January 4, 2009. The amendment to ASC 815 expands the disclosure requirements of derivative and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In May 2009, the FASB amended ASC Topic 855 (“ASC 855”, originally issued as SFAS No. 165, “Subsequent Events”), which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the amended guidance of ASC 855 during the second quarter 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued amendments to ASC Topic 810 (“ASC 810”, originally issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”), which addresses the elimination of the concept of a qualifying special purpose entity. The amended guidance also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, the amended guidance provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The amendment to ASC 810 will become effective during the first fiscal quarter of 2010. We do not expect this amendment will have a material impact on our consolidated financial statements.
 
In June 2009, the FASB issued ASC Topic 105 (“ASC 105”, originally issued as SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. ASC 105 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. ASC 105 became effective in the third fiscal quarter of 2009 and did not have a material impact on our consolidated financial statements.
 
(2)   Acquisition
 
On January 31, 2009, the Company completed the purchase from GSC Enterprises, Inc. (“GSC”), of substantially all of the assets relating to three military food distribution centers located in San Antonio, Texas, Pensacola, Florida and Junction City, Kansas serving military commissaries and exchanges (“Business”). The Company also assumed certain trade payables, accrued expenses and receivables associated with the assets being acquired. The aggregate purchase price paid was $78.1 million in cash.
 
Effective January 4, 2009, the Company adopted the provisions of ASC Topic 805 (“ASC 805”, originally issued as SFAS No. 141R, “Business Combinations”). ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer to recognize the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date.
 
The following table summarizes the fair values of the assets acquired and liabilities of the Business assumed at the acquisition date:
 
         
    As of
 
    January 31,
 
    2009  
    (In thousands)  
 
Cash and cash equivalents
  $ 47  
Accounts receivable
    61,285  
Inventories
    42,061  
Prepaid expenses and other
    210  
Property, plant and equipment
    30,294  
Other assets
    890  
         
Total identifiable assets acquired
    134,787  
Current liabilities
    43,114  
Accrued expenses
    1,162  
Deferred tax liability, net
    4,272  
Other long-term liabilities
    1,456  
         
Total liabilities assumed
    50,004  
         
Net assets acquired
  $ 84,783  
         
 
The fair value of the net identifiable assets acquired and liabilities assumed of $84.8 million exceeded the purchase price of $78.1 million. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $6.7 million (net of tax) in fiscal 2009 associated with the acquisition of the Business. The gain is included in the line item “Gain on acquisition of a business” in the Consolidated Statement of Income.
 
A contingency of $0.3 million is included in the other long-term liabilities account in the table above related to a payment the Company would be required to make in the event a purchase option is not exercised associated with the lease of the Pensacola, FL facility prior to October 10, 2010. The Company has determined the range of the potential loss on the contingency is zero to $1.0 million and the acquisition date fair value of the contingency is $0.3 million based upon a probability-weighted discounted cash flow valuation technique. As of January 2, 2010, there were no changes in the recognized amounts or range of outcomes associated with this contingency.
 
The Company has recognized acquisition and integration costs of $2.8 million during fiscal 2009.
 
Sales of the Business included in the Consolidated Statement of Income for fiscal 2009 were $683.3 million. Although the Company has made reasonable efforts to do so, synergies achieved through the integration of the Business into the Company’s military segment, unallocated interest expense and the allocation of shared overhead specific to the Business cannot be precisely determined. Accordingly, the Company has deemed it impracticable to calculate the precise impact the Business will have on the Company’s net earnings during fiscal 2009. However, please refer to “Note 19-Segment Reporting” for a comparison of military segment sales and profits for fiscal years 2009, 2008 and 2007.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Supplemental pro forma financial information
 
The unaudited pro forma financial information in the table below combines the historical results for the Company and the historical results for the Business for the 52 and 53 weeks ended January 2, 2010 and January 3, 2009. This pro forma financial information is provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the combined operations for the periods presented or that will be achieved by the combined operations in the future.
 
                 
    52 Weeks Ended
  53 Weeks Ended
    January 2,
  January 3,
    2010   2009
    (In thousands, except per share data)
 
Total revenues
  $ 5,274,945       5,348,799  
Net earnings
    2,944       36,096  
Basic earnings per share
    0.23       2.80  
Diluted earnings per share
    0.22       2.74  
 
(3)   Change in Accounting Principle
 
Effective January 4, 2009, the Company adopted the provisions of ASC Subtopic 470-20 (“ASC 470-20”, originally issued as FASB Staff Position APB 14-1, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”), which impacts the accounting associated with our senior convertible notes. ASC 470-20 requires us to recognize interest expense, including non-cash interest, based on the market rate for similar debt instruments without the conversion feature, which the Company determined to be 8.0%. Furthermore, it requires retrospective accounting treatment. Under ASC 470-20, the liability component of convertible debt is measured upon issuance using an 8.0% interest rate and an assumed eight year life, as determined by the first date the holders may require the Company redeem the note. The difference between the proceeds from the issuance and the fair value of the liability is assigned to equity. Additionally, ASC 470-20 states that transaction costs incurred with third parties shall be allocated to and accounted for as debt issuance costs and equity issuance costs in proportion to the allocation of proceeds between the liability and equity component, respectively.
 
The following table represents the Company’s initial measurement of the convertible debt as of March 15, 2005 and its retrospective measurement under ASC 470-20:
 
                         
    Measurement under
  Initial
   
    ASC 470-20
  Measurement
   
    3/15/2005   3/15/2005   Change
    (In millions)
 
Other assets
  $ 3.6       4.9       (1.3 )(a)
Long-term debt
    110.8       150.1       (39.3 )(b)
Deferred tax liability, net
    14.8             14.8 (c)
Additional paid-in capital
    23.2             23.2 (d)
 
 
(a) Other assets represents the deferred financing cost asset related to the debt issuance. The $1.3 million change represents the portion of the costs allocated to equity in the additional paid-in capital account under ASC 470-20.
 
(b) The $39.3 million change in the carrying value of long-term debt represents the difference between the fair value of the long-term debt under ASC 470-20 and the proceeds received upon issuance of the convertible notes, which is allocated to equity.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(c) The Company’s tax basis in the long-term debt and deferred financing cost asset are $39.3 million and $1.3 million higher than their book basis, resulting in a $14.8 million net deferred tax liability.
 
(d) The $23.2 million change in equity in the additional paid-in capital account represent the following:
 
         
    (In millions)
 
Long-term debt reclassified to equity
  $ 39.3  
Deferred financing costs reclassified to equity
    (1.3 )
Deferred tax liability
    (14.8 )
Total additional paid-in capital impact
    23.2  
 
The following tables represent the retrospective accounting impact the adoption of ASC 470-20 had on the Company’s Consolidated Statement of Income and Consolidated Balance Sheet for prior year periods presented in this report:
 
                                 
    Consolidated Statement of Income
    Fiscal 2008
  Fiscal 2007
    53 Weeks Ended
  52 Weeks Ended
    January 3,
  December 29,
    2009   2007
    As
  As
  As
  As
    Adjusted   Reported   Adjusted   Reported
    (In thousands, except EPS data)
 
Interest expense
  $ 26,466       21,523     $ 28,088       23,581  
Income tax expense
    20,646       22,574       16,984       18,742  
Net earnings
    33,145       36,160       36,031       38,780  
Basic EPS
    2.57       2.81       2.67       2.88  
Diluted EPS
    2.52       2.75       2.64       2.84  
 
                                 
    Consolidated Balance Sheet
    Fiscal 2008
  Fiscal 2007
    January 3,
  December 29,
    2009   2007
    As
  As
  As
  As
    Adjusted   Reported   Adjusted   Reported
    (In thousands)
 
Other assets
  $ 11,591       13,997     $ 7,856       9,971  
Long-term debt
    222,774       246,441       250,125       278,443  
Deferred tax liability, net
    22,233       13,940       17,446       7,227  
Additional paid-in capital
    98,048       74,836       84,657       61,446  
Retained earnings
    268,562       278,804       244,915       252,142  
Total stockholders’ equity
    349,020       336,050       331,600       315,616  
 
(4)   Vendor Allowances and Credits
 
We participate with our 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 allowances are often subject to negotiation with our vendors. In the case of off-invoice allowances, discounts are typically offered by vendors with respect to certain merchandise purchased by us during a specified period of time. We use 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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
are either reflected directly on the vendor’s invoice, as a reduction from the normal wholesale prices for merchandise to which the allowance applies, or we are 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 our 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 specific shipments of goods to retailers (or to customers in the case of our own retail stores) during a specified period (retail performance allowances), slotting (adding a new item to the system in one or more of our distribution centers) 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 we are invoiced at the regular price with the understanding that we may bill back the vendor for the requisite allowance when the performance is satisfied. We also assess an administrative fee, reflected on the invoices sent to vendors, to recoup our reasonable costs of performing the tasks associated with administering retail performance allowances.
 
We collectively plan promotions with our vendors and arrive at the amount the respective vendor plans to spend on promotions with us. Each vendor has its own method for determining the amount of promotional funds to be spent with us. In most situations, the vendor allowances are based on units we purchase from the vendor. In other situations, the allowances are based on our past or anticipated purchases and/or the anticipated performance of the planned promotions. Forecasting promotional expenditures is a critical part of our frequently scheduled planning sessions with our vendors. As individual promotions are completed and the associated billing is processed, the vendors track our promotional program execution and spend rate, and discuss the tracking, performance and spend rate with us on a regular basis throughout the year. These communications include discussions with respect to 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 us. 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 us.
 
We have a vendor dispute resolution process to facilitate timely research and resolution of disputed deductions from vendor payments. We estimate and record a payable based on current and historical claims.
 
(5)   Special Charges
 
2004 Special Charge
 
In fiscal 2004, we recorded a charge of $34.9 million related to the closure of 18 retail stores and our intent to seek purchasers for our Denver area AVANZA retail stores. The charge was reflected in the “special charges” line within the consolidated statements of income.
 
In fiscal 2005, we decided to continue to operate the three Denver area AVANZA stores and therefore recorded a reversal of $1.5 million of the special charge related to the stores as the assets of these stores were revalued at historical cost less depreciation during the time held-for-sale. Partially offsetting this reversal was a $0.2 million change in estimate for one other property.
 
In fiscal 2006, we recorded additional charges related to two properties included in the 2004 special charge of $5.5 million to write down capitalized leases and $0.9 million to reserve for lease commitments as a result of lower than originally estimated sublease income. Additionally, we reversed $0.2 million of a previously recorded charge to change an estimate for another property.


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In fiscal 2007, we reversed $1.6 million of previously established lease reserves after subleasing a property earlier than anticipated. This reversal was partially offset by a charge of $0.3 million due to revised lease commitment estimates.
 
During fiscal 2009 and 2008, no special charges or reversal of previous charges were recognized.
 
Following is a summary of the activity in the 2004 reserve established for store dispositions:
 
                                                 
    Write-Down
    Write-Down
                Other
       
    of Tangible
    of Intangible
    Lease
          Exit
       
    Assets     Assets     Commitments     Severance     Costs     Total  
    (In thousands)  
 
Initial accrual
  $ 20,596     $ 1,072     $ 14,129     $ 109     $ 588     $ 36,494  
Change in estimates
    889             (2,493 )     (23 )           (1,627 )
Used in 2004
    (21,485 )     (1,072 )     (2,162 )     (86 )     (361 )     (25,166 )
                                                 
Balance at January 1, 2005
                9,474             227       9,701  
Change in estimates
    (1,531 )           235                   (1,296 )
Used in 2005
    1,531             (2,026 )           (55 )     (550 )
                                                 
Balance at December 31, 2005
                7,683             172       7,855  
Change in estimates
    5,516             737                   6,253  
Used in 2006
    (5,516 )           (2,087 )           (76 )     (7,679 )
                                                 
Balance at December 30, 2006
                6,333             96       6,429  
Change in estimates
                (1,282 )                 (1,282 )
Used in 2007
                (947 )           (1 )     (948 )
                                                 
Balance at December 29, 2007
                4,104             95       4,199  
Change in estimates
                                   
Used in 2008
                (855 )                 (855 )
                                                 
Balance at January 3, 2009
                3,249             95       3,344  
Change in estimates
                                   
Used in 2009
                (923 )           (2 )     (925 )
                                                 
Balance at January 3, 2009
  $     $     $ 2,326     $     $ 93     $ 2,419  
                                                 
 
2009 Special Charge
 
In fiscal 2009, we recorded a special charge of $6.0 million due to an asset impairment in our food distribution segment. The charge was comprised of the write-downs of $5.5 million of leasehold improvements and $0.5 million of fixtures and equipment.
 
(6)   Long-Lived Asset Impairment Charges
 
Impairment charges of $8.5 million, $2.6 million and $1.9 million were recorded for long-lived asset impairments in fiscal 2009, 2008 and 2007, respectively. The impairment charges primarily related to six retail stores and one food distribution center in 2009, eight retail stores in 2008 and seven retail stores in fiscal 2007 that were impaired as a result of increased competition within the stores’ respective market areas. The estimated undiscounted cash flows related to these facilities indicated that the carrying value of the assets may not be recoverable based on current expectations, therefore these assets were written down in accordance with ASC 360-10-35.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(7)   Accounts and Notes Receivable
 
Accounts and notes receivable at the end of fiscal 2009 and 2008 are comprised of the following components:
 
                 
    2009     2008  
    (In thousands)  
 
Customer notes receivable, current
  $ 7,227     $ 8,434  
Customer accounts receivable
    229,884       160,202  
Other receivables
    18,769       22,101  
Allowance for doubtful accounts
    (5,113 )     (4,794 )
Net current accounts and notes receivable
  $ 250,767     $ 185,943  
                 
Long-term customer notes receivable
  $ 23,917     $ 29,090  
Allowance for doubtful accounts
    (574 )     (737 )
                 
Net long-term notes receivable
  $ 23,343     $ 28,353  
                 
 
Operating results include bad debt expense of $1.4 million in fiscal 2009, the reversal of bad debt expense of $1.3 million during fiscal 2008 and bad debt expense of $1.2 million during fiscal 2007.
 
(8)   Long-term Debt and Bank Credit Facilities
 
Long-term debt at the end of the fiscal 2009 and 2008 is summarized as follows:
 
                 
    2009     2008  
    (In thousands)  
 
Asset-backed credit agreement:
               
Revolving credit
  $ 124,100       93,600  
Senior subordinated convertible debt, 3.50% due in 2035
    131,364       126,420  
Industrial development bonds, 5.60% to 5.75% due in various installments through 2014
    2,365       2,875  
Notes payable and mortgage notes, 7.95% due in various installments through 2013
    388       474  
                 
Total debt
    258,217       223,369  
Less current maturities
    (627 )     (595 )
                 
Long-term debt
  $ 257,590       222,774  
                 
 
Asset-backed Credit Agreement
 
On April 11, 2008, we entered into our credit agreement which is an asset-backed loan consisting of a $340.0 million revolving credit facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit Facility”). Provided no default is then existing or would arise, the Company may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $110.0 million. The Revolving Credit Facility has a 5-year term and will be due and payable in full on April 11, 2013. The Company can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate or LIBOR plus a margin. The LIBOR interest rate margin currently is 2.00% and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions. At January 2,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2010, $203.3 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $12.6 million of outstanding letters of credit primarily supporting workers’ compensation obligations.
 
The credit agreement contains no financial covenants unless and until (i) the continuance of an event of default under the credit agreement, or (ii) the failure of the Company to maintain excess availability (A) greater than 10% of the borrowing base for more than two (2) consecutive business days or (B) greater than 7.5% of the borrowing base at any time, in which event, the Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability exceeds 10% of the borrowing base for ninety (90) consecutive days.
 
The credit agreement contains standard covenants requiring the Company and its subsidiaries, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve the corporate existence, maintain insurance, and pay taxes in a timely manner. Events of default under the credit agreement are usual and customary for transactions of this type including, among other things: (a) any failure to pay principal there under when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.
 
We are currently in compliance with all covenants contained within the credit agreement.
 
Senior Subordinated Convertible Debt
 
To finance a portion of the acquisition from Roundy’s, which consisted primarily of our Lima and Westville distribution centers, we sold $150.1 million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of senior subordinated convertible notes due 2035 in a private placement completed on March 15, 2005. The notes are our unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our senior secured credit facility.
 
Cash interest at the rate of 3.50% per year is payable semi-annually on the issue price of the notes until March 15, 2013. After that date, cash interest will not be payable, unless contingent cash interest becomes payable, and original issue discount for non-tax purposes will accrue on the notes at a daily rate of 3.50% per year until the maturity date of the notes. On the maturity date of the notes, a holder will receive $1,000 per note (a “$1,000 Note”). Contingent cash interest will be paid on the notes during any six-month period, commencing March 16, 2013, if the average market price of a note for a ten trading day measurement period preceding the applicable six-month period equals 130% or more of the accreted principal amount of the note, plus accrued cash interest, if any. The contingent cash interest payable with respect to any six-month period will equal an annual rate of 0.25% of the average market price of the note for the ten trading day measurement period described above.
 
The notes will be convertible at the option of the holder only upon the occurrence of certain events summarized as follows:
 
(1) if the closing price of our stock reaches a specified threshold (currently $63.35) for a specified period of time,
 
(2) if the notes are called for redemption,
 
(3) if specified corporate transactions or distributions to the holders of our common stock occur,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(4) if a change in control occurs or,
 
(5) during the ten trading days prior to, but not on, the maturity date.
 
Upon conversion by the holder, the notes convert at an adjusted conversion rate of 9.5652 shares (initially 9.3120 shares) of our common stock per $1,000 Note (equal to an adjusted conversion price of approximately $48.73 per share). Upon conversion, we will pay the holder the conversion value in cash up to the accreted principal amount of the note and the excess conversion value (or residual value shares), if any, in cash, stock or both, at our option. The conversion rate is adjusted upon certain dilutive events as described in the indenture, but in no event shall the conversion rate exceed 12.7109 shares per $1,000 Note. The number of residual value shares cannot exceed 7.1469 shares per $1,000 Note.
 
We may redeem all or a portion of the notes for cash at any time on or after the eighth anniversary of the issuance of the notes. Holders may require us to purchase for cash all or a portion of their notes on the 8th, 10th, 15th, 20th and 25th anniversaries of the issuance of the notes. In addition, upon specified change in control events, each holder will have the option, subject to certain limitations, to require us to purchase for cash all or any portion of such holder’s notes.
 
In connection with the closing of the sale of the notes, we entered into a registration rights agreement with the initial purchasers of the notes. In accordance with that agreement, we filed with the Securities and Exchange Commission a shelf registration statement covering the resale by security holders of the notes and the common stock issuable upon conversion of the notes. The shelf registration statement was declared effective by the Securities and Exchange Commission on October 5, 2005. Our contractual obligation, however, to maintain the effectiveness of the shelf registration statement has expired. As a result, we removed from registration, by means of a post-effective amendment filed on July 24, 2007, all notes and common stock that remained unsold at such time.
 
Industrial Development Bonds and Mortgages
 
At January 2, 2010, land in the amount of $1.4 million and buildings and other assets with a depreciated cost of approximately $3.2 million are pledged to secure obligations under issues of industrial development bonds and mortgages.
 
Maturities of Long-term Debt
 
Aggregate annual maturities of long-term debt for the five fiscal years after January 2, 2010, are as follows (in thousands):
 
         
2010
  $ 627  
2011
    670  
2012
    704  
2013
    124,812  
2014
    40  
Thereafter
    131,364  
         
Total
  $ 258,217  
         
 
Interest paid was $17.8 million, $18.7 million and $22.0 million in fiscal 2009, 2008 and 2007, respectively.


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(9)   Derivative Instruments
 
We have market risk exposure to changing interest rates primarily as a result of our borrowing activities and commodity price risk associated with anticipated purchases of diesel fuel. Our objective in managing our exposure to changes in interest rates and commodity prices is to reduce fluctuations in earnings and cash flows. To achieve these objectives, from time-to-time we use derivative instruments, primarily interest rate and commodity 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 and 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 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 effective in accordance with ASC 815 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.
 
As of January 2, 2010, we had two outstanding interest rate swap agreements with notional amounts totaling $35.0 million. The notional amounts of the two outstanding swaps are reduced as follows (amounts in thousands):
 
                         
Notional
  Effective Date   Termination Date   Fixed Rate
 
20,000
    10/15/2009       10/15/2010       3.49 %
10,000
    10/15/2010       10/15/2011       3.49 %
 
                         
Notional
  Effective Date   Termination Date   Fixed Rate
 
15,000
    10/15/2009       10/15/2010       3.38 %
7,500
    10/15/2010       10/15/2011       3.38 %
 
Interest rate swap agreements outstanding at January 2, 2010 and January 3, 2009 and their fair values are summarized as follows:
 
         
    January 2,
(In thousands, except percentages)
  2010
 
Notional amount (pay fixed/receive variable)
  $ 35,000  
Fair value liability
    (1,132 )
Average receive rate for effective swaps
    2.6 %
Average pay rate for effective swaps
    3.4 %
 
         
    January 3,
(In thousands, except percentages)
  2009
 
Notional amount (pay fixed/receive variable)
  $ 52,500  
Fair value liability
    (1,911 )
Average receive rate for effective swaps
    2.6 %
Average pay rate for effective swaps
    3.4 %
 
From time-to-time we use commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The agreements call for an exchange of payments with us making payments based on fixed price per gallon and receiving payments based on floating prices, without an exchange of the underlying


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NASH FINCH COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
commodity amount upon which the payments are made. Resulting gains and losses on the fair market value of the commodity swap agreement are immediately recognized as income or expense.
 
As of January 2, 2010, there were no commodity swap agreements in existence. Our only commodity swap agreement in place during fiscal 2008 expired during the first quarter and was settled for fair market value. Pre-tax gains of $0.4 million were recorded as a reduction to cost of sales during fiscal 2007.
 
In addition to the previously discussed interest rate and commodity swap agreements, from time-to-time we enter into a fixed price fuel supply agreements to support our food distribution segment. On January 1, 2009, we entered into an agreement which required us to purchase a total of 252,000 gallons of diesel fuel per month at prices ranging from $1.90 to $1.98 per gallon. The term of the agreement was for one year and expired on December 31, 2009. During fiscal 2007 and 2008 we had a fixed price fuel supply agreement which required us to purchase a total of 168,000 gallons of diesel fuel per month at prices ranging from $2.28 to $2.49 per gallon. The term of the agreement began on February 1, 2007, and expired on December 31, 2007. These fixed price fuel agreements qualified and were designated under the “normal purchase” exception under ASC 815, therefore the fuel purchases under these contracts are expensed as incurred as an increase to cost of sales.
 
(10)   Income Taxes
 
Total income tax expense is allocated as follows:
 
                         
    2009   2008   2007
    (In thousands)
 
Income tax expense from continuing operations
  $ 20,972     $ 20,646     $ 16,984  
 
Income tax expense from continuing operations is made up of the following components: