**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**x**                              Annual Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

**For the fiscal year ended: January 1, 2005**

**o**                                 Transition Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934

**For the Transition Period from                  to                  .**

**Commission file number: 0-785**

**NASH-FINCH COMPANY**

(Exactname of Registrant as specified in its charter)

| **Delaware**                                                            | **41-0431960**                        |
|-------------------------------------------------------------------------|---------------------------------------|
| (State of Incorporation)                                                | (I.R.S. Employer  Identification No.) |
| **7600 France Avenue South  P.O. Box 355  Minneapolis, Minnesota** | **55440-0355**                        |
| (Address of principal executive offices)                                | (Zip Code)                            |

 

Registrant’stelephone number, including area code: **(952) 832-0534**

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

Securities registered pursuantto Section 12(g) of the Act:

**Common Stock, par value $1.66**2¤3 per shareCommon Stock Purchase Rights

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act). Yes x  No o

The aggregate market value ofthe voting stock held by non-affiliates of the Registrant as of June 18,2004 (the last business day of the Registrant’s most recently completed secondfiscal quarter) was $277,798,225 based on the last reported sale price of$22.83 on the NASDAQ National Market on that date.

As of  February 28, 2005, 12,677,395 shares of Common Stockof the Registrant were outstanding.

DOCUMENTSINCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statementfor its Annual Meeting of Stockholders to be held on May 10, 2005 areincorporated by reference into Part III, as specifically set forth in Part III.

 

----

 

**Nash Finch CompanyIndex**
|                 | ** ** |                                                                                                                                 | ** ** | **Page No.** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| *Part I*   |       |                                                                                                                            |       |              |
| Item 1.         |       | Business                                                                                                                        |       | 1                 |
| Item 2.         |       | Properties                                                                                                                      |       | 8                 |
| Item 3.         |       | Legal  Proceedings                                                                                                              |       | 9                 |
| Item 4.         |       | Submission  of Matters to a Vote of Security Holders                                                                            |       | 10                |
| *Part II*  |       |                                                                                                                            |       |              |
| Item 5.         |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities             |       | 12                |
| Item 6.         |       | Selected  Financial Data                                                                                                        |       | 13                |
| Item 7.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |       | 14                |
| Item 7A.        |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                     |       | 32                |
| Item 8.         |       | Financial  Statements and Supplementary Data                                                                                    |       | 33                |
| Item 9.         |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                  |       | 73                |
| Item 9A.        |       | Controls  and Procedures                                                                                                        |       | 73                |
| Item 9B.        |       | Other  Information                                                                                                              |       | 74                |
| *Part III* |       |                                                                                                                            |       |              |
| Item 10.        |       | Directors  and Executive Officers of the Registrant                                                                             |       | 74                |
| Item 11.        |       | Executive  Compensation                                                                                                         |       | 75                |
| Item 12.        |       | Security  Ownership of Certain Beneficial Owners and Management                                                                 |       | 75                |
| Item 13.        |       | Certain  Relationships and Related Transactions                                                                                 |       | 75                |
| Item 14.        |       | Principal  Accounting Fees and Services                                                                                         |       | 75                |
| *Part IV*  |       |                                                                                                                            |       |              |
| Item 15.        |       | Exhibits  and Financial Statement Schedules                                                                                     |       | 75                |
| SIGNATURES      |       | 79                                                                                                                              |

 

 

----

**NashFinch Company**

**PART I**

*Throughout this report, we refer to Nash-Finch Company, together with itssubsidiaries, as “we,” “us,” “Nash Finch” or “the Company.”*

*This report,including the information that is or will be incorporated by reference intothis report, contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. The statements regarding theCompany contained in this report that are not historical in nature,particularly those that utilize terminology such as “may,” “will,” “should,” “likely,”“expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparableterminology, are forward-looking statements based on current expectations andassumptions, and entail various risks and uncertainties that could cause actualresults to differ materially from those expressed in such forward-lookingstatements. Important factors known to us that could cause material differencesare identified and discussed in this report, particularly in Part II, Item7 under the caption “Cautionary Factors.” You should carefully consider eachcautionary factor and all of the other information in this report. We undertakeno obligation to revise or update publicly any forward-looking statements. Youare advised, however, to consult any future disclosures we make on relatedsubjects in future reports to the Securities and Exchange Commission (the “SEC”or the “Commission”).*

We own or have the rightsto various trademarks, trade names and service marks, including the followingreferred to in this report: *AVANZA*®,*Econofoods*®, *Sun Mart*®, *Family Thrift Center*®, *OurFamily®, Fame®, Value ChoiceTM, Food Pride®*and*Fresh Place*®. Thetrademark *IGA*®, referred to inthis report, is the registered trademark of IGA, Inc.

**ITEM 1.   BUSINESS**

Originally established in1885 and incorporated in 1921, today we are one of the leading fooddistribution and retail companies in the United States, with approximately $3.9billion in annual sales. Our business consists of three primary operatingsegments: food distribution, military food distribution and food retailing. We are the second largest publicly traded wholesalefood distributor in the United States.  Financial information about our business segments for the three mostrecent fiscal years is contained in Part II, Item 8 of this report underNote (20)—“Segment Information” of Notes to Consolidated Financial Statements.

**Food Distribution Segment**

Our food distribution segment sells and distributes awide variety of nationally branded and private label grocery products from 15distribution centers to more than 1,500 grocery stores and other customerslocated in 26 states across the United States. Our customers are relativelydiverse, with the largest customer consisting of a consortium of stores representingapproximately 11.5%, and five others representing approximately 4.3%, 3.8%,3.5%, 3.2% and 3.2% of our fiscal 2004 food distribution sales. No othercustomer represents more than 3% of our food distribution business. Approximately48% of our food distribution sales in fiscal 2004 were generated throughcustomers with whom we have long-term sales and service agreements. Several ofour distribution centers also distribute products to military commissarieslocated in their geographic areas.

Our distribution centers arestrategically located to efficiently serve our corporate-owned stores, ourindependent customer stores and our other customers. The distribution centersare equipped with modern materials handling equipment for receiving, storingand shipping merchandise and are designed for high-volume operations at lowunit costs. For fiscal 2004, our distribution centers had an on-timedelivery rate, defined as being within 1⁄2 hour of our committed delivery time,of 97.8%, a fill rate, defined as the percentage of cases shipped relative tothe number of cases ordered, of 96.1%, and selector accuracy, defined aspercentage of cases selected matching the order as submitted by the customer,of 99.6%. We 

1

----

continue to implementoperating initiatives to enhance productivity and expand profitability whileproviding a higher level of service to our distribution customers. Our distribution centers have varying levels ofexcess capacity to serve additional customers without materially increasing ourcosts, which enhances our profitability.

Depending upon the size of thedistribution center and the profile of the customers served, our distributioncenters typically carry a full line of national brand, private label andperishable food or grocery products. Non-food items and specialty groceryproducts are distributed from a dedicated area of the distribution centerlocated in Bellefontaine, Ohio, and from two distribution centers located inSioux Falls, South Dakota. We currently have a fleet of 219 tractors and 722semi-trailers, which deliver the majority of our products to our customers.

Ourretailers order their inventory at regular intervals through direct linkagewith our information systems. Our food distribution sales are made on a marketprice-plus-fee and freight basis, with the fee based on the type of commodityand quantity purchased. We promptly adjust our selling prices based on thelatest market information, and our freight policy contains a fuel surchargeclause that allows us to partially mitigate the impact of rising fuel costs.

*Products*

We sell and distributeprimarily nationally advertised branded products and a number of unbrandedproducts, principally meat and produce, which we purchase directly from variousmanufacturers, processors and suppliers or through manufacturers’representatives and brokers. We also sell and distribute premium qualityprivate label products under the proprietary trademark *Our Family*,a long-standing private label of Nash Finch that offers a high qualityalternative to national brands. In addition, we sell and distribute twolower-priced lines of private label products under the *Fame*and *Value Choice* trademarks. Under ourprivate label line of products, we offer over 2,000 stock keeping units ofcompetitively priced, high quality grocery products, which compete withnational branded and other value brand products.

*Services*

To furtherstrengthen our relationships with our food distribution customers, we offer,either directly or through third parties, a wide variety of support services tohelp them develop and operate stores, as well as compete more effectively. Theseservices include:

·       promotional,advertising and merchandising programs;

·       installationof computerized ordering, receiving and scanning systems;

·       retailaccounting, budgeting and payroll services;

·       personnelmanagement assistance and employee training;

·       retailequipment procurement assistance;

·       consumerand market research;

·       remodelingand store development services;

·       negotiatingreal estate transactions;

·       securingexisting grocery stores that are for sale or lease in the market areas we serveand, occasionally, acquiring or leasing existing stores for resale or subleaseto these customers; and

·       NashNet,which provides supply chain efficiencies through internet services.

2

----

We also provide financial assistance to our fooddistribution customers primarily in connection with new store development orthe upgrading and expansion of existing stores. As of January 1, 2005, wehad approximately $37.0 million of loans outstanding to 67 of our fooddistribution customers, and guaranteed outstanding debt and lease obligationsof food distribution customers in the amount of $10.6 million. We typicallyenter into long-term supply agreements with independent customers, ranging from2 to 20 years. Approximately 48% of food distribution revenues in fiscal 2004were from customers subject to such arrangements. These agreements may alsocontain provisions that give us the opportunity to purchase customers’independent retail businesses before any third party. In the normal course ofbusiness, we also sublease retail properties and assign retail property leasesto third parties. We estimate that as of January 1, 2005, our maximumcontingent liability exposure with respect to the subleased and assigned leasesto be approximately $62.3 million and $20.0 million, respectively.

We distribute products toindependent stores that carry our proprietary *Food Pride*banner and the *IGA* banner. We encourage ourindependent customers to join one of these banner groups to receive many of thesame marketing programs and procurement efficiencies available to largergrocery store chains while allowing them to maintain their flexibility andautonomy as independents. To use either of these banners, these independentsmust comply with applicable program standards. As of January 1, 2005, weserved approximately 67****retail storesunder our *Food Pride* banner and 162****stores under the *IGA* banner.

**Military Food DistributionSegment**

Our military food distribution segment, the MDVdivision, is the largest distributor by revenue of grocery products to U.S.military commissaries. The MDV division serves over 300 military commissariesand exchanges located in the continental United States, Europe, Cuba, PuertoRico, Iceland the Azores and Honduras. Commissaries that we serve in the UnitedStates are located primarily in the Mid-Atlantic region, consisting of thestates along the Atlantic coast from New York to North Carolina. Ourdistribution center in Norfolk, Virginia is exclusively dedicated to supplyingproducts to military commissaries and is strategically located among thelargest concentration of military bases in the United States and near Atlanticports used to ship grocery products to overseas commissaries. Our MDV divisionhas an outstanding reputation as a supplier focused exclusively on U.S.military commissaries, based in large measure on its excellent service metrics,which include fill rate, on-time delivery and handling of order adjustments.

The Defense Commissary Agency,also known as DeCA, operates a chain of commissaries on U.S. military basesthroughout the world. DeCA contracts with manufacturers to obtain grocery andrelated products for the commissary system. Manufacturers either deliver theproducts to the commissaries themselves or, more commonly, contract withdistributors such as us to deliver the product. These distributors actas drayage agents for the manufacturers, purchasing and maintaining inventoriesof products DeCA purchases from the manufacturers, and providing handling,distribution and transportation services for the manufacturers. Manufacturerswho use distributors in this fashion must authorize the distributors as theirofficial representatives to DeCA, and the distributors must adhere to DeCAfrequent delivery system procedures governing matters such as productidentification, ordering and processing, information exchange and resolution ofdiscrepancies. We obtain distribution contracts with manufacturers throughcompetitive bidding processes and direct negotiations.

As commissaries need to berestocked, DeCA identifies each manufacturer with whom an order is to be placedfor additional products, determines which distributor is the manufacturer’sofficial representative in a particular region, and places a product order withthat distributor under the auspices of DeCA’s master contract with theapplicable manufacturer. The distributor selects that product from its existinginventory, delivers it to the commissary or commissaries designated by DeCA,and bills the manufacturer for the product shipped. The manufacturer then billsDeCA under the terms of its master contract. Overseas commissaries are servicedin a similar fashion, except that a distributor’s responsibility 

3

----

isto deliver products as and when needed to the port designated by DeCA, which inturn bears the responsibility for shipping the product to the applicablecommissary or overseas warehouse.

After we ship a particular manufacturer’s products tocommissaries in response to an order from DeCA, we invoice the manufacturer forthe same purchase price as was previously paid by us plus a service or drayagefee that is typically based on a percentage of the purchase price, but may insome cases be based on a dollar amount per case or pound of product handled.

MDV has distributioncontracts with over 400 manufacturers that supply products to the DeCAcommissary system. These contracts generally have an indefinite term, but maybe terminated by either party without cause upon 30 days prior written noticeto the other party. The contracts typically specify the commissaries we are tosupply on behalf of the manufacturer, the manufacturer’s products to besupplied, service and delivery requirements and pricing and payment terms. Theten largest customers of our MDV division currently represent approximately 45%of the military segment’s annual revenue.

**Retail Segment**

Our food retailing segment is made up of 85corporate-owned stores located primarily in the Upper Midwest states ofColorado, Illinois, Iowa, Minnesota, Nebraska, North Dakota, South Dakota,Wisconsin and Wyoming. We believe that approximately 74% of our conventionalgrocery stores are #1 or #2 in their respective local markets, which includeall supermarkets and supercenters within the respective city limits in whichour stores are located, based on sales. Our corporate-owned stores, which rangefrom stores in rural trade areas to modern supermarkets in growing urban areas,principally operate under the *Econofoods*, *Sun Mart*, *Family Thrift Center,AVANZA* and *Wholesale Food Outlet*banners. Our stores are typically located close to our distribution centers inorder to create certain operating and logistical efficiencies. As of January 1,2005, we operated 78 conventional supermarkets, 3*****AVANZA* grocery stores and 3 *WholesaleFood Outlet* grocery stores, both of which offer products designed tomeet the specific tastes and needs of Hispanic shoppers, and 1 other retailstore.

During the second quarter of 2004, we completed astrategic review that identified certain retail stores that did not meet returnobjectives, provide long-term strategic opportunities or justify additionalcapital investments. As a result of this review, we closed 18 retail stores atthe end of the second quarter and are currently seeking purchasers for ourthree Denver area *AVANZA* stores. We also closedfour stores during the first quarter of 2004, one store in the third quarter of2004 and one store in the fourth quarter of 2004. The closure and sale of thesestores will benefit the retail segment by enabling us to focus on a variety ofretail initiatives, such as improvements in merchandising and pricingstrategies, store-level execution, and perishable offerings and quality.

Our conventional grocerystores offer a wide variety of high quality grocery products and services. Manyhave 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, moneywiring and phone cards. We emphasize outstanding customer service and havecreated our G.R.E.A.T. (Greet, React, Escort, Anticipate, Thank) CustomerService Program to train every associate (employee) on the core elements ofproviding exceptional customer service. A mystery shopper visits each storeevery two weeks to measure performance and we provide feedback on the resultsto management and store personnel. “*The**Fresh Place*” concept within our conventional grocery storesis an umbrella banner that emphasizes our high-quality perishable products,such as fresh produce, deli, meats, seafood, baked goods, and takeout foods fortoday’s busy consumer.

4

----

**Competition**

*Food DistributionSegment*

Competition is intenseamong the distributors in the food distribution segment as evidenced by the lowmargin nature of the business. Success in this segment will be measured by theability to leverage scale in order to gain pricing advantages, to providesuperior merchandising programs and services to the independent customer baseand to use technology to increase distribution efficiencies. We compete withlocal, regional and national food distributors, as well as withvertically-integrated national and regional chains using a variety of formats,including supercenters, supermarkets and warehouse clubs, that purchasedirectly from suppliers and self-distribute products to their stores. We facecompetition from these companies on the basis of price, quality, variety andavailability of products, strength of private label brands, schedules andreliability of deliveries, and the range and quality of customer services.Continuing our quality service by focusing on key metrics such as our on-timedelivery rate, fill rate, and selector accuracy will be essential inmaintaining our competitive advantage. We believe we lead the industry inon-time delivery rate, fill rate and selector accuracy, which were 97.8%,96.1%, and 99.6%, respectively, for fiscal 2004.

*Military FoodDistribution Segment*

We are one of sixdistributors with annual sales to the DeCA commissary system in excess of $100million. We estimate that over 95% of DeCA’spurchases from distributors are made through these six distributors. Theremaining distributors that supply DeCA tend to be smaller, local providers. Inaddition, manufacturers themselves deliver or contract with others to delivercertain products, primarily fresh meat, poultry, produce, deli items, softdrinks and snack items, directly to DeCA commissaries. Because of the narrowmargins in this industry, it is of critical importance for distributors toachieve economies of scale, which is typically a function of the density orconcentration of military bases within the geographic market(s) adistributor serves, and the distributor’s share of that market. As a result, nodistributor in this industry has a nationwide presence. Rather, distributorstend to concentrate on specific regions, or areas within specific regions,where they can achieve critical mass and utilize warehouse and distributionfacilities efficiently. In addition, distributors that operate larger civiliandistribution businesses tend to compete for DeCA commissary business in areaswhere such business would enable them to more efficiently utilize the capacityof their existing civilian distribution centers. We believe the principalcompetitive factors among distributors within this industry are customerservice, price, operating efficiencies, reputation with DeCA and location ofdistribution centers. We believe our competitive position is very strong withrespect to all these factors within the geographic areas where we compete.

*Food RetailingSegment*

Competition in the retailgrocery business in our geographic markets is intense. We compete with manyorganizations of various sizes, ranging from national and regional chains thatoperate a variety of formats (such as supercenters, supermarkets, extreme valuefood stores and membership warehouse club stores) to local grocery store chainsand privately owned unaffiliated grocery stores. Although our target geographicareas have a relatively low presence of national and multi-regional grocerystore chains, we are facing increasing competitive pressure from the expansionof supercenter and regional chains. During 2004, there were four newsupercenters opened in markets where we operate. In 2005, we expect anadditional 13 supercenters to open within our markets. Depending upon themarket, we compete based on price, quality and assortment, store appeal,including store location and format, sales promotions, advertising, service andconvenience. We believe that by focusing on convenience, outstanding perishableexecution and exceptional customer service, we can successfully compete.

5

----

**Vendor Allowances and Credits**

We participate with our vendors in a broad menu ofpromotions to increase sales of products. These promotions fall into two maincategories: off-invoice allowances and performance-based allowances and areoften subject to negotiation with our vendors. In the case of off-invoiceallowances, discounts are typically offered by vendors with respect to certainmerchandise purchased by us during a specified period of time. We useoff-invoice allowances to support a variety of marketing programs such asreduced price offerings for specific time periods, food shows, palletpromotions and private label promotions. The discounts are either reflecteddirectly on the vendor invoice, as a reduction from the normal wholesale pricesfor merchandise to which the allowance applies, or we are allowed to deduct theallowance as an offset against the vendor’s invoice when it is paid.

In the case of performance-based allowances, theallowance or rebate is based on our completion of some specific activity, suchas purchasing or selling product during a certain time period. This basicperformance requirement may be accompanied by an additional performancerequirement such as providing advertising or special in-store promotion,tracking specific shipments of goods to retailers, or to customers in the caseof our own retail stores, during a specified period (count-recount promotions),slotting (adding a new item to the system) and merchandising a new item, orachieving certain minimum purchase quantities. The billing for theseperformance-based allowances is normally in the form of a “bill-back” in whichcase we are invoiced at the regular price with the understanding that we maybill back the vendor for the requisite allowance when the performance issatisfied. We also assess an administrative fee, reflected on the invoices sentto vendors, to recoup our reasonable costs of performing the tasks associatedwith administering count-recount promotions.

We collectively planpromotions with our vendors and arrive at the amount the respective vendorplans to spend on promotions with us. Each vendor has its own method fordetermining the amount of promotional funds budgeted to be spent with us duringthe period. In most situations, the vendor allowances are based on units wepurchased from the vendor. In other situations, the allowances are based on ourpast or anticipated purchases and/or the anticipated performance of the plannedpromotions. Forecasting promotional expenditures is a critical part of ourfrequently scheduled planning sessions with our vendors. As individualpromotions are completed and the associated billing is processed, the vendorstrack our promotional program execution and spend rate, and discuss thetracking, performance and spend rate with us on a regular basis throughout the year,variously on a weekly, monthly, quarterly or annual basis. These communicationsinclude future promotions, product cost, targeted retails and price points,anticipated volume, promotion expenditures, vendor maintenance, billing issuesand procedures, new items/discontinued items, and trade spend levels relativeto budget per event and per year, as well as the resolution of any issues thatarise between the vendor and us. In the future, the nature and menu ofpromotional programs and the allocation of dollars among them may change as aresult of ongoing negotiations and commercial relationships between vendors andus.

**Trademarks and Servicemarks**

We own or license a numberof trademarks, tradenames and servicemarks that relate to our products andservices, including those mentioned in this report. We consider certain ofthese trademarks, tradenames and servicemarks, such as *Our Family*and*Value Choice*, to be of material value tothe business conducted by our food distribution and retail segments, and we activelydefend and enforce such trademarks, tradenames and servicemarks.

**Employees**

As of January 1,2005, we employed 8,658 persons, of whom 4,676 were employed on a full-timebasis and 3,982 were employed on a part-time basis. We consider our employeerelations to be good. Only 455****of 

6

----

ouremployees are represented by unions and consist primarily of warehousepersonnel and drivers in our Ohio and Michigan distribution centers.

**Recent Developments**

On February 24, 2005, we entered into an AssetPurchase Agreement (the “Asset Purchase Agreement”) with Roundy’s, Inc. (“Roundy’s”)whereby we agreed to purchase, with certain exceptions, all of the assetsrelating to two wholesale food and non-food distribution centers located inLima, Ohio and Westville, Indiana and the related wholesale distributionbusiness conducted by Roundy’s out of these distribution centers and an additional leased warehouse.In addition, we agreed to purchase two Pick ‘n Save® grocery storeslocated in Ironton, Ohio and Van Wert, Ohio, the retail grocery businessconducted from these stores, Roundy’s general merchandise and health and beautycare products distribution business involving the customers of the twopurchased distribution centers, inventory at the purchased facilities and allcustomer contracts related to the purchased facilities. We have also agreed tooffer employment to the approximately 1,150 full- and part-time employeesrelated to the purchased facilities and to assume certain trade payables,accrued expenses and receivables associated with the assets we are acquiring. We have notagreed to assume any debt in connection with this acquisition. The aggregatepurchase price for the acquisition is approximately $225 million in cash,subject to certain post-closing adjustments.

The closing of this acquisition is subject tocustomary conditions, including the expiration or termination of the waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended, and financing. We intend to finance this acquisition with borrowingsunder our existing bank credit facility and a debt or convertible debtfinancing and expect the acquisition to close in late March or April 2005.

On February 22, 2005,we entered into a First Amendment to our Credit Agreement, dated as of November 12,2004, with the lenders party to that Credit Agreement and Deutsche Bank TrustCompany Americas, as Administrative Agent. Subject to the terms and conditionstherein, the First Amendment generally amends the Credit Agreement so as topermit us to enter into the Asset Purchase Agreement and to close and financethe acquisition.

**Available Information**

Our internet website is *www.nashfinch.com*. The references to our website in thisreport are inactive references only, and the information on our website is notincorporated by reference in this report. Through the Investor Relationsportion of our website and a link to a third-party content provider (under thetab “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-Kand amendments to such reports filed or furnished pursuant to Sections 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the SEC. We have also posted on our website, under the caption “CorporateGovernance,” our *Code of Business Conduct* that isapplicable to all our directors and employees, as well as our *Code of Ethics for Senior Financial Management*that isapplicable to our Chief Executive Officer, Chief Financial Officer andCorporate Controller. Any amendment to or waiver from the provisions of eitherof these Codes that is applicable to any of these three executive officers willbe disclosed on our website under the “Corporate Governance” caption.

7

----

**ITEM 2.**   PROPERTIES

Our principal executiveoffices are located in Minneapolis, Minnesota, and consist of approximately120,486 square feet of office space in a building that we own.

**Food DistributionSegment**

Thetable below lists, as of January 1, 2005, the locations and sizes of ourdistribution centers primarily used in our food distribution operations. Unlessotherwise indicated, we own each of these distribution centers.
| **Location**                 | ** ** | ** ** | ** ** | **Approx. Size  (Square Feet)** | ** ** |
|------------------------------|------------|------------|------------|-------------------------------------------|------------|
| Upper Midwest Region:        |       |       |       |                                      |       |
| Omaha, Nebraska              |       |       | 626,900    |                                      |       |
| Cedar Rapids, Iowa           |       |       | 351,900    |                                      |       |
| St. Cloud, Minnesota         |       |       | 329,000    |                                      |       |
| Sioux Falls, South Dakota(1) |       |       | 303,400    |                                      |       |
| Fargo, North Dakota          |       |       | 288,800    |                                      |       |
| Rapid City, South  Dakota(2) |       |       | 195,100    |                                      |       |
| Minot, North Dakota          |       |       | 185,200    |                                      |       |
| Southeast Region:            |       |       |       |                                      |       |
| Lumberton, North Carolina(3) |       |       | 336,500    |                                      |       |
| Statesboro, Georgia(3)       |       |       | 230,500    |                                      |       |
| Bluefield, Virginia          |       |       | 187,500    |                                      |       |
| Central Region:              |       |       |       |                                      |       |
| Bellefontaine, Ohio(4)       |       |       | 666,000    |                                      |       |
| Cincinnati, Ohio             |       |       | 403,300    |                                      |       |
| Bridgeport, Michigan(3)      |       |       | 604,500    |                                      |       |
| Total Square Footage         |       |       | 4,708,600  |                                      |       |

----

(1)          Includes 107,300 squarefeet that we lease. The Sioux Falls facility represents two distinctdistribution centers, one that distributes limited variety and slow movingproducts, and the other that distributes general merchandise and health andbeauty care products.

(2)          Includes8,000 square feet that we lease.

(3)          Leased facility.

(4)          Thisfacility includes two separate distribution operations, one that distributesdry groceries, frozen foods, fresh and processed meat products, and a varietyof non-food products, and the other that distributes health and beauty careproducts, general merchandise and specialty grocery products.

8

----

**Military Distribution Segment**

Thetable below lists, as of January 1, 2005, the locations and sizes of ourfacilities exclusively used in our military distribution business. Unlessotherwise indicated, we lease each of these facilities. The Norfolk facilitiescomprise our distribution center, while the Jessup facility is used as anintermediate holding area for high velocity and large cube products to bedelivered to commissaries in the northern portion of the Mid-Atlantic regionthat we serve.
| **Location**          | ** ** | ** ** | ** ** | **Approx. Size  (Square Feet)** | ** ** |
|-----------------------|------------|------------|------------|-------------------------------------------|------------|
| Jessup, Maryland      |       |       | 115,200    |                                      |       |
| Norfolk,  Virginia(1) |       |       | 787,500    |                                      |       |
| Total Square Footage  |       |       | 902,700    |                                      |       |

----

(1)          Includes54,400 square feet that we own.

**Food RetailingSegment**

Thetable below sets forth, as of January 1, 2005, selected informationregarding our 85 corporate-owned stores. We own 28 and lease 57 of thesestores.
| **Banner**             | ** ** | ** ** | ** ** | **Number  of Stores** | ** ** | **Areas of  Operation** | ** ** | **Average  Square Feet** | ** ** |
|------------------------|------------|------------|------------|----------------------------|------------|------------------------------|------------|-------------------------------|------------|
| *Econofoods*           |       |       | 41         |                       |       | IA,  IL, MN, SD, WI, WY      |       |                          | 35,915     |   |   |
| *Sun  Mart*            |       |       | 31         |                       |       | CO,  MN, NE, ND              |       |                          | 32,499     |   |   |
| *Family Thrift Center* |       |       | 6          |                       |       | SD                           |       |                          | 33,188     |   |   |
| *AVANZA*               |       |       | 3          |                       |       | CO                           |       |                          | 32,562     |   |   |
| Wholesale Food  Outlet |       |       | 3          |                       |       | CO,  IA, NE                  |       |                          | 28,784     |   |   |
| Other Stores           |       |       | 1          |                       |       | MN                           |       |                          | 3,512      |   |   |
| Total                  |       |       | 85         |                       |       |                         |       |                          |       |   |   |

 

Asof January 1, 2005, the aggregate square footage of our 85 retail grocerystores totaled 2,866,644 square feet.

**ITEM 3.**   LEGAL PROCEEDINGS

*ShareholderLitigation*

On June 22, 2004, the United States DistrictCourt for the District of Minnesota dismissed with prejudice the securitiesclass action which had been filed against the Company and certain of itsexecutive officers in June 2003, and which had consolidated eight separateclass actions previously filed in late 2002 and early 2003. The consolidatedaction alleged that the defendants violated the Securities Exchange Act of 1934by purportedly issuing false statements about the Company’s business andfinancial results in connection with vendor promotions. In October 2004,the District Court rejected plaintiffs’ motion requesting that this dismissalbe vacated, and in November 2004 plaintiffs agreed to dismiss their appealof the District Court’s ruling.

On June 15, 2004, theconsolidated shareholder derivative actions that had been filed in Minnesotastate court against Nash Finch’s Board of Directors and certain officers werealso dismissed with prejudice. The derivative actions arose out of the same setof allegations as the federal securities class action described above. In December 2004,the time period during which plaintiffs could appeal this dismissal expired.

9

----

*SEC Investigation*

As previously disclosed, on October 9, 2002, NashFinch received a letter from the staff of the Division of Enforcement of theSEC indicating that they were conducting an informal inquiry into our processfor assessing count-recount charges to our vendors and how we account for thosecharges. In response, we commenced an internal review of our practices inconjunction with the Audit Committee, special outside counsel and our prior andthen-current auditors, and filed a written response to the inquiry on November 22,2002. On February 4, 2003, we were notified by the staff of the SEC’sDivision of Enforcement that the SEC had approved a formal order ofinvestigation of Nash Finch.

Also as previouslydisclosed, on February 3, 2003, we provided the Office of the ChiefAccountant of the SEC a written communication detailing the basis for themanner in which we assess and account for count-recount charges, advising thatwe believe these charges were properly accounted for in accordance withgenerally accepted accounting principles, and seeking the SEC staff’sconcurrence with this conclusion. After a February 19, 2003 meeting withmembers of the staff of the SEC’s Office of the Chief Accountant and Divisionof Corporation Finance, Nash Finch received a letter dated March 7, 2003from the staff of the SEC’s Office of the Chief Accountant and Division ofCorporation Finance indicating that, based on our oral and writtenrepresentations, they would not object at that time to our accounting for thecount-recount charges. The response by the staff of the Office of the ChiefAccountant and the Division of Corporation Finance does not preclude anyfurther action by the Division of Enforcement.

*Other*

We are also engaged fromtime to time in routine legal proceedings incidental to our business. We do notbelieve that any of these routine legal proceedings will have a material impacton the business or financial condition of the Company and its subsidiaries,taken as a whole.

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

Nomatter was submitted to a vote of security holders during the fourth quarter ofthe fiscal year covered by this report.

***ITEM 4A.   EXECUTIVEOFFICERS OF THE REGISTRANT***

Thefollowing table sets forth information about our executive officers as of March 1,2005:
| **Name**                    | ** ** | ** ** | ** ** | **Age** | ** ** | **Year First Elected  or Appointed as an  Executive Officer** | ** ** | **Title**                                                         | ** ** |
|-----------------------------|------------|------------|------------|---------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Ron Marshall                |       | 50         |       |    | 1998       |                                                                                        |       | Chief Executive Officer                                           |       |
| Michael J. Lewis            |       | 54         |       |    | 2003       |                                                                                        |       | Executive Vice President, President of Retail                     |       |
| James M. Patitucci          |       | 54         |       |    | 2004       |                                                                                        |       | Executive Vice President, Merchandising and Marketing             |       |
| David J. Bersie             |       | 53         |       |    | 2002       |                                                                                        |       | Sr. Vice President, Food Distribution                             |       |
| Bruce A. Cross              |       | 52         |       |    | 1998       |                                                                                        |       | Sr. Vice President, Business Transformation                       |       |
| Joe R. Eulberg              |       | 47         |       |    | 2003       |                                                                                        |       | Sr. Vice President, Human Resources                               |       |
| Kathleen E.  McDermott |       | 55         |       |    | 2002       |                                                                                        |       | Sr. Vice President, General Counsel &  Secretary         |       |
| Jeffrey E. Poore            |       | 46         |       |    | 2001       |                                                                                        |       | Sr. Vice President, Military                                      |       |
| LeAnne  M. Stewart          |       | 40         |       |    | 1999       |                                                                                        |       | Sr.  Vice President, Chief Financial Officer & Treasurer |       |

 

There are no familyrelationships between or among any of our executive officers or directors. Ourexecutive officers are elected by the Board of Directors for one-yearterms, commencing with their election at the first meeting of the Board ofDirectors immediately following the annual meeting of stockholders andcontinuing until the next such meeting of the Board of Directors.

10

----

*Ron Marshall* has served as our Chief Executive Officer and adirector since June 1998 and as our President from June 1998 to September 2002.

*Michael J. Lewis* has served asour Executive Vice President and President of Retail since November 2003. Hepreviously served as President of Conquest Management Corporation, a consultingfirm specializing in growth strategies for retail companies, from August 1995to November 2003.

*James M. Patitucci* has served asour Executive Vice President, Merchandising and Marketing since February 2004.Prior to joining us, he was President and Chief Executive Officer of GroceryOutlet Inc., an extreme value discount grocery retailer, from October 2000to September 2003. From December 1999 to October 2000, he servedas Senior Vice President-Sales and Marketing for Ralph’s Grocery Company, adivision of Kroger Company, a grocery retailer.

*David J. Bersie* has served as ourSenior Vice President, Food Distribution since September 2002. Hepreviously served as our Vice President of the Midwest Region from October 2000to September 2002 and as Division Manager of the Cincinnati and CedarRapids Distribution Centers from October 1999 to October 2000.

*Bruce A. Cross* has served as ourSenior Vice President, Business Transformation since May 2000. He servedas our Senior Vice President and Chief Information Officer from September 1998to May 2000.

*Joe R. Eulberg* has served as ourSenior Vice President, Human Resources since November 2003. He previouslyserved as Vice President of Human Resources with 7-Eleven Incorporated, aconvenience store operator and franchisor, from August 2000 to August 2003.From September 1998 to August 2000, he served as Senior VicePresident, Human Resources at the Accor Economy Lodging division of Accor S.A.,an operator and franchisor of economy lodging properties.

*Kathleen E. McDermott* has servedas our Senior Vice President, General Counsel and Secretary since March 2002.She previously served as a Partner with Collier Shannon Scott, PLLC, a lawfirm, from January 2001 to March 2002. FromJune 1993 to June 1999, she served as Executive Vice President and Chief LegalOfficer at American Stores Company, a food and drug retailer.

*Jeffrey E. Poore* has served asour Senior Vice President, Military since July 2004. He previously servedas our Vice President, Distribution and Logistics from May 2001 to July 2004.Prior to joining Nash Finch, Mr. Poore served in various positions withSuperValu Inc., a food wholesaler and retailer, most recently as VicePresident, Logistics from January 1999 to April 2001.

*LeAnne M. Stewart* has served asour Senior Vice President, Chief Financial Officer and Treasurer since October 2004.She previously served as our Vice President and Corporate Controller from April 2000to October 2004, as Vice President, Financial Planning and Analysis from July 1999to April 2000, and as Treasurer from May 2000 to May 2001.

11

----

**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

Ourcommon stock is quoted on the Nasdaq National Market and currently trades underthe symbol NAFC. The following table sets forth, for each of the calendarperiods indicated, the range of high and low closing sales prices for ourcommon stock as reported by the Nasdaq National Market, and the quarterly cashdividends paid per share of common stock. Prices do not include adjustments forretail mark-ups, mark-downs or commissions. At January 1, 2005 there were2,579 stockholders of record.
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** | **Dividends  Per Share** | ** ** |
|----------------|------------|----------|------------|----------|------------|-------------------------------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High**                      | ** ** | **Low** | ** ** | **2004** | ** ** | **2003** | ** ** |
| First Quarter  |       | $        | 28.88      |     | 19.75      |                          | 9.86       |   | 4.26 |   | 0.135 |   | 0.00 |   |
| Second Quarter |       | 25.10    |       | 18.06    |       | 13.90                         |       | 6.90 |   | 0.135 |   | 0.18 |   |
| Third Quarter  |       | 31.99    |       | 22.60    |       | 18.70                         |       | 13.33 |   | 0.135 |   | 0.09 |   |
| Fourth Quarter |       | 38.66    |       | 29.81    |       | 24.70                         |       | 15.97 |   | 0.135 |   | 0.09 |   |
|                |            |          |            |          |            |                               |            |  |  |  |  |  |  |  |

 

On February 22, 2005,the Nash Finch Board of Directors declared a cash dividend of $0.135 per commonshare, payable on March 18, 2005 to stockholders of record as of March 4,2005.

12

----

**ITEM 6.   SELECTED FINANCIALDATA**

**NASHFINCH COMPANY and SUBSIDIARIES**

**Consolidated Summary of Operations**Five years ended January 1,2005 (not covered by Independent Auditors’ Report)
| ** **                                                                                    | ** ** | **2004**            | ** ** | **2003**            | ** ** | **2002**            | ** ** | **2001**            | ** ** | **2000**            | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                    | ** ** | **(52 weeks)** | ** ** | **(53 weeks)** | ** ** | **(52 weeks)** | ** ** | **(52 weeks)** | ** ** | **(52 weeks)** | ** ** |
| **(Dollar amounts in thousands except per share amounts)** | ** ** | ** **          | ** ** |
| Sales(1)                                                                                      |       | $                   | 3,897,074  |                | 3,971,502  |                | 3,874,672  |                | 3,982,206  |                | 3,839,499  |   |
| Cost of sales including warehousing and transporation  expenses(1)                            |       | 3,474,329           |       | 3,516,460           |       | 3,408,409           |       | 3,529,124           |       | 3,409,778           |       |
| Selling, general and adminstrative expenses                                                   |       | 295,524             |       | 326,828             |       | 347,418             |       | 335,886             |       | 322,448             |       |
| Special charges                                                                               |       | 34,779              |       | —              |       | (765                | )          | —              |       | —              |       |
| Extingusihment of debt                                                                        |       | 7,204               |       | —              |       | —              |       | —              |       | —              |       |
| Interest expense                                                                              |       | 25,798              |       | 33,869              |       | 29,490              |       | 34,303              |       | 34,444              |       |
| Depreciation and amortization                                                                 |       | 40,241              |       | 42,412              |       | 39,988              |       | 46,601              |       | 45,330              |       |
| Provision for income taxes                                                                    |       | 4,322               |       | 17,254              |       | 19,552              |       | 15,025              |       | 11,659              |       |
| Net earnings from continuing operations                                                       |       | $                   | 14,877     |                | 34,679     |                | 30,580     |                | 21,267     |                | 15,840     |   |
| Earnings on disposal of discontinued operations, net  of income tax                           |       | 55                  |       | 413                 |       | —              |       | —              |       | —              |       |
| Extraordinary charge from early extinguishment of  debt, net of income tax                    |       | —              |       | —              |       | —              |       | —              |       | (369                | )          |
| Cumulative effect of change in accounting principle,  net of income tax(2)                    |       | —              |       | —              |       | (6,960              | )          | —              |       | —              |       |
| Net earnings                                                                                  |       | $                   | 14,932     |                | 35,092     |                | 23,620     |                | 21,267     |                | 15,471     |   |
| Basic earnings per  share:                                                                    |       |                |       |                |       |                |       |                |       |                |       |
| Earnings from continuing operations                                                           |       | $                   | 1.20       |                | 2.87       |                | 2.59       |                | 1.83       |                | 1.38       |   |
| Earnings from discontinued operations                                                         |       | —              |       | 0.03                |       | —              |       | —              |       | —              |       |
| Extraordinary charge from early extinguishment of  debt                                       |       | —              |       | —              |       | —              |       | —              |       | (0.03               | )          |
| Cumulative effect of change in accounting  principle(2)                                       |       | —              |       | —              |       | (0.59               | )          | —              |       | —              |       |
| Basic earnings per share                                                                      |       | $                   | 1.20       |                | 2.90       |                | 2.00       |                | 1.83       |                | 1.35       |   |
| Diluted earnings  per share:                                                                  |       |                |       |                |       |                |       |                |       |                |       |
| Earnings from continuing operations                                                           |       | $                   | 1.18       |                | 2.85       |                | 2.52       |                | 1.78       |                | 1.38       |   |
| Earnings from discontinued operations                                                         |       | —              |       | 0.03                |       | —              |       | —              |       | —              |       |
| Extraordinary charge from early extinguishment of  debt                                       |       | —              |       | —              |       | —              |       | —              |       | (0.03               | )          |
| Cumulative effect of change in accounting  principle(2)                                       |       | —              |       | —              |       | (0.57               | )          | —              |       | —              |       |
| Diluted earnings per share                                                                    |       | $                   | 1.18       |                | 2.88       |                | 1.95       |                | 1.78       |                | 1.35       |   |
| Cash dividends declared per common share                                                      |       | $                   | 0.54       |                | 0.36       |                | 0.36       |                | 0.36       |                | 0.36       |   |
| Pretax earnings from continuing operations as a  percent of sales                             |       | 0.49                | %          | 1.31                | %          | 1.29                | %          | 0.91                | %          | 0.72                | %          |
| Net earnings as a percent of sales                                                            |       | 0.38                | %          | 0.88                | %          | 0.61                | %          | 0.53                | %          | 0.40                | %          |
| Effective income tax rate                                                                     |       | 22.6                | %          | 33.3                | %          | 39.0                | %          | 41.4                | %          | 42.4                | %          |
| Current assets                                                                                |       | $                   | 400,587    |                | 415,810    |                | 468,281    |                | 479,364    |                | 433,539    |   |
| Current liabilities                                                                           |       | $                   | 280,162    |                | 284,752    |                | 309,256    |                | 383,624    |                | 324,786    |   |
| Net working capital                                                                           |       | $                   | 120,425    |                | 131,058    |                | 159,025    |                | 95,740     |                | 108,753    |   |
| Ratio of current assets to current liabilities                                                |       | 1.43                |       | 1.46                |       | 1.51                |       | 1.25                |       | 1.33                |       |
| Total assets                                                                                  |       | $                   | 815,628    |                | 886,352    |                | 947,922    |                | 970,245    |                | 880,828    |   |
| Capital expenditures                                                                          |       | $                   | 22,327     |                | 40,728     |                | 52,605     |                | 43,924     |                | 54,066     |   |
| Long-term obligations (long-term debt and capitalized  lease obligations)                     |       | $                   | 239,603    |                | 326,583    |                | 405,376    |                | 368,807    |                | 353,664    |   |
| Stockholders’ equity                                                                     |       | $                   | 273,928    |                | 256,457    |                | 221,479    |                | 203,408    |                | 184,540    |   |
| Stockholders’ equity per share(3)                                                        |       | $                   | 22.21      |                | 21.36      |                | 18.61      |                | 17.43      |                | 16.12      |   |
| Return on stockholders’ equity(4)                                                        |       | 5.43                | %          | 13.52               | %          | 13.81               | %          | 10.46               | %          | 8.58                | %          |
| Number of common stockholders of record at year-end                                           |       | 2,579               |       | 2,841               |       | 2,797               |       | 2,710               |       | 2,786               |       |
| Common stock high price(5)                                                                    |       | $                   | 38.66      |                | 24.70      |                | 33.18      |                | 35.54      |                | 13.56      |   |
| Common stock low  price(5)                                                                    |       | $                   | 18.06      |                | 4.26       |                | 7.12       |                | 11.81      |                | 6.00       |   |

----

(1)        See Item 8, Note 1 of this report under the caption “RevenueRecognition” regarding the reclassification of facilitated services.

(2)        SeeItem 7, of this report under the caption “Cumulative Effect of Change inAccounting Principle” regarding the adoption of EITF No. 02-16.

(3)        Basedon average outstanding shares at year-end.

(4)        Returnbased on continuing operations.

(5)        Highand low closing sales price on Nasdaq National Market.

13

----

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Overview**

We are one of the leading food distribution and retailcompanies in the United States, with approximately $3.9 billion in annual sales.Approximately 50% of our sales come from our food distribution segment, whichsells and distributes a wide variety of nationally branded and private labelgrocery products from 15 distribution centers to more than 1,500 grocery storesand other customers located in 26 states, primarily in the Midwest andSoutheast. Approximately 29% of our annual sales come from our military fooddistribution segment, which contracts with vendors to distribute a wide varietyof grocery products to military commissaries and military distribution centerssupporting over 100 military commissaries located primarily in the Mid-Atlanticregion of the United States, and in Europe, Cuba, Puerto Rico, Iceland, theAzores and Honduras. The remaining 21% of our annual sales come from our retailsegment, which operates 85 corporate-owned stores primarily in the UpperMidwest.

Our food distribution and retail businesses operate inintensely competitive industries, characterized by low profit margins andincreasing consolidation. Alternative store formats, such as supercenters,warehouse clubs and extreme value food stores, have gained and continue to gainmarket share at the expense of conventional grocery stores, which represent thesubstantial majority of our corporate-owned stores as well as of our independentretail customer base. Largely as a result of this trend, over the three yearsdiscussed in this report we have experienced decreasing same store sales in ourretail segment and, to a lesser degree, attrition among the existing customerbase in our food distribution segment. Despite these competitive pressures, ourannual sales over this three-year period have been relatively flat as a resultof new business gained by our food distribution and military distributionbusinesses.

In fiscal 2004, our food distribution sales increased2.4 % over the year earlier primarily as a result of new customer accounts. Excludingthe effect of the 53rd week in fiscal year 2003, food distributionsales grew 4.2% over the year earlier. Webelieve that additional business opportunities will continue to be available toour food distribution segment from additional sales opportunities with ourcurrent customer base, former customers of Fleming and other wholesalers,independent operators who purchase stores from major retailers seeking torationalize their markets and retailers adding food to their product offerings.The degree to which we are able to continue to capitalize on theseopportunities will determine the degree to which new business gains can exceedcustomer attrition, which has historically ranged from two to four percent.

Our military food distribution segment continues toexperience solid year-over-year sales growth. This was driven by higher salesto military bases both overseas and in the U.S. We believe that our excellentreputation with DeCA has helped us win new business. The segment has continued to capitalize on increased profitability infiscal 2004 as a result of continued efficiencies gained through theconsolidation of two large distribution centers in fiscal 2003. We believe weare well positioned to continue to benefit from this consolidation as well asattain further revenue growth through expansion of our customer base andextension of our product offerings.

Our retail segment continued to be negatively affectedby increasing competition, primarily from the growth of alternative storeformats that have gained market share at the expense of conventional stores.During the second quarter of 2004, we completed a strategic review thatidentified certain retail stores that did not meet return objectives, providelong-term strategic opportunities or justify additional capital investments. Asa result of this review, we closed 18 retail stores at the end of the secondquarter and are currently seeking purchasers for our three Denver area *AVANZA* stores. Exitingthese underperforming assets is consistent with our commitment to continue tolower operating costs, improve our balance sheet and focus investment andattention on core areas of our business. We believe that the closure and saleof these stores, as well as the closure of six additional stores during 2004,will benefit our retail segment by 

14

----

enablingus to focus on a variety of retail initiatives, such as improvements inmerchandising and pricing strategies, store-level execution, and perishableofferings and quality.

During 2004, we reduced total debt (including capitallease obligations) by $86.8 million as part of a continuing effort to reducethe Company’s leverage, and we believe that doing so reduces the risk profileof the Company. On November 12, 2004 we concluded the refinancing of oursenior secured bank credit facility which had been scheduled to mature on December 19,2005. On December 13, 2004, we redeemed the $165 million in SeniorSubordinated Notes due 2008 at a redemption price of 102.833% using proceedsfrom the new senior secured bank facility.

In February 2004, ourBoard increased our quarterly dividend from $0.09 per share to $0.135 per share.With the exception of temporary draws on our revolving credit line to buildinventories for certain holidays during the year, we expect that cash flow fromoperations will be sufficient to enable us to further reduce our debt during2005. Reducing dependence on debt also frees up borrowing capacity to enable usto take advantage of potential acquisition or investment opportunities thatpresent themselves.

**Results of Operations**

The following discussionsummarizes our operating results for fiscal 2004 compared to fiscal 2003 andfiscal 2003 compared to fiscal 2002. However, fiscal 2004 and 2002 results arenot directly comparable to fiscal 2003 because fiscal 2003 contained anadditional week.

*Sales*

Thefollowing tables summarize our sales activity for fiscal 2004, 2003 and 2002.
| ** **              | ** ** | **2004**   | ** ** | **2003**  | ** ** | **2002**                   | ** ** |
|-------------------------|------------|------------|------------|-----------|------------|----------------------------|------------|
| **Segment sales:** | ** ** | ** ** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** | **Percent  Change** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** | **Percent  Change** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** |
| Food Distribution       |       | $          | 1,961.2    |      | 50.3       | %                          |       | 2.4 | % |   | 1,915.2 |   | 48.2 | % |   | 4.9 | % |   | 1,825.8 |   | 47.1 | % |
| Military                |       | 1,122.1    |       | 28.8      | %          |                       | 2.9        | % |   | 1,090.0 |   | 27.5 | % |   | 6.8 | % |   | 1,020.7 |   | 26.4 | % |
| Retail                  |       | 813.8      |       | 20.9      | %          |                       | (15.8      | )% |   | 966.3 |   | 24.3 | % |   | (6.0 | )% |   | 1,028.2 |   | 26.5 | % |
| **Total  Sales**        |       | $          | 3,897.1    |      | 100.0      | %                          |       | (1.9 | )% |   | 3,971.5 |   | 100.0 | % |   | 2.5 | % |   | 3,874.7 |   | 100.0 | % |
|                         |            |            |            |           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes the impact on Company and segment sales of theadditional week in the fourth fiscal quarter of 2003:

**Adjusted Fiscal 2003 Sales for the Effect of an Additional Week of Sales**
| **Segment sales:** | ** ** | ** ** | ** ** | **Sales** | ** ** | **53rd   Week  Sales** | ** ** | **Comparable  52 Weeks of  Sales** | ** ** | **Comparable  Percent Change  2004 to 2003** | ** ** |
|-------------------------|------------|------------|------------|-----------|------------|-----------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|
| Food Distribution       |       | $          | 1,915.2    |      | $          | 33.3                        |       |                                         | $          | 1,881.9                                                     |       |   |   | 4.2 | % |   |
| Military                |       | 1,090.0    |       | 17.3      |       |                        | 1,072.7    |                                         |       |                                                        | 4.6        | % |   |
| Retail                  |       | 966.3      |       | 17.8      |       |                        | 948.5      |                                         |       |                                                        | (14.2      | )% |   |
| **Total  Sales**        |       | $          | 3,971.5    |      | $          | 68.4                        |       |                                         | $          | 3,903.1                                                     |       |   |   | (0.2 | )% |   |

 

The increase in food distribution sales in fiscal 2004and fiscal 2003 was due to newbusiness with former Fleming customers and other new accounts. Partiallyoffsetting the fiscal 2003 increase were reduced salesand store closings by certain of our independent retail customers because ofincreased competition in their respective markets.

The increase in military segment sales in fiscal 2004and 2003 was due to increased shipments throughout the domestic commissarysystem and overseas.

15

----

Approximately50% of the decrease in retail sales in fiscal 2004 is attributable to thepreviously discussed store closures during 2004, with the balance reflecting negativesame store sales. Same store sales, which compare retail sales for stores whichwere in operation for the same number of weeks in the comparative periods,decreased 7.0% for 2004 as compared to 2003. These declines continue to reflecta difficult competitive environment in which supercenters and other alternativeformats compete for price conscious consumers. The decrease in retail segmentsales from fiscal 2002 to fiscal 2003 primarily reflects a 10.6% decrease insame store sales. During fiscal 2004 and 2003, our corporate store countchanged as follows:
| ** **                             | ** ** | **Fiscal Year  2004** | ** ** | **Fiscal Year  2003** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Number of stores  at beginning of year |       |                       | 110        |                       |       |   | 109 |   |   |
| New stores                             |       |                       | 0          |                       |       |   | 4 |   |   |
| Acquired stores                        |       |                       | 0          |                       |       |   | 6 |   |   |
| Closed or sold  stores                 |       |                       | (25        | )                          |       |   | (9 | ) |   |
| Number of stores at end  of year       |       |                       | 85         |                       |       |   | 110 |   |   |

 

*Gross Profit*

Gross profit (calculated as sales less cost of sales)for fiscal 2004 was 10.8% of sales compared to 11.5% for fiscal 2003 and 12.0%for fiscal 2002. Gross profit was negatively impacted in fiscal 2004 versusfiscal 2003 and in fiscal 2003 versus 2002 because retail segment sales, whichearn a higher gross profit than food distribution and military distributionsegment sales, represented a smaller percentage of our total sales. Costsassociated with the consolidation of two large warehouse facilities in themilitary distribution segment reduced gross profit in 2003 by $2.7 million, butcompletion of the consolidation effort in late 2003 benefited the gross profitmargin in the military distribution segment during 2004. In addition, grossprofit comparisons were negatively impacted by a LIFO charge of $3.5 million infiscal 2004 versus credits of $1.1 million in fiscal 2003 and $2.2 million infiscal 2002. The LIFO charge in fiscal 2004 was due to food price inflationacross all categories of products. The LIFO credits in 2003 and 2002 were dueto food price deflation and decreased inventory levels as a result of lowersales.

In the fourth quarter offiscal 2002, we early adopted the provisions of EITF No. 02-16 *“Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor,”* (See “Critical AccountingPolicies-Vendor Allowances and Credits” below for discussion) retroactive tothe beginning of fiscal 2002. The impact of the adoption on gross profit infiscal 2002, excluding the cumulative effect adjustment, was an increase of$1.4 million. In addition, the adoption resulted in a reclassification of $9.1million of net cooperative advertising income from selling, general and administrativeexpenses to cost of sales.

*Selling, Generaland Administrative*

Selling, general and administrative expenses(SG&A) for fiscal 2004 were 7.6% of sales as compared to 8.2% of sales infiscal 2003 and 9.0% of sales in fiscal 2002. SG&A expense in dollars andas a percentage of sales in fiscal 2004 compared to fiscal 2003 was lowerbecause retail segment sales, which have higher SG&A expenses than fooddistribution and military distribution segment sales, represented a smallerpercentage of our total sales. Gains on the sale of real estate increased from$0.8 million in fiscal 2003 to $5.6 million in fiscal 2004. Bad debt expensedecreased by $4.5 million due to improved receivables management. Charges forasset impairments other than those recorded as part of the special chargedecreased $1.8 million from fiscal 2003 to 2004, from $2.7 million to $0.9million. The impairment charges for fiscal 2004 and 2003 related primarily tothree and six stores, respectively, whose carrying values were impaired due toincreased competition within the stores’ respective market areas.

16

----

The decrease in SG&Aexpenses in dollars and as a percentage of sales in fiscal 2003 from fiscal2002 was primarily due to several factors. SG&A expenses were reduced infiscal 2003 compared to fiscal 2002 because retail segment sales, which havehigher SG&A expenses than food distribution and military distributionsegment sales, represented a smaller percentage of our total sales. Inaddition, health insurance expense for fiscal 2003 decreased by $6.2 million,primarily reflecting a decision to eliminate post-retirement medical benefitsfor active non-union employees in the fourth quarter. Charges for assetimpairments decreased $3.9 million from fiscal 2002 to 2003, from $6.6 millionto $2.7 million. The impairment charges for fiscal 2003 and 2002 related to sixand fifteen stores, respectively, whose carrying values were impaired due toincreased competition within the stores’ respective market areas. Partiallyoffsetting these decreases was a decrease of $3.0 million in gains on the saleof real estate, from $3.8 million in 2002 to $0.8 million in 2003.

*Special Charges*

During the second quarter of 2004, the Companycompleted a strategic review that identified certain retail stores that did notmeet return objectives, provide long-term strategic opportunities or justifyadditional capital investments. Consequently, the Company announced that it wasclosing or selling 21 retail outlets. The Company closed 18 stores in thesecond quarter of 2004 and is continuing to market its three Denver area AVANZAstores. As a result of these store dispositions, the Company recorded a pre-taxspecial charge of $36.5 million which was reflected in the “Special charge”line within the consolidated statements of income, and $3.3 million of costsreflected in operating earnings, primarily involving inventory markdownsrelated to the store closures. The special charge included $21.7 million forasset impairments (including $1.1 million of goodwill allocated to the storesbeing sold), $14.1 million for future lease obligations, $0.1 million inseverance and $0.6 million in other charges based on management’s estimates offair value of assets, lease subsidies, future payments on exited real estate, leaseterminations and other related costs.

During the fourth fiscal quarter of 2004, we recordeda net reversal of $1.6 million of the special charge because we were able tosettle five leases for less than initially estimated and adjusted the estimateneeded on four other properties for which more current market information wasavailable.

We recorded special charges totaling $31.3 million infiscal 1997 and $71.4 million (offset by $2.9 million of fiscal 1997 chargeadjustments) in fiscal 1998. These charges affected our food distribution andretail segments and were also designed to redirect our technology efforts. Allactions contemplated by the charges are complete. At January 1, 2005, theremaining accrued liability was $1.7 million and consisted primarily of lease commitments.

During fiscal 2004 andfiscal 2002, the Company reversed $0.08 million and $0.76 million, respectivelyof its fiscal 1998 and 1997 special charges due to agreements reached to settlecertain leases for less than what the Company had originally estimated.

*Depreciation andAmortization Expense*

Depreciation andamortization expense for fiscal 2004 decreased by 5.1% compared to fiscal 2003.The decrease was primarily due to the disposal of retail assets as part of thestrategic review completed in the second fiscal quarter. Depreciation andamortization expense for fiscal 2003 increased by 6.1% from fiscal 2002,primarily due to the addition of information technology software in fiscal2003.

*Interest Expense*

Interest expense forfiscal 2004 decreased by 23.8% compared to fiscal 2003, primarily due to adecrease in average borrowing level from $137.5 million in 2003 to $74.9million in 2004. Partially offsetting the decrease in average borrowing levelswas an increase in average interest rate from 5.1% in 

17

----

2003 to5.9% in 2004. Interest expense for fiscal 2003 included $2.5 million paid toour bondholders and $1.3 million paid to our bank lenders in the first quarterof 2003 as consideration for waivers to extend the deadlines for filing ourthird quarter Form 10-Q for fiscal 2002, our Form 10-K for fiscal2002 and our first quarter Form 10-Q for fiscal 2003. Interest expense forfiscal 2003 increased by 14.8% compared to fiscal 2002, due largely to paymentof the waiver fees described above. Apart from the waiver fees, the impact ofan increase in our average borrowing rate under the bank credit facility from4.5% in fiscal 2002 to 5.1% in fiscal 2003 was offset by a decrease in ouraverage borrowing level under that facility, from $156.6 million in 2002 to$137.5 million in fiscal 2003.

*Income Tax Expense*

The effective tax rate forfiscal 2004 was 22.6% compared to 33.3% in fiscal 2003 and 39.0% in fiscal 2002.The decrease in the effective rate from fiscal 2003 to fiscal 2004 and fiscal2002 to fiscal 2003 was due to reductions in income tax expense of $2.5 millionand $3.0 million recognized in 2004 and 2003, respectively, as a result of theresolution of various outstanding state and federal tax issues. Refer to thetax rate table in Part II, Item 8 of this report under Note (10)-“IncomeTaxes” of Notes to the Consolidated Financial Statements for the comparativecomponents of these rates.

*DiscontinuedOperations*

The gain on discontinuedoperations of $0.1 million in fiscal 2004 and $0.4 million in fiscal 2003 was aresult of the resolution of a contingency associated with the sale of our NashDe-Camp produce growing and marketing subsidiary in fiscal 1999.

*Cumulative Effectof Change in Accounting Principle*

We adopted the provisionsof EITF Issue No. 02-16, *“Accounting by a Customer(Including a Reseller) for Certain Consideration Received From a Vendor”*as of the beginning of fiscal 2002. The cumulative effect at the beginning offiscal 2002 was a charge of $7.0 million, net of income taxes of $4.4 million. Thecumulative effect of a change in accounting principle has been presented in ourconsolidated statement of income for fiscal 2002 (See “Critical AccountingPolices” under the caption “Vendor Allowances and Credits” and “New AccountingStandards” in Part II, Item 7 of this report).

18

----

*Net Earnings*

Net earnings for the 52week fiscal 2004 were $14.9 million, or $1.18 per diluted share, compared to$35.1 million, or $2.88 per diluted share, for the 53 week 2003 year and $23.6million, or $1.95 per diluted share, for the 52 week 2002 year. Net earnings ineach of the three years were affected by a number of events included in thediscussion above that affected the comparability of results. Some of the moresignificant of these events are summarized as follows:
| ** **                                                                                                                             | ** ** | **Fifty-Two Weeks Ended  January 1, 2005**                                        | ** ** | **Fifty-Three Weeks Ended  January 3, 2004**                | ** ** | **Fifty-Two Weeks Ended  December 28, 2002**                                      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **        $        ** | ** ** | **      EPS      ** | ** ** | **        $        ** | ** ** | **        EPS        ** | ** ** | **        $        ** | ** ** | **      EPS      ** | ** ** |
| Net earnings from  continuing operations as reported                                                                                   |       |                                                                                                  | 14,877     |                                                                            |       |                                                                                                  | 1.18       |   |   |   | 34,679 |   |   |   | 2.85 |   |   |   | 23,620 |   |   |   | 1.95 |   |   |
| *Items  affecting earnings*                                                                                                            |       |                                                                                                  |       |                                                                            |       |                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Call premium for early redemption of Senior  Subordinated Notes (Q4 2004)                                                         |       |                                                                                                  | 2,819      |                                                                            |       |                                                                                                  | 0.22       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Write-off of unamortized finance costs and original  issuance discount on credit facility and senior subordinated notes (Q4 2004) |       |                                                                                                  | 1,525      |                                                                            |       |                                                                                                  | 0.12       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Change in estimate of special charge from store  dispositions (Q4 2004)                                                      |       |                                                                                                  | (1,311     | )                                                                               |       |                                                                                                  | (0.10      | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Special charges from store dispositions (Q2 2004,   Q3 2002)                                                                           |       |                                                                                                  | 22,261     |                                                                            |       |                                                                                                  | 1.76       |   |   |   | — |   |   |   | — |   |   |   | (467 | ) |   |   | (0.03 | ) |   |
| Store closure cost reflected in operations (Q2 2004)                                                                                   |       |                                                                                                  | 2,009      |                                                                            |       |                                                                                                  | 0.16       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Fees paid to lenders as consideration for bond  indenture and credit facility waivers (Q1 2003)                                        |       |                                                                                                  | —     |                                                                            |       |                                                                                                  | —     |   |   |   | 2,339 |   |   |   | 0.19 |   |   |   | — |   |   |   | — |   |   |
| Reduction of health insurance expense (Q4 2003)                                                                                        |       |                                                                                                  | —     |                                                                            |       |                                                                                                  | —     |   |   |   | (3,790 | ) |   |   | (0.31 | ) |   |   | — |   |   |   | — |   |   |
| Reduction in income tax expense (Q4 2004, Q3  2004 and   Q3 2003)                                                                 |       |                                                                                                  | (3,300     | )                                                                               |       |                                                                                                  | (0.27      | ) |   |   | (3,000 | ) |   |   | (0.25 | ) |   |   | — |   |   |   | — |   |   |
| Cumulative  effect of accounting change (Q1 2002)                                                                                      |       |                                                                                                  | —     |                                                                            |       |                                                                                                  | —     |   |   |   | — |   |   |   | — |   |   |   | 6,960 |   |   |   | 0.57 |   |   |

 

**Liquidity and CapitalResources**

Historically,we have financed our capital needs through a combination of internal andexternal sources. These sources include cash flow from operations, short-termbank borrowings, various types of long-term debt and lease and equity financing.During 2005, we expectthat cash flow from operations will be sufficient to meet our working capitalneeds and enable us to further reduce our debt, with temporary draws on ourrevolving credit line needed during the year to build inventories for certainholidays. Longer term, we believe that cash flows from operations, short-termbank borrowings, various types of long-term debt and lease and equity financingwill be adequate to meet our working capital needs, planned capitalexpenditures and debt service obligations.

19

----

Cash flow from operations decreased by $12.6 millionin fiscal 2004 compared to fiscal 2003 due to costs related to the 2004 specialcharge. Partially offsetting these costs was a decrease in inventory ofapproximately $19.4 million, $15.0 million of which related to the retail storeclosures. A rise in accounts receivable from the prior year was offset by anincrease in accounts payable. Cash flow from operations increased by $53.9million in fiscal 2003 compared to fiscal 2002. Primary contributors to the2003 increase were increased earnings of $11.5 million and more efficientreceivables management, which resulted in a decrease in accounts receivable of$18.5 million.

Cash used for investing activities decreased by $29.1million in fiscal 2004 compared to fiscal 2003, mostly due to a decrease in netadditions to property, plant and equipment of $26.5 million in fiscal 2004versus fiscal 2003. Cash used for investing activities increased slightly infiscal 2003 as compared to fiscal 2002. We expect our capital expenditures forfiscal 2005 to approximate $35 million excluding acquisitions.These expenditures are expected to include maintenance projects in our fooddistribution segment, store maintenance and remodels in our food retailingsegment, information system upgrades and other miscellaneous projects acrossour business.

Cash used for financingactivities increased by $5.5 million in fiscal 2004 compared to fiscal 2003,primarily due to a $4.7 million premium paid for early extinguishment of the8.5% Senior Subordinated Notes due 2008. The $165 million principal balance onthe 8.5% Senior Subordinated Notes was paid during the fourth quarter usingproceeds from the new senior secured bank credit facility described below. Cashused for financing activities increased by $95.0 million in fiscal 2003compared to fiscal 2002, primarily due to $79.4 million used to pay down ourrevolving bank credit facility. At January 1, 2005, credit availabilityunder the new bank facility was $97.8 million.

*ContractualObligations and Commercial Commitments*

The followingtable summarizes our significant contractual cash obligations as of January 1,2005, and the expected timing of cash payments related to such obligations infuture periods:
| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**       | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5  Years** | ** ** |   |
| **(in thousands)**                | ** ** | ** **                                | ** ** |
| Long Term Debt(1)                      |       | $                                         | 202,060    |   |   | 2,817 |   |   |   | 4,405 |   |   |   | 15,068 |   |   | 179,770 |   |
| Capital Lease  Obligations(2)(3)       |       | 78,351                                    |       |   | 7,346 |   |   |   | 14,680 |   |   |   | 14,503 |   |   | 41,822 |   |
| Operating  Leases(2)                   |       | 135,963                                   |       |   | 23,158 |   |   |   | 38,947 |   |   |   | 26,182 |   |   | 47,676 |   |
| Purchase  Obligations(4)               |       | 22,476                                    |       |   | 18,969 |   |   |   | 3,367 |   |   |   | 140 |   |   | — |   |
| Total Contractual Cash  Obligations(5) |       | $                                         | 438,850    |   |   | 52,290 |   |   |   | 61,399 |   |   |   | 55,893 |   |   | 269,268 |   |
|                                        |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Referto Part II, Item 8 in this report under Note (8)—“Long-term Debt and BankCredit Facilities” in Notes to Consolidated Financial Statements and to thediscussion of covenant compliance below for additional information regardinglong term debt.

(2)       Leaseobligations primarily relate to store locations for our retail segment, as wellas store locations subleased to independent food distribution customers. Adiscussion of lease commitments can be found in Part II, Item 8 in thisreport under Note (14)—“Leases” in Notes to Consolidated Financial Statementsand under the caption “Lease Commitments” under “Critical Accounting Policies,”below.

(3)       Includesamounts classified as imputed interest.

(4)       Themajority of our purchase obligations involve purchase orders made in theordinary course of business, which are not included in the table above. Ourpurchase orders are based on our current needs and are fulfilled by our vendorswithin very short time horizons. Any amounts for which we are liable underpurchase orders are reflected in our consolidated balance sheet as accountspayable upon 

20

----

shipment of the underlyingproduct. The purchase obligations shown in this table also exclude agreementsthat are cancelable by us without significant penalty, which include contractsfor routine outsourced services. The amount of purchase obligations shown inthe table represents the amount of product we are contractually obligated topurchase to earn $2.1 million in upfront contract monies received. Should wenot be able to fulfill these purchase obligations, we would be only obligatedto pay back the unearned upfront contract monies.

(5)       Wehave not included obligations under our pension and postretirement medicalbenefit plans in the contractual obligations table. As of December 31,2004 we had a pension funding obligation of $6.4 million as discussedfurther in Part II, Item 8 in this report under Note (19)—“Pension andOther Post-retirement Benefits”.

Wehave also made certain commercial commitments that extend beyond 2004. Thesecommitments include standby letters of credit and guarantees of certain fooddistribution customer debt and lease obligations. The following summarizesthese commitments as of January 1, 2005:
| ** **                                 | ** ** | **Total**               | ** ** | **Commitment Expiration Per Period** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| **Other Commercial Commitments** | ** ** | ** **              | ** ** | **Amounts  Committed**                              | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Standby Letters of Credit(1)               |       |                    | $          | 17,221                                              |       |   |   | 17,221 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Guarantees(2)                              |       |                    | 30,617     |                                                |       |   | 1,350 |   |   |   | 735 |   |   |   | 10,423 |   |   |   | 18,109 |   |   |
| Total Other  Commercial Commitments        |       |                    | $          | 47,838                                              |       |   |   | 18,571 |   |   |   | 735 |   |   |   | 10,423 |   |   |   | 18,109 |   |   |
|                                            |            |                         |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Lettersof credit relate primarily to supporting workers’ compensation obligations andare renewable annually.

(2)          Referto Part II, Item 8 of this report under Note (15)—“Concentration of CreditRisk” of Notes to Consolidated Financial Statements and under the caption “Guaranteesof Debt and Lease Obligations of Others” under “Critical Accounting Policies,”below, for additional information regarding debt, lease guarantees and assignedleases.

*Bank Credit Agreement*

On November 12, 2004we concluded the refinancing of our senior secured bank credit facility whichhad been scheduled to mature on December 19, 2005. The new credit facilityconsists of $125 million in revolving credit, all of which may be used forloans and up to $40 million of which may be used for letters of credit, and a$175 million Term Loan B. The revolving credit portion of the facility has afive year term and the Term Loan B has a six year term. Borrowings under thenew credit facility aresecured by a security interest in substantially all assets of the Company andits wholly-owned subsidiaries that are not pledged under other debt agreements.Proceeds of the Term Loan B were used to redeem our 8.5% Senior SubordinatedNotes due 2008, as discussed below. The refinancing and redemption are expectedto reduce our annual interest expense, provide us with the ability to continuereducing our debt by structuring our debt in a form that can be prepaid withoutpenalty and provide a more accommodating covenant structure to increasestrategic and operating flexibility.

Borrowings under the newbank credit facility bear interest at either the Eurodollar rate or the primerate, plus in either case a margin increase that is dependent on our totalleverage ratio. The new credit facility requires us to hedge a certain portionof such borrowings through the use of interest rate swaps, as we have donehistorically. We pay a commitment commission on the unused portion of therevolver, but the Term Loan B was subject to a commitment commission only untilthe loan was activated. The margin increase and the commitment commission arereset quarterly based on movement of a leverage ratio defined by the agreement.At January 1, 2005 the margin for the revolver and Term Loan B were 1.75% 

21

----

and2.25%, respectively and the commitment commission was 0.375%. The marginincrease and the commitment commission were 1.75% and 0.375%, respectivelyunder the prior credit facility at the end of fiscal 2003.

The new credit facilityrepresents one of our primary sources of liquidity, both short-term and long-term,and the continued availability of credit under that facility is of materialimportance to our ability to fund our capital and working capital needs. Thecredit agreement governing the new credit facility contains various restrictivecovenants, compliance with which is essential to continued credit availability.Among the most significant of these restrictive covenants are financialcovenants which require us to maintain predetermined ratio levels related tointerest coverage and leverage. These ratios are based on EBITDA, on a rollingfour quarter basis, withsome adjustments (“Consolidated EBITDA”). Consolidated EBITDA is a non-GAAPfinancial measure that is defined in our bank credit agreement as earningsbefore interest, income taxes, depreciation and amortization, adjusted toexclude extraordinary gains or losses, gains or losses from sales of assetsother than inventory in the ordinary course of business, upfront fees andexpenses incurred in connection with the execution and delivery of the newcredit agreement, and non-cash charges (such as LIFO charges, closed storelease costs and asset impairments), less cash payments made during the currentperiod on non-cash charges recorded in prior periods. Consolidated EBITDAshould not be considered an alternative measure of our net income, operatingperformance, cash flow or liquidity. It is provided as additional informationrelative to compliance with our debt covenants. In addition, the new creditagreement requires us to maintain predetermined ratio levels related to workingcapital coverage (the ratio of the sum of net trade accounts receivable plusinventory to the sum of loans and letters of credit outstanding under the newcredit agreement plus up to $60 million of additional secured indebtednesspermitted to be issued under the new credit agreement).

The new credit agreement requires us to maintainan interest coverage ratio of 3.50:1.00 at fiscal year end 2004 and increasingto 4:00:1.00 at fiscal year end 2007 and thereafter, a leverage ratio of3:50:1.00 at fiscal year end 2004, stepping down to 3.25:1.00 at fiscal yearend 2006 and to 3:00:1.00 at fiscal year end 2007 and thereafter, and a workingcapital ratio of 1.50:1.00 at fiscal year end 2004, stepping up to 1.75:1.00 atfiscal year end 2005 and to 2.00:1.00 at fiscal year end 2008 and thereafter.We must also maintain a senior secured leverage ratio (total unsubordinatedsecured debt to Consolidated EBITDA) of 2.75:1.00 at fiscal year end 2004,stepping down to 2.50:1.00 at fiscal year end 2006, and to 2.25:1.00 at fiscalyear end 2007 and thereafter.

As of January 1,2005, we were in compliance with all financial covenants as defined in ourcredit agreement which are summarized as follows:
| **Financial Covenant**       | ** ** | ** **           | ** ** | **Required Ratio** | ** ** | **Actual Ratio** | ** ** |
|-----------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------|------------|
| Interest Coverage  Ratio(1)       |       | 3.50:1.00 (minimum)  |       |                    | 4.95:1.00  |                  |       |
| Leverage Ratio(2)                 |       | 3.50:1.00 (maximum)  |       |                    | 1.92:1.00  |                  |       |
| Senior Secured Leverage  Ratio(3) |       | 2.75:1.00 (maximum)  |       |                    | 1.45:1.00  |                  |       |
| Working Capital Ratio(4)          |       | 1.50:1.00  (minimum) |       |                    | 2.07:1.00  |                  |       |

----

(1)          Ratioof Consolidated EBITDA for the trailing four quarters to interest expense forsuch period.

(2)          Totaloutstanding debt toConsolidated EBITDA for the trailing four quarters.

(3)          Totalsenior secured debtto ConsolidatedEBITDA for the trailing four quarters.

(4)          Ratioof net trade accounts receivable plus inventory to the sum of loans and lettersof credit outstanding under the new credit agreement plus certain additionalsecured debt.

Any failure to comply withany of these financial covenants would constitute an event of default under thebank credit agreement, entitling a majority of the bank lenders to, among otherthings, terminate future credit availability under the agreement and acceleratethe maturity of outstanding obligations under that agreement.

22

----

Thefollowing is a summary of the calculation of Consolidated EBITDA (in thousands)for fiscal 2004, 2003 and 2002:
| ** **                                                    | ** ** | **2004**       | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|
| ** **                                                    | ** ** | **Qtr 1** | ** ** | **Qtr 2** | ** ** | **Qtr 3** | ** ** | **Qtr 4** | ** ** | **Rolling 4 Qtr** | ** ** |
| Earnings from  continuing operations before income taxes |       | $              | 7,757      |   | (25.639 | ) | 22,620 |   | 14,461 |   |   | 19,199 |   |   |
| Interest expense                                              |       | 6,505          |       | 6,487 |   | 7,799 |   | 5,007 |   |   | 25,798 |   |   |
| Depreciation and  amortization                                |       | 10,156         |       | 9,800 |   | 11,615 |   | 8,670 |   |   | 40,241 |   |   |
| LIFO                                                          |       | 392            |       | 783 |   | 1,043 |   | 1,307 |   |   | 3,525 |   |   |
| Closed store  lease costs                                     |       | (129           | )          | 1,146 |   | 643 |   | 3,211 |   |   | 4,871 |   |   |
| Asset impairments                                             |       | —         |       | — |   | — |   | 853 |   |   | 853 |   |   |
| Gains on sale of  real estate                                 |       | (82            | )          | (14 | ) | (3,317 | ) | (2,173 | ) |   | (5,586 | ) |   |
| Subsequent cash  payments on non-cash charges                 |       | (565           | )          | (625 | ) | (1,633 | ) | (693 | ) |   | (3,516 | ) |   |
| Extinguishment of  debt                                       |       | —         |       | — |   | — |   | 7,204 |   |   | 7,204 |   |   |
| Special charge                                                |       | —         |       | 36,494 |   | — |   | (1,715 | ) |   | 34,779 |   |   |
| Total Consolidated  EBITDA                                    |       | $              | 24,034     |   | 28,432 |   | 38,770 |   | 36,132 |   |   | 127,368 |   |   |

 
| ** **                                               | ** ** | **2003**       | ** ** |
|----------------------------------------------------------|------------|----------------|------------|
| ** **                                               | ** ** | **Qtr 1** | ** ** | **Qtr 2** | ** ** | **Qtr 3** | ** ** | **Qtr 4** | ** ** | **Rolling 4 Qtr** | ** ** |
| Earnings from  continuing operations before income taxes |       | $              | 5,346      |   | 11,910 |   | 14,105 |   | 20,572 |   |   | 51,933 |   |   |
| Interest expense                                         |       | 10,791         |       | 7,035 |   | 9,011 |   | 7,032 |   |   | 33,869 |   |   |
| Depreciation and  amortization                           |       | 9,440          |       | 9,642 |   | 13,098 |   | 10,232 |   |   | 42,412 |   |   |
| LIFO                                                     |       | 400            |       | 400 |   | 41 |   | (1,961 | ) |   | (1,120 | ) |   |
| Closed store  lease costs                                |       | 354            |       | 32 |   | 583 |   | 187 |   |   | 1,156 |   |   |
| Asset impairments                                        |       | 390            |       | — |   | 1,725 |   | 591 |   |   | 2,706 |   |   |
| Gains on sale of  real estate                            |       | (66            | )          | (126 | ) | (218 | ) | (338 | ) |   | (748 | ) |   |
| Subsequent cash  payments on non-cash charges            |       | (532           | )          | (508 | ) | (602 | ) | (598 | ) |   | (2,240 | ) |   |
| Curtailment of  post retirement plan                     |       | —         |       | — |   | — |   | (4,004 | ) |   | (4,004 | ) |   |
| Total Consolidated  EBITDA                               |       | $              | 26,123     |   | 28,385 |   | 37,743 |   | 31,713 |   |   | 123,964 |   |   |

 
| ** **                                               | ** ** | **2002**       | ** ** |
|----------------------------------------------------------|------------|----------------|------------|
| ** **                                               | ** ** | **Qtr 1** | ** ** | **Qtr 2** | ** ** | **Qtr 3** | ** ** | **Qtr 4** | ** ** | **Rolling 4 Qtr.** | ** ** |
| Earnings from  continuing operations before income taxes |       | $              | 11,291     |   | 15,795 |   | 10,508 |   | 12,538 |   |   | 50,132 |   |   |
| Interest expense                                         |       | 6,647          |       | 6,651 |   | 9,235 |   | 6,957 |   |   | 29,490 |   |   |
| Depreciation and  amortization                           |       | 9,307          |       | 9,165 |   | 12,298 |   | 9,218 |   |   | 39,988 |   |   |
| LIFO                                                     |       | 923            |       | 300 |   | — |   | (3,457 | ) |   | (2,234 | ) |   |
| Closed store  lease costs                                |       | —         |       | — |   | 353 |   | 1,101 |   |   | 1,454 |   |   |
| Asset impairments                                        |       | —         |       | — |   | 1,518 |   | 5,067 |   |   | 6,585 |   |   |
| Gains on sale of  real estate                            |       | (7             | )          | (5 | ) | (1,386 | ) | (2,428 | ) |   | (3,826 | ) |   |
| Subsequent cash  payments on non-cash charges            |       | (400           | )          | (593 | ) | (684 | ) | (421 | ) |   | (2,098 | ) |   |
| Special charge                                           |       | —         |       | — |   | (765 | ) | — |   |   | (765 | ) |   |
| Total Consolidated  EBITDA                               |       | $              | 27,761     |   | 31,313 |   | 31,077 |   | 28,575 |   |   | 118,726 |   |   |

 

23

----

The credit agreement alsocontains covenants that limit the Company’s ability to incur debt (includingguaranteeing the debt of others) and liens, acquire or dispose of assets, paydividends on and repurchase its stock, make capital expenditures and make loansor advances to others, including customers.

*Redemption ofSenior Subordinated Notes*

On December 13, 2004,we redeemed the $165 million in 8.5% Senior Subordinated Notes (the “Notes”)Due 2008 at a redemption price of 102.833%, plus accrued and unpaid interest onthe notes as of the redemption date. We drew under the Term Loan B to fund theredemption of these notes. Charges recorded during the fourth fiscal quarterfor redemption of the Notes and the refinancing of our credit facility includeda call premium of $4.7 million and $2.5 million for unamortized finance costsand original issue discount charge.

*Defaults During2003*

In February 2003,we were notified by the Trustee for our 8.5% Senior Subordinated Notes that a defaulthad occurred under the related Indenture as a result of our failure to file ourForm 10-Q for the third quarter ended October 5, 2002 with the SEC. Ifthe default was not remedied within the 30 day cure period, an event of defaultwould have occurred under the Indenture and our bank credit facility. Laterthat month we obtained a waiver of the default under the Indenture, for which we paid a fee to the note holdersequal to 1.5% of the outstanding principal amount of the notes. In March 2003 we obtained an extension oftime from our bank lenders to submit to them our audited fiscal 2002 financialstatements, for which we paid afee to the bank lenders equal to 0.5% of the sum of our revolving loancommitments and aggregate outstanding term loans as of the effective date ofthe extension. The waiver under theIndenture and the extension from the banks were conditioned upon our receivingaudited financial statements for fiscal 2002 and making specified filings withthe SEC by specified deadlines. We subsequently complied with the extendeddeadlines.

*Debt ObligationsGenerally*

Fordebt obligations, the following table presents principal cash flows, relatedweighted average interest rates by expected maturity dates and fair value as ofJanuary 1, 2005:
| ** ** | ** ** | **Fixed Rate**             | ** ** | **Variable Rate** | ** ** |
|------------|------------|---------------------------------|------------|------------------------|------------|
| ** ** | ** ** | ** Fair Value ** | ** ** | **Amount**             | ** ** | **Rate** | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** ** | ** ** | **(In thousands)**         | ** ** |
| 2005       |       |                            |       |                   |       | $ | 2,021 |   | 6.7 | % |   |   | $ | 796 |   | 4.7 | % |
| 2006       |       |                            |       |                   |       | 2,138 |   | 6.7 | % |   |   | 723 |   | 4.7 | % |
| 2007       |       |                            |       |                   |       | 779 |   | 6.7 | % |   |   | 764 |   | 4.7 | % |
| 2008       |       |                            |       |                   |       | 708 |   | 6.8 | % |   |   | 827 |   | 4.7 | % |
| 2009       |       |                            |       |                   |       | 767 |   | 6.8 | % |   |   | 12,766 |   | 4.7 | % |
| Thereafter |       |                            |       |                   |       | 4,770 |   | 7.2 | % |   |   | 175,000 |   | 4.7 | % |
|       |       |                            | $          | 11,059                 |       |   | $ | 11,183 |   |   |   | $ | 191,662 |   | $ | 190,876 |   |   |   |
|            |            |                                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*DerivativeInstruments*

We have market risk exposure to changing interestrates primarily as a result of our borrowing activities and commodity pricerisk associated with anticipated purchases of diesel fuel. Our objective inmanaging our exposure to changes in interest rates and commodity prices is toreduce fluctuations in earnings and cash flows. To achieve these objectives, weuse derivative instruments, primarily interest rate and commodity swapagreements, to manage risk exposures when appropriate, based on marketconditions. We do not enter into derivative agreements for trading or otherspeculative purposes, nor are we a party to any leveraged derivativeinstrument.

24

----

The interest rate swap and commodity swap agreementsare designated as cash flow hedges and are reflected at fair value in ourconsolidated balance sheet and the related gains or losses on these contractsare deferred in stockholders’ equity as a component of other comprehensiveincome. Deferred gains and losses are amortized as an adjustment to expenseover the same period in which the related items being hedged are recognized inincome. However, to the extent that any of these contracts are not consideredto be perfectly effective in offsetting the change in the value of the itemsbeing hedged, any changes in fair value relating to the ineffective portion ofthese contracts are immediately recognized in income.

Interestrate swap agreements are entered into for periods consistent with relatedunderlying exposures and do not constitute positions independent of thoseexposures. At January 1, 2005, we had seven outstanding interest rate swapagreements which commenced and expire as follows:
| Notional           | ** ** | ** ** | ** ** | **Effective Date** | ** ** | **Termination Date** | ** ** | **Fixed Rate** | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| $50,000            |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 2.985      | % |   |
|   40,000 |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 3.010      | % |   |
|   50,000 |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 2.992      | % |   |
|   45,000 |       | 12/13/2005 |       |                    | 12/13/2006 |                      |       |                | 3.809      | % |   |
|   20,000 |       | 12/13/2005 |       |                    | 12/13/2006 |                      |       |                | 3.825      | % |   |
|   20,000 |       | 12/13/2006 |       |                    | 12/13/2007 |                      |       |                | 4.095      | % |   |
|   30,000 |       | 12/13/2006 |       |                    | 12/13/2007 |                      |       |                | 4.100      | % |   |

 

At January 3, 2004, we had three outstandinginterest rate swap agreements which commenced on July 26, 2002, December 6,2002 and June 6, 2003, respectively. Those three agreements expired on September 25,2004, October 6, 2004 and October 6, 2004 with notional amounts of$50 million, $35 million and $35 million, respectively.

The interest rate swap agreements described abovetotaled $255 million in notional amounts as of January 1, 2005 and $120million in notional amounts as of January 3, 2004, which amounts are usedto calculate the contractual cash flows to be exchanged under the contract. Interestrate swap agreements outstanding at year end and their fair value at that dateare summarized as follows (in thousands):

InterestRate Swaps:
| ** **                                | ** ** | **1/1/05** | ** ** | **1/3/04** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Pay fixed /  receive variable             |       | $          | 255,000    |       | $          | 120,000 |   |
| Fair value                                |       | (82        | )          | (1,955     | )          |
| Average receive  rate for effective swaps |       | 2.4        | %          | 1.2        | %          |
| Average pay rate for  effective swaps     |       | 3.0        | %          | 3.3        | %          |
|                                           |            |            |            |            |            |  |  |

 

We arealso using commodity swap agreements to reduce price risk associated withanticipated purchases of diesel fuel. The outstanding commodity swap agreementshedge approximately 50% of our expected fuel usage for the periods set forth inthe swap agreements. At January 1, 2005, we had two outstanding commodityswap agreements which commenced and expire as follows:
| Notional              | ** ** | ** ** | ** ** | **Effective Date** | ** ** | **Termination Date** | ** ** | **Fixed Rate** | ** ** |
|-----------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| 100,000 gallons/month |       |       | 12/7/2004  |                    |       |                      | 11/30/2006 |                |       |   | $ | 1.18 |   |   |
| 100,000 gallons/month |       |       | 1/1/2005   |                    |       |                      | 12/31/2006 |                |       |   | $ | 1.16 |   |   |

 

The fair market value of the commodity swaps totaled$0.071 million as of 1/1/2005.

25

----

*Off-Balance SheetArrangements*

As of the date of thisreport, we do not participate in transactions that generate relationships withunconsolidated entities or financial partnerships, often referred to asstructured finance or special purpose entities, which are generally establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes.

**Critical Accounting Policies**

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses, and related disclosure of contingent assetsand liabilities. Management bases its estimates on historical experience andvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that may not be readily apparentfrom other sources. Senior management has discussed the development, selectionand disclosure of these estimates with the Audit Committee of our Board ofDirectors and with our independent auditors.

An accounting policy isconsidered critical if it requires an accounting estimate to be made based onassumptions about matters that are highly uncertain at the time the estimate ismade, and if different estimates that reasonably could have been used, orchanges in the accounting estimates that are reasonably likely to occur periodically,could materially impact our financial statements. We consider the followingaccounting policies to be critical and could result in materially differentamounts being reported under different conditions or using differentassumptions:

***Vendor Allowances and Credits***

We participate with our vendors in a broad menu ofpromotions to increase sales of products. These promotions fall into two maincategories: off-invoice allowances and performance-based allowances and areoften subject to negotiation with our vendors. In the case of off-invoiceallowances, discounts are typically offered by vendors with respect to certainmerchandise purchased by us during a specified period of time. We useoff-invoice allowances to support a variety of marketing programs such asreduced price offerings for specific time periods, food shows, palletpromotions and private label promotions. The discounts are either reflecteddirectly on the vendor invoice, as a reduction from the normal wholesale pricesfor merchandise to which the allowance applies, or we are allowed to deduct theallowance as an offset against the vendor’s invoice when it is paid.

In the case of performance-based allowances, theallowance or rebate is based on our completion of some specific activity, suchas purchasing or selling product during a certain time period. This basicperformance requirement may be accompanied by an additional performancerequirement such as providing advertising or special in-store promotion,tracking specific shipments of goods to retailers, or to customers in the caseof our own retail stores, during a specified period (count-recount promotions),slotting (adding a new item to the system) and merchandising a new item, orachieving certain minimum purchase quantities. The billing for theseperformance-based allowances is normally in the form of a “bill-back” in whichcase we are invoiced at the regular price with the understanding that we maybill back the vendor for the requisite allowance when the performance issatisfied. We also assess an administrative fee, reflected on the invoices sentto vendors, to recoup our reasonable costs of performing the tasks associatedwith administering count-recount promotions.

We collectively plan promotions with our vendors andarrive 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 fundsbudgeted to be spent with us during the period. In most situations, the vendorallowances are based on units we purchased from the vendor. In othersituations, the allowances are based 

26

----

on our past or anticipatedpurchases and/or the anticipated performance of the planned promotions. Forecastingpromotional expenditures is a critical part of our twice yearly planningsessions with our vendors. As individual promotions are completed and theassociated billing is processed, the vendors track our promotional programexecution and spend rate, and discuss the tracking, performance and spend ratewith us on a regular basis throughout the year, variously on a weekly, monthly,quarterly or annual basis. These communications include future promotions,product cost, targeted retails and price points, anticipated volume, promotionexpenditures, vendor maintenance, billing issues and procedures, newitems/discontinued items, and trade spend levels relative to budget per eventand per year, as well as the resolution of any issues that arise between thevendor and us. In the future, the nature and menu of promotional programs and theallocation of dollars among them may change as a result of ongoing negotiationsand commercial relationships between vendors and us.

EITF Issue No. 02-16, “Accounting by aCustomer (Including a Reseller) for Certain Consideration Received from aVendor,” addresses how a reseller of a vendor’s products should account forcash consideration received from a vendor and how to measure that considerationin its income statement. We early adopted the provisions of EITF No. 02-16at the beginning of fiscal 2002, and recognized a charge of $7.0 million, netof income taxes of $4.4 million, that represents the cumulative effect of thedeferral of consideration received from vendors as of the beginning of fiscal2002. Excluding the cumulative impact, the adoption of EITF No. 02-16on the year ended December 28, 2002 was a decrease in cost of sales of$1.4 million.

As is common in ourindustry, we use a third party service to undertake accounts payable audits onan ongoing basis. These audits examine vendor allowances offered to us during agiven year as well as cash discounts, freight allowances and duplicate paymentsand establish a basis for us to recover overpayments made to vendors. We reducefuture payments to vendors based on the results of these audits, at which timewe also establish reserves for commissions payable to the third party serviceprovider as well as for amounts that may not be collected. Although ourestimates of reserves do not anticipate changes in our historical paybackrates, such changes could have a material impact on our currently recordedreserves.

***Customer Exposure and Credit Risk***

*Allowancefor Doubtful Accounts**—Methodology.  *Weevaluate the collectability of our accounts and notes receivable based on acombination of factors. In most circumstances when we become aware of factorsthat may indicate a deterioration in a specific customer’s ability to meet itsfinancial obligations to us (e.g., reductions of product purchases,deteriorating store conditions, changes in payment patterns), we record aspecific reserve for bad debts against amounts due to reduce the net recognizedreceivable to the amount we reasonably believe will be collected. Indetermining the adequacy of the reserves, we analyze factors such as the valueof any collateral, customer financial statements, historical collectionexperience, aging of receivables and other economic and industry factors. It ispossible that the accuracy of the estimation process could be materiallyaffected by different judgments as to the collectability based on informationconsidered and further deterioration of accounts. If circumstances change(i.e., further evidence of material adverse creditworthiness, additionalaccounts become credit risks, store closures), our estimates of therecoverability of amounts due us could be reduced by a material amount,including to zero. Refer to Part II, Item 8 of this report under Note (7)—“Accountsand Notes Receivable” of Notes to Consolidated Financial Statements for adiscussion of these allowances.

*Lease Commitments.  *We havehistorically leased store sites for sublease to qualified independent retailersat rates that are at least as high as the rent paid by us. Under terms of theoriginal lease agreements, we remain primarily liable for any commitments anindependent retailer may no longer be financially able to satisfy. We alsolease store sites for our retail segment. Should a retailer be unable toperform 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 

27

----

estimated losses requiresthat significant estimates and judgments be made by management. Our reservesfor such properties can be materially affected by factors such as the extent ofinterested sublessees and their creditworthiness, our ability to negotiateearly termination agreements with lessors, and general economic conditions andthe demand for commercial property. Should the number of defaults by sublesseesor corporate store closures materially increase, the remaining leasecommitments we must record could have a material adverse effect on operatingresults and cash flows. Refer to Part II, Item 8 of this report under Note(14)—“Leases” of Notes to Consolidated Financial Statements for a discussion ofLease Commitments.

*Guarantees of Debt and LeaseObligations of Others.  *We have guaranteed the debt andlease obligations of certain of our food distribution customers. In the eventthese retailers are unable to meet their debt service payments or otherwiseexperience an event of default, we would be unconditionally liable for theoutstanding balance of their debt and lease obligations ($10.6 million as of January 1,2005), which would be due in accordance with the underlying agreements. All ofthe guarantees were issued prior to December 31, 2002 and therefore werenot subject to the recognition andmeasurement provisions of FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requiremetns for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others, an interpretation of FASBStatements No. 5, 57 and 107 and a recission of FASB Interpretation No. 34”(FIN 45). We have also assigned various leases to certain food distributioncustomers. If the assignees were to become unable to continue making paymentsunder the assigned leases, we estimate our maximum potential obligation withrespect to the assigned leases to be approximately $20.0 million as of January 1,2005. In circumstances when we become aware of factors that indicatedeterioration in a customer’s ability to meet its financial obligationsguaranteed or assigned by us, we record a specific reserve in the amount wereasonably believe we will be obligated to pay on the customer’s behalf, net ofany anticipated recoveries from the customer. In determining the adequacy ofthese reserves, we analyze factors such as those described above in “Allowancefor Doubtful Accounts—Methodology” and “Lease Commitments”. It is possible thatthe accuracy of the estimation process could be materially affected bydifferent judgments as to the obligations based on information considered andfurther deterioration of accounts. Triggering these guarantees or obligationsunder assigned leases would not, however, result in cross default of our debt,but could restrict resources available for general business initiatives.

***Impairment of Long-lived Assets***

Property, plant and equipment are tested forimpairment in accordance with SFAS 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets,”* whenever events orchanges in circumstances indicate that the carrying amounts of such long-livedassets may not be recoverable from future net pretax cash flows. Impairmenttesting requires significant management judgment including estimating futuresales and costs, alternative uses for the assets and estimated proceeds fromdisposal of the assets. Estimates of future results are often influenced byassessments of changes in competition, merchandising strategies, humanresources and general market conditions, which may result in not recognizing animpairment loss. Impairment testing is conducted at the lowest level where cashflows can be measured and are independent of cash flows of other assets. Anasset impairment would be indicated if the sum of the expected future netpretax cash flows from the use of the asset (undiscounted and without interestcharges) is less than the carrying amount of the asset. An impairment losswould be measured based on the difference between the fair value of the assetand its carrying amount. We generally determine fair value by discountingexpected future cash flows at the rate the Company utilizes to evaluatepotential investments.

The estimates andassumptions used in the impairment analysis are consistent with the businessplans and estimates we use to manage our business operations and to makeacquisition and divestiture decisions. The use of different assumptions wouldincrease or decrease the impairment charge. Actual outcomes may differ from theestimates.

28

----

***Income Tax Assets and Liabilities***

The company provides forincome taxes in accordance with Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the recognitionof deferred tax liabilities and assets for the expected future tax consequencesof temporary differences between the financial statement carrying amounts andthe tax bases of assets and liabilities. The company maintains valuationallowances where it is more likely than not all or a portion of the deferredtax asset will not be realized. Changes in valuation allowances from period toperiod are included in the Company’s tax provision in the period of change. Indetermining whether a valuation allowance is warranted, the Company takes intoaccount such factors as prior earnings history, expected future earnings,carryback and carryforward periods, and tax strategies that could potentiallyenhance the likelihood of realization of a deferred tax asset. The Company isalso subject to examination of its income tax returns for multiple years by theInternal Revenue Service and other tax authorities. The Company periodicallyassesses the likelihood of adverse outcomes resulting from these examinations todetermine the impact on its deferred taxes and income tax liabilities and theadequacy of its provision for income taxes.

***Reserves for Self Insurance***

We are primarilyself-insured for workers’ compensation, general and automobile liability andhealth insurance costs. It is our policy to record our self-insuranceliabilities based on claims filed and an estimate of claims incurred but notyet reported. Worker’s compensation, general and automobile liabilities areactuarially determined on a discounted basis. We have purchased stop-losscoverage to limit our exposure to any significant exposure on a per claim basis.Any projection of losses concerning workers’ compensation, general andautomobile and health insurance liability is subject to a considerable degreeof variability. Among the causes of this variability are unpredictable externalfactors affecting future inflation rates, litigation trends, legalinterpretations, benefit level changes and claim settlement patterns. Althoughour estimates of liabilities incurred do not anticipate significant changes inhistorical trends for these variables, such changes could have a materialimpact on future claim costs and currently recorded liabilities.

**New Accounting Standards**

In December 2004, the FASB issued Statement No. 123R(Revised 2004), *“Share-Based Payment”*. Therevisions to SFAS No 123 require compensation costs related to share-basedpayment transactions to be recognized in the financial statements. With limitedexceptions, the amount of compensation cost will be measured based on thegrant-date fair value of the equity or liability instruments issued. Inaddition, liability awards will be remeasured each reporting period. Compensationcost will be recognized over the period that an employee provides service inexchange for the award. Statement 123R replaces FASB Statement No. 123, *“Accounting for Stock Based Compensation”*, and supercedesAPB Opinion No. 25, *“Accounting for StockIssued to Employees*”. For public entities, the provisions of thestatement are effective as of the beginning of the first interim or annualreporting period that begins after June 15, 2005, however early adoptionis allowed. We expect to adopt the provisions of the new statement in the thirdfiscal quarter of 2005. We donot currently expectthat the impact on net income on a full year basis will be significantlydifferent from the historical pro forma impacts as previously disclosed in the “StockOption Plans” policy description in Part II, Item 8 in this report underNote (1)—“Summary of Signigicant Accounting Policies”.

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)became law in the United States. The Act introduces a prescription drug benefitunder Medicare as well as a federal subsidy to sponsors of retiree health carebenefit plans that provide a benefit that is at least “actuarially equivalent”to Medicare. The benefit and subsidy introduced by the Act begin in 2006. In May 2004,the FASB issued FASB Staff Position (FSP) No. 106-2, *“Accounting and Disclosure*

29

----

*RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003.”* FSP 106-2 requires an employer to initiallyaccount for any subsidy received under the Act as an actuarial experience gainto the accumulated postretirement benefit obligation (APBO), which would beamortized over future service periods. Future subsidies would reduce servicecost each year. FSP 106-2 was effective for us in the third fiscalquarter ended October 9, 2004. We believe that our postretirement benefitplan is not actuarially equivalent to Medicare Part D under the Act andconsequently will not receive significant subsidies under the Act.

**Cautionary Factors**

Nash Finch and its representatives may, from time totime, make written or oral forward-looking statements relating to developments,results, conditions or other events that the Company expects or anticipateswill occur in the future. These forward-looking statements may involve a widevariety of topics, such as the Company’s future financial performance orcondition, its strategies, market or economic conditions or the competitiveenvironment. Any forward-looking statements made are based on management’s thencurrent expectations and assumptions and, as a result, are subject to variousrisks and uncertainties that could cause actual results or conditions to differmaterially from those predicted or projected.

The following cautionaryfactors are considered to be the more significant factors that could causeactual results to differ materially from those predicted or projected by anyforward-looking statements, and are provided here as a readily availablereference. These factors are in addition to any other cautionary statements,written or oral, which may be made or referred to in connection with anyforward-looking statement, or contained elsewhere in this report.

***Competitive Conditions***

The wholesale fooddistribution and food retailing businesses are intensely competitive,characterized by high inventory turnover, narrow profit margins and increasingconsolidation. Our food retailing business, focused in the Upper Midwest, hashistorically competed with traditional grocery stores and is increasinglycompeting with alternative store formats such as supercenters, warehouse clubs,dollar stores and extreme value food stores. Our distribution business competesnot only with local, regional and national food distributors, but also withvertically-integrated national and regional chains that employ a variety offormats, including supercenters, supermarkets and warehouse clubs. Some of ourcompetitors are substantially larger and may have greater financial resourcesand geographic scope, lower merchandise acquisition costs and lower operatingexpenses than we do, intensifying price competition at the wholesale and retaillevels. Industry consolidation and the expansion of alternative store formats,which have gained and continue to gain market share at the expense oftraditional grocery stores, tend to produce even stronger competition for ourfood retail business and for the independent retailer customers of ourdistribution business. To the extent our independent customers are acquired byour competitors or are not successful in competing with other retail chains andnon-traditional competitors, sales by our distribution business will also beaffected. If we fail to effectively implement strategies to respond to thesecompetitive pressures, our operating results could be adversely affected byprice reductions, decreased sales or margins, or loss of market share.

***Need to Improve Retail Operations***

Primarily due to thecompetitive conditions discussed above, same store sales in the Company’sretail business decreased 7.0% in 2004 from 2003, after having decreased 10.6%in 2003 from the prior year. We brought new leadership into the retail businessin late 2003 with a view toward improving our response to and performance underthese difficult competitive conditions. It is expected that this effort willrequire a variety of initiatives of varying scope and duration. In connectionwith such an undertaking there are 

30

----

numerousrisks and uncertainties, including our ability to successfully identify thoseinitiatives that will be the most effective in improving the competitiveposition of our retail business, our ability to efficiently and timelyimplement these initiatives, and the response of competitors to theseinitiatives. If we are unable to improve the overall competitive position ofour retail stores, the revenue and operating performance of that segment maycontinue to decline, and we may be compelled to close or dispose of additionalstores and may incur restructuring or other charges associated with suchclosure and disposition activities.

***Sensitivity toEconomic Conditions***

The food distribution andretailing industry is sensitive to national and regional economic conditions,particularly those that influence consumer confidence, spending and buyinghabits. Economic downturns or uncertainty may not only adversely affect overalldemand and intensify price competition, but also cause consumers to “trade down”by purchasing lower priced, and often lower margin, items and to purchase lessin traditional supermarket channels. These consumer responses, coupled with theimpact of general economic factors such as prevailing interest rates, foodprice inflation or deflation, employment trends in our markets, and labor andenergy costs, can also have a significant impact on the Company’s operatingresults. Increasing volatility in financial markets may cause these factors tochange with a greater degree of frequency and magnitude.

***Risks and CostsAssociated with Expansion and Acquisition***

Efforts to grow ourdistribution businesses may include acquisitions. Acquisitions entail variousrisks such as identifying suitable candidates at acceptable rates of return,timely and effectively integrating the operations, systems and personnel of theacquired business, retaining the customer baseof the acquired operations, expenses of any undisclosed orpotential environmental or legal liabilities and diversion of management’s timeand attention from other business concerns. Successful integration of any newoperations will depend on our ability to manage those operations, realizeopportunities for revenue growth presented by strengthened product offeringsand expanded geographic market coverage,maintenance of the customer base and, to some degree,eliminate redundant and excess costs. A failure to effectively manage theserisks could increase the costs or reduce the benefits to be derived fromacquisitions and expansion, and therefore negatively impact our business andoperations.

***Customer Retentionand Obtaining New Customers in the Distribution Business***

Increasing the growth andprofitability of our distribution business is particularly dependent upon ourability to retain existing customers and capture additional distributioncustomers through our existing network of distribution centers, enabling us tomore effectively utilize the fixed assets in that business. Our ability toachieve these goals is dependent, in part, upon our ability to continue toprovide industry-leading customer service, offer competitive products at lowprices, maintain high levels of productivity and efficiency, particularly inthe process of integrating new customers into our distribution system, andoffer marketing, merchandising and ancillary services that provide value to ourindependent and military commissary customers. If we are unable to executethese tasks effectively, we may not be able to attract significant numbers ofnew customers and attrition among our existing customer base could increase,either or both of which could have an adverse impact on our revenue andprofitability.

***Customer CreditRisk***

In the ordinary course of business, we extend credit,including loans, to our food distribution customers, and provide financialassistance to some customers by guaranteeing their loan or lease obligations. Wealso lease store sites for sublease to independent retailers. Generally, ourloans and other financial accommodations are extended to small businesses thatare unrated and may have limited access to conventional financing. While weseek to obtain security interests and other credit support in connection withthe financial accommodations we extend, such collateral may not be sufficientto cover our exposure. 

31

----

In addition, as of January 1, 2005, one retailer comprised 41.2% of ourbalance of outstanding loans. Greater than expected lossesfrom existing or future credit extensions, loans, guarantee commitments orsublease arrangements, particularly in times of economic difficulty oruncertainty, could negatively impact our financial condition and operatingresults.

***Impact of Debt andDebt Covenants on Operating Flexibility***

Covenants in the documentsgoverning our outstanding or future debt, or our future debt levels, couldlimit our operating and financial flexibility. Our ability to respond to marketconditions and opportunities as well as capital needs could be constrained bythe degree to which we are leveraged, by changes in the availability or cost ofcapital, and by contractual limitations on the degree to which we may, withoutthe consent of our lenders, take actions such as engaging in mergers oracquisitions, incurring additional debt, making capital expenditures and makinginvestments, loans or advances. If needs or opportunities were identified thatwould require financial resources beyond existing resources, obtaining thoseresources could increase the Company’s borrowing costs, further reducefinancial flexibility, require alterations in strategies and affect futureoperating results.

***Possible Changes inMilitary Commissary System***

Because our military fooddistribution segment sells and distributes grocery products to militarycommissaries in the U.S. and overseas, any material changes in the commissarysystem, in military staffing levels or in locations of bases may have acorresponding impact on the sales and operating performance of this segment. Thesechanges could include privatization of some or all of the military commissarysystem, relocation or consolidation in the number of commissaries, baseclosings, troop redeployments or consolidations in the geographic areascontaining commissaries served by us, or a reduction in the number of personshaving access to the commissaries.

***Other Factors***

Other factors that couldcause actual results to differ materially from those predicted include changesin federal, state and local laws and regulations; issues affecting the fooddistribution and retail industry generally, such as food safety concerns, anincrease in consumers eating away from home and the manner in which vendorstarget their promotional dollars; the ability to attract and retain qualifiedemployees; unanticipated problems with product procurement; changes in vendorpromotions or allowances; adverse determinations or developments with respectto litigation, other legal proceedings or the SEC investigation of Nash Finch;the success or failure of new business ventures or initiatives; naturaldisasters and acts of terrorism.

The foregoing discussionof important factors is not exhaustive, and we do not undertake to revise anyforward-looking statement to reflect events or circumstances that occur afterthe date the statement is made.

**ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

Ourexposure in the financial markets consists of changes in interest ratesrelative to our investment in notes receivable, the balance of our debt obligationsoutstanding, and derivatives employed from time to time to manage our exposureto changes in interest rates and commodity prices.

We carry notes receivable because, in the normal courseof business, we make long-term loans to certain retail customers.Substantially all notes receivable are based on floating interest rates whichadjust to changes in market rates. As a result, the carrying value of notesreceivable approximates market value. (Refer to Part II, Item 8 of thisreport under Note 6—“Accounts and Notes Receivable”in Notes to Consolidated Financial Statements for more information). See disclosures set forthunder Item 7 under the caption “Liquidity and Capital Resources.”

32

----

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report ofIndependent Registered Public Accounting Firm

The Boardof Directors and StockholdersNash Finch Company:

We haveaudited management’s assessment, included in the Management Report on InternalControl Over Financial Reporting located in item 9A, that Nash Finch Companymaintained effective internal control over financial reporting as of January 1,2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Nash FinchCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of thecompany’s internal control over financial reporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In ouropinion, management’s assessment that Nash Finch Company maintained effectiveinternal control over financial reporting as of January 1, 2005, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, Nash Finch Company maintained, in all material respects, effectiveinternal control over financial reporting as of January 1, 2005, based on****theCOSO criteria**.**

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of Nash FinchCompany and subsidiaries as of January 1, 2005 and January 3, 2004,and the related consolidated statements of income, stockholders’ equity, andcash flows for each of the three years in the period ended January 1, 2005and our report dated March 2, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Minneapolis, MinnesotaMarch 2, 2005

 

33

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholdersNash Finch Company:

We have audited the accompanying consolidated balancesheets of Nash Finch Company and subsidiaries as of January 1, 2005 and January 3,2004, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the three years in the period ended January 1,2005. Our audits also included the financial statement schedule listed in theIndex at Item 15(2). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of Nash Finch Company and subsidiaries at January 1, 2005 and January 3,2004, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended January 1, 2005, in conformitywith U.S. generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Nash FinchCompany’s internal control over financial reporting as of January 1, 2005,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated March 2, 2005 expressed an unqualified opinion thereon.
|                        | /s/ Ernst & Young LLP |
|------------------------|--------------------------------|
| March 2, 2005     |                           |
| Minneapolis, Minnesota |                           |

 

34

----

**NASH FINCH COMPANY AND SUBSIDIARIESConsolidated Statements ofIncome(In thousands, except per share amounts)**
| **Fiscal years ended January 1, 2005,**                           | ** ** | **2004**   | ** ** | **2003**            | ** ** | **2002**            | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|---------------------|------------|
| **January 3, 2004 and December 28, 2002**                    | ** ** | ** ** | ** ** | **(52 weeks)** | ** ** | **(53 weeks)** | ** ** | **(52 weeks)** | ** ** |
| Sales                                                                                      |       | $          | 3,897,074  |                | 3,971,502  |                | 3,874,672  |   |
| Cost and  expenses:                                                                        |       |       |       |                |       |                |       |
| Cost of sales                                                                              |       | 3,474,329  |       | 3,516,460           |       | 3,408,409           |       |
| Selling, general and administrative                                                        |       | 295,524    |       | 326,828             |       | 347,418             |       |
| Special charges                                                                            |       | 34,779     |       | —              |       | (765                | )          |
| Extinguishment of debt                                                                     |       | 7,204      |       | —              |       | —              |       |
| Depreciation and amortization                                                              |       | 40,241     |       | 42,412              |       | 39,988              |       |
| Interest expense                                                                           |       | 25,798     |       | 33,869              |       | 29,490              |       |
| Total cost and expenses                                                                    |       | 3,877,875  |       | 3,919,569           |       | 3,824,540           |       |
| Earnings from continuing operations before income  taxes                                   |       | 19,199     |       | 51,933              |       | 50,132              |       |
| Income tax expense                                                                         |       | 4,322      |       | 17,254              |       | 19,552              |       |
| Earnings from continuing operations                                                        |       | 14,877     |       | 34,679              |       | 30,580              |       |
| Discontinued  operations:                                                                  |       |       |       |                |       |                |       |
| Gain on disposition                                                                        |       | 91         |       | 678                 |       | —              |       |
| Tax expense                                                                                |       | 36         |       | 265                 |       | —              |       |
| Net earnings from discontinued operations                                                  |       | 55         |       | 413                 |       | —              |       |
| Earnings before cumulative effect of change in  accounting principle                       |       | 14,932     |       | 35,092              |       | 30,580              |       |
| Cumulative effect of change in accounting principle,  net of income tax benefits of $4,450 |       | —     |       | —              |       | (6,960              | )          |
| Net earnings                                                                               |       | $          | 14,932     |                | 35,092     |                | 23,620     |   |
| Basic earnings  per share:                                                                 |       |       |       |                |       |                |       |
| Continuing operations                                                                      |       | $          | 1.20       |                | 2.87       |                | 2.59       |   |
| Discontinued operations                                                                    |       | —     |       | 0.03                |       | —              |       |
| Cumulative effect of change in accounting principle,  net of income tax benefit            |       | —     |       | —              |       | (0.59               | )          |
| Net earnings per share                                                                     |       | $          | 1.20       |                | 2.90       |                | 2.00       |   |
| Diluted earnings  per share:                                                               |       |       |       |                |       |                |       |
| Continuing operations                                                                      |       | $          | 1.18       |                | 2.85       |                | 2.52       |   |
| Discontinued operations                                                                    |       | —     |       | 0.03                |       | —              |       |
| Cumulative effect of change in accounting principle,  net of income tax benefit            |       | —     |       | —              |       | (0.57               | )          |
| Net earnings per  share                                                                    |       | $          | 1.18       |                | 2.88       |                | 1.95       |   |
|                                                                                            |            |            |            |                     |            |                     |            |  |  |  |

 

See accompanying notes to consolidated financial statements.

35

----

**NASH FINCH COMPANY AND SUBSIDIARIESConsolidated Balance Sheets(In thousands, except per share amounts)**
| ** **                                                                                                    | ** ** | ** January 1,   2005** | ** ** | **January 3,  2004** | ** **   |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------|--------------|
| ***Assets***                                                                                                  | ** ** |                                  | ** ** | *** ***              |         |   | ** ** |   |   |
| Current assets:                                                                                               |       |                                  |       | *** ***              |         |   |   |   |   |
| Cash                                                                                                          |       |                                  | $          | 5,029                     | *** *** |   |   | 12,757 |   |   |
| Accounts and notes  receivable, net                                                                           |       |                                  | 157,397    | *** ***              |         |   | 145,902 |   |   |
| Inventories                                                                                                   |       |                                  | 213,343    | *** ***              |         |   | 236,289 |   |   |
| Prepaid expenses                                                                                              |       |                                  | 15,524     | *** ***              |         |   | 15,136 |   |   |
| Deferred tax assets                                                                                           |       |                                  | 9,294      | *** ***              |         |   | 5,726 |   |   |
| Total current assets                                                                                          |       |                                  | 400,587    | *** ***              |         |   | 415,810 |   |   |
| Investments in  marketable securities                                                                         |       |                                  | 1,661      | *** ***              |         |   | 20 |   |   |
| Notes receivable,  net                                                                                        |       |                                  | 26,554     | *** ***              |         |   | 31,178 |   |   |
| Property, plant and equipment:                                                                                |       |                                  |       | *** ***              |         |   |   |   |   |
| Land                                                                                                          |       |                                  | 21,289     | *** ***              |         |   | 24,121 |   |   |
| Buildings and  improvements                                                                                   |       |                                  | 155,906    | *** ***              |         |   | 163,693 |   |   |
| Furniture, fixtures and  equipment                                                                            |       |                                  | 300,432    | *** ***              |         |   | 328,318 |   |   |
| Leasehold improvements                                                                                        |       |                                  | 71,907     | *** ***              |         |   | 86,746 |   |   |
| Construction in progress                                                                                      |       |                                  | 1,784      | *** ***              |         |   | 1,673 |   |   |
| Assets under capitalized  leases                                                                              |       |                                  | 40,171     | *** ***              |         |   | 41,661 |   |   |
|                                                                                                          |       |                                  | 591,489    | *** ***              |         |   | 646,212 |   |   |
| Less accumulated  depreciation and amortization                                                               |       |                                  | (377,820   | )                         |         |   | (383,861 | ) |   |
| Net property, plant and  equipment                                                                            |       |                                  | 213,669    | *** ***              |         |   | 262,351 |   |   |
| Goodwill                                                                                                      |       |                                  | 147,435    | *** ***              |         |   | 149,792 |   |   |
| Investment in  direct financing leases                                                                        |       |                                  | 10,876     | *** ***              |         |   | 13,426 |   |   |
| Deferred tax  asset, net                                                                                      |       |                                  | 2,560      | *** ***              |         |   | — |   |   |
| Other assets                                                                                                  |       |                                  | 12,286     | *** ***              |         |   | 13,775 |   |   |
| Total assets                                                                                                  |       |                                  | $          | 815,628                   | *** *** |   |   | 886,352 |   |   |
|                                                                                                          |       |                                  |       | *** ***              |         |   |   |   |   |
| ***Liabilities  and Stockholders’ Equity***                                                              |       |                                  |       | *** ***              |         |   |   |   |   |
| Current liabilities:                                                                                          |       |                                  |       | *** ***              |         |   |   |   |   |
| Outstanding checks                                                                                            |       |                                  | $          | 11,344                    | *** *** |   |   | 23,350 |   |   |
| Current maturities of  long-term debt and capitalized lease obligations                                       |       |                                  | 5,440      | *** ***              |         |   | 5,278 |   |   |
| Accounts payable                                                                                              |       |                                  | 180,359    | *** ***              |         |   | 166,742 |   |   |
| Accrued expenses                                                                                              |       |                                  | 72,200     | *** ***              |         |   | 78,768 |   |   |
| Income taxes                                                                                                  |       |                                  | 10,819     | *** ***              |         |   | 10,614 |   |   |
| Total current liabilities                                                                                     |       |                                  | 280,162    | *** ***              |         |   | 284,752 |   |   |
| Long-term debt                                                                                                |       |                                  | 199,243    | *** ***              |         |   | 281,944 |   |   |
| Capitalized lease  obligations                                                                                |       |                                  | 40,360     | *** ***              |         |   | 44,639 |   |   |
| Deferred tax  liability, net                                                                                  |       |                                  | —     | *** ***              |         |   | 6,358 |   |   |
| Other liabilities                                                                                             |       |                                  | 21,935     | *** ***              |         |   | 12,202 |   |   |
| Commitments and  contingencies                                                                                |       |                                  | —     | *** ***              |         |   | — |   |   |
| Stockholders’ equity:                                                                                    |       |                                  |       | *** ***              |         |   |   |   |   |
| Preferred stock—no par  value Authorized 500 shares; none issued                                         |       |                                  | —     | *** ***              |         |   | — |   |   |
| Common stock of $1.66 2/3  par value Authorized 50,000 shares, issued 12,657 and 12,152 shares,  respectively |       |                                  | 21,096     | *** ***              |         |   | 20,255 |   |   |
| Additional paid-in  capital                                                                                   |       |                                  | 34,848     | *** ***              |         |   | 27,995 |   |   |
| Restricted stock                                                                                              |       |                                  | (224       | )                         |         |   | (475 | ) |   |
| Common stock held in  trust                                                                                   |       |                                  | (1,652     | )                         |         |   | — |   |   |
| Deferred compensation  obligations                                                                            |       |                                  | 1,652      |                      |         |   | — |   |   |
| Accumulated other comprehensive  income                                                                       |       |                                  | (5,262     | )                         |         |   | (5,970 | ) |   |
| Retained earnings                                                                                             |       |                                  | 223,676    |                      |         |   | 215,417 |   |   |
|                                                                                                          |       |                                  | 274,134    |                      |         |   | 257,222 |   |   |
| Less cost of 11 and 35  shares of common stock in treasury, respectively                                      |       |                                  | (206       | )                         |         |   | (765 | ) |   |
| Total stockholders’  equity                                                                              |       |                                  | 273,928    | *** ***              |         |   | 256,457 |   |   |
| Total liabilities and stockholders’ equity                                                               |       |                                  | $          | 815,628                   | *** *** |   |   | 886,352 |   |   |

 

See accompanying notes to consolidated financial statements.

36

----

**NASH FINCH COMPANY AND SUBSIDIARIESConsolidated Statements ofCash Flows(In thousands)**
| ** **                                                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                              |       |     |       |     |       |     |       |
| Net earnings                                                                       |       | $        | 14,932     |     | 35,092     |     | 23,620     |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Special charges—non  cash portion                                             |       | 34,779   |       | —   |       | (765     | )          |
| Discountinued  operations                                                          |       | (91      | )          | (678     | )          | —   |       |
| Extinguishment of debt                                                             |       | 2,530    |       | —   |       | —   |       |
| Curtailment of  post retirement plan                                               |       | —   |       | (4,004   | )          | —   |       |
| Depreciation and  amortization                                                     |       | 40,241   |       | 42,412   |       | 39,988   |       |
| Amortization of  deferred financing costs                                          |       | 1,115    |       | 1,129    |       | 1,135    |       |
| Amortization of  rebatable loans                                                   |       | 2,392    |       | 1,521    |       | 1,798    |       |
| Provision for bad  debts                                                           |       | 4,220    |       | 8,707    |       | 8,997    |       |
| Deferred income  tax expense                                                       |       | (8,621   | )          | 15,480   |       | 8,320    |       |
| Gain on sale of  property, plant and equipment                                     |       | (6,001   | )          | (1,003   | )          | (3,815   | )          |
| Cumulative effect  of change in accounting principle                               |       | —   |       | —   |       | 6,960    |       |
| LIFO charge  (credit)                                                              |       | 3,525    |       | (1,120   | )          | (2,234   | )          |
| Asset impairments                                                                  |       | 853      |       | 2,706    |       | 6,585    |       |
| Other                                                                              |       | 5,228    |       | (832     | )          | 4,781    |       |
| Changes in operating  assets and liabilities, net of effects of acquisitions       |       |     |       |     |       |     |       |
| Accounts and notes  receivable                                                     |       | (11,270  | )          | 18,484   |       | (859     | )          |
| Inventories                                                                        |       | 19,421   |       | 13,145   |       | 24,448   |       |
| Prepaid expenses                                                                   |       | (388     | )          | (2,564   | )          | 2,675    |       |
| Accounts payable                                                                   |       | 13,617   |       | (3,817   | )          | (48,718  | )          |
| Accrued expenses                                                                   |       | (17,747  | )          | (9,411   | )          | (8,265   | )          |
| Income taxes  payable                                                              |       | (3,035   | )          | 541      |       | (1,309   | )          |
| Other assets and  liabilities                                                      |       | 6,819    |       | (1,286   | )          | (2,777   | )          |
| Net cash provided  by operating activities                                         |       | $        | 101,894    |     | 114,502    |     | 60,565     |   |
| Investing activities:                                                              |       |     |       |     |       |     |       |
| Disposal of  property, plant and equipment                                         |       | 17,136   |       | 9,002    |       | 14,435   |       |
| Additions to  property, plant and equipment                                        |       | (22,327  | )          | (40,728  | )          | (52,605  | )          |
| Business acquired,  net of cash                                                    |       | —   |       | (2,054   | )          | (3,356   | )          |
| Loans to customers                                                                 |       | (4,364   | )          | (10,626  | )          | (5,551   | )          |
| Payments from  customers on loans                                                  |       | 2,916    |       | 7,058    |       | 10,042   |       |
| Purchase of  marketable securities                                                 |       | (2,610   | )          | —   |       | —   |       |
| Sale of marketable  securities                                                     |       | 1,113    |       | —   |       | —   |       |
| Other                                                                              |       | (144     | )          | —   |       | 2,473    |       |
| Net cash used in  investing activities                                             |       | $        | (8,280     | )        | (37,348    | )        | (34,562    | ) |
| Financing activities:                                                              |       |     |       |     |       |     |       |
| Proceeds  (payments) of revolving debt                                             |       | 14,674   |       | (79,400  | )          | 39,400   |       |
| Dividends paid                                                                     |       | (6,673   | )          | (4,320   | )          | (4,292   | )          |
| Proceeds from  exercise of stock options                                           |       | 5,380    |       | 1,087    |       | 266      |       |
| Proceeds from  employee stock purchase plan                                        |       | 654      |       | 638      |       | 878      |       |
| Proceeds from  long-term debt                                                      |       | 175,000  |       | —   |       | —   |       |
| Payments of  long-term debt                                                        |       | (268,047 | )          | (7,195   | )          | (3,491   | )          |
| Payments of  capitalized lease obligations                                         |       | (2,515   | )          | (2,900   | )          | (2,845   | )          |
| Decrease in  outstanding checks                                                    |       | (12,006  | )          | (3,726   | )          | (30,674  | )          |
| Premium paid for  early extinguishment of debt                                     |       | (4,674   | )          | —   |       | —   |       |
| Other                                                                              |       | (3,135   | )          | —   |       | (4,293   | )          |
| Net used in  financing activities                                                  |       | (101,342 | )          | (95,816  | )          | (5,051   | )          |
| Net increase  (decrease) in cash                                                   |       | (7,728   | )          | (18,662  | )          | 20,952   |       |
| Cash at beginning  of year                                                         |       | 12,757   |       | 31,419   |       | 10,467   |       |
| Cash at end of  year                                                               |       | $        | 5,029      |     | 12,757     |     | 31,419     |   |
| Supplemental disclosure of cash flow information:                                  |       |     |       |     |       |     |       |
| Non cash investing and  financing activities                                       |       |     |       |     |       |     |       |
| Purchase of real  estate under capital leases                                      |       | $        | —     |     | —     |     | 3,789      |   |
| Acquisition of  minority interest                                                  |       | —   |       | —   |       | 1,849    |       |

 

See accompanying notes to consolidated financial statements.

37

----

**NASH FINCH COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (In thousands, except per share amounts)**
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **               | ** ** | ** **             | ** ** | **Accumulated other  comprehensive income (loss)** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------------------|------------|------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **               | ** ** | ** **             | ** ** | ** **                                                        | ** ** | **Unrealized** | ** ** | **Deferred** | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **               | ** ** | ** **             | ** ** | ** **                                                        | ** ** | **(loss)/** | ** ** | **(loss)/** | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**           | ** ** | ** **             | ** ** | **Minimum**                                                       | ** ** | **gain on** | ** ** | **gain on** | ** ** |
| **Fiscal period ended January 1, 2005**         | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | ** Retained ** | ** ** | **pension liab.** | ** ** | **marketable**                                                    | ** ** | **hedging** | ** ** |
| **Janurary 3, 2004 and December 28, 2002** | ** ** | ** **            | ** ** | **Shares**  | ** ** | ** Amount **   | ** ** | **capital**            | ** ** | **earnings**                                                      | ** ** | **adjustment** | ** ** | **securities** | ** ** | **activities** | ** ** |
| Balance at  December 29, 2001                                       |       | 11,831                |       |        | 19,718     |                     |       |                   | 21,894     |                                                              |       |   | 165,317 |   |   |   | (2,390 | ) |   |   | — |   |   |   | (128 | ) |   |
| Net earnings                                                             |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | 23,620 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other comprehensive income, net of tax                                   |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loss on  hedging activities                                     |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,105 | ) |   |
| Additional minimum  pension liability                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | (3,884 | ) |   |   | — |   |   |   | — |   |   |
| Comprehensive  income                                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Dividend declared  of $.36 per share                                     |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | (4,292 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Treasury stock  issued upon exercise of options                          |       | —                |       |        | —     |                     |       |                   | 73         |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued upon exercise of options                            |       | 21                    |       |        | 35         |                     |       |                   | 195        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued for employee stock purchase  plan                   |       | 43                    |       |        | 72         |                     |       |                   | 878        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Issuance of  restricted stock                                            |       | 50                    |       |        | 84         |                     |       |                   | 1,373      |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortized  compensation under restricted stock plan                      |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock based  deferred compensation                                       |       | —                |       |        | —     |                     |       |                   | 248        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Forfeiture of  restricted stock issued pursuant to                       |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| performance awards                                                       |       | —                |       |        |       |                     |       |                   | (61        | )                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Distribution of  stock pursuant to performance awards                    |       | 67                    |       |        | 112        |                     |       |                   | 1675       |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Balance at  December 28, 2002                                       |       | 12,012                |       |        | 20,021     |                     |       |                   | 26,275     |                                                              |       |   | 184,645 |   |   |   | (6,274 | ) |   |   | — |   |   |   | (1,233 | ) |   |
| Net earnings                                                             |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | 35,092 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other comprehensive income, net of tax                                   |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred gain on hedging activities                                      |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 41 |   |   |
| Minimum pension  liability adjustment                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | 1,496 |   |   |   | — |   |   |   | — |   |   |
| Comprehensive  income                                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Dividend declared  of $.36 per share                                     |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | (4,320 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Treasury stock  issued upon exercise of options                          |       | —                |       |        | —     |                     |       |                   | 9          |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued upon exercise of options                            |       | 93                    |       |        | 156        |                     |       |                   | 784        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued for employee stock purchase  plan                   |       | 47                    |       |        | 78         |                     |       |                   | 559        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortized  compensation under restricted stock plan                      |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock based  deferred compensation                                       |       | —                |       |        | —     |                     |       |                   | 277        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Forfeiture of  restricted stock issued pursuant to                       |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| performance awards                                                       |       | —                |       |        | —     |                     |       |                   | (9         | )                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Distribution of  stock pursuant to performance awards                    |       | —                |       |        | —     |                     |       |                   | 100        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Balance  January 3, 2004                                            |       | 12,152                |       |        | $          | 20,255                   |       |                   |       | $                                                                 | 27,995     |   |   |   | $ | 215,417 |   |   |   | $ | (4,778 | ) |   |   | $ | — |   |   |   | $ | (1,192 | ) |   |
| Net earnings                                                             |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | 14,932 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Other comprehensive income, net of tax                                   |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred gain on hedging activities                                      |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,186 |   |   |
| Unrealized gains  (losses) on investments in rabbi   trust               |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   | 87 |   |   |   |   |   |   |
| Minimum pension  liability adjustment                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | (565 | ) |   |   | — |   |   |   | — |   |   |
| Comprehensive  income                                                    |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Dividend declared  of $.54 per share                                     |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   | (6,673 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Treasury stock  issued upon exercise of options                          |       | —                |       |        | —     |                     |       |                   | (167       | )                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued upon exercise of options                            |       | 347                   |       |        | 579        |                     |       |                   | 4,605      |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued for employee stock purchase  plan                   |       | 40                    |       |        | 66         |                     |       |                   | 587        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Common stock  issued to a rabbi trust                                    |       | 118                   |       |        | 196        |                     |       |                   | (196       | )                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Tax benefit  associated with compensation plans                          |       | —                |       |        | —     |                     |       |                   | 1,714      |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortized compensation  under restricted stock plan                      |       | —                |       |        | —     |                     |       |                   | —     |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock based  deferred compensation                                       |       | —                |       |        | —     |                     |       |                   | 340        |                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Forfeiture of  restricted stock issued pursuant to                       |       |                  |       |        |       |                     |       |                   |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| performance awards                                                       |       | —                |       |        | —     |                     |       |                   | (30        | )                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Balance January 1,  2005                                            |       | 12,657                |       |        | $          | 21,096                   |       |                   |       | $                                                                 | 34,848     |   |   |   | $ | 223,676 |   |   |   | $ | (5,343 | ) |   |   | $ | 87 |   |   |   | $ | (6 | ) |   |
|                                                                          |            |                       |            |             |            |                          |            |                        |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

38

----

**NASH FINCH COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Continued) (In thousands, except per share amounts)**

 
| ** **                                                               | ** ** | ** **     | ** ** | **Deferred**     | ** ** | **Common stock**              | ** ** | ** **              | ** ** | ** **             | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|----------------|------------|------------------|------------|------------------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| **Fiscal period ended January 1, 2005**         | ** ** | **Restricted** | ** ** | **compensation** | ** ** | **held in a trust** | ** ** | **Treasury stock** | ** ** | **stockholders’** | ** ** |
| **Janurary 3, 2004 and December 28, 2002** | ** ** | ** **     | ** ** | **stock**        | ** ** | **obligation**                     | ** ** | **Shares**              | ** ** | ** Amount ** | ** ** | **Shares** | ** ** | ** Amount ** | ** ** | **equity** | ** ** |
| Balance at  December 29, 2001                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | (73 | ) |   |   | (1,003 | ) |   |   | 203,408 |   |   |
| Net earnings                                                             |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 23,620 |   |   |
| Other comprehensive  income, net of tax                                  |       |           |       |             |       |                               |       |                    |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loss on  hedging activities                                     |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,105 | ) |   |
| Additional minimum  pension liability                                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (3,884 | ) |   |
| Comprehensive income                                                     |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 18,631 |   |   |
| Dividend declared  of $.36 per share                                     |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (4,292 | ) |   |
| Treasury stock  issued upon exercise of options                          |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 7 |   |   |   | 37 |   |   |   | 110 |   |   |
| Common stock  issued upon exercise of options                            |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 230 |   |   |
| Common stock  issued for employee stock purchase plan                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 950 |   |   |
| Issuance of  restricted stock                                            |       |           | (1,457     | )                |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortized  compensation under restricted stock plan                      |       |           | 563        |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 563 |   |   |
| Stock based  deferred compensation                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 248 |   |   |
| Forfeiture of  restricted stock issued pursuant to                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| performance awards                                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | (5 | ) |   |   | (101 | ) |   |   | (162 | ) |   |
| Distribution of  stock pursuant to performance awards                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 1 |   |   |   | 6 |   |   |   | 1,793 |   |   |
| Balance at  December 28, 2002                                       |       |           | (894       | )                |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | (70 | ) |   |   | (1,061 | ) |   |   | 221,479 |   |   |
| Net earnings                                                             |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 35,092 |   |   |
| Other comprehensive  income, net of tax                                  |       |           |       |             |       |                               |       |                    |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred gain on hedging activities                                      |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 41 |   |   |
| Minimum pension  liability adjustment                                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,496 |   |   |
| Comprehensive  income                                                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 36,629 |   |   |
| Dividend declared  of $.36 per share                                     |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (4,320 | ) |   |
| Treasury stock  issued upon exercise of options                          |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   |   | 140 |   |   |   | 149 |   |   |
| Common stock  issued upon exercise of options                            |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 940 |   |   |
| Common stock  issued for employee stock purchase plan                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 637 |   |   |
| Amortized  compensation under restricted stock plan                      |       |           | 419        |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 419 |   |   |
| Stock based  deferred compensation                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   |   | 95 |   |   |   | 372 |   |   |
| Forfeiture of restricted  stock issued pursuant to                       |       |           |       |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| performance awards                                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | (1 | ) |   |   | (3 | ) |   |   | (12 | ) |   |
| Distribution of  stock pursuant to performance awards                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   |   | 64 |   |   |   | 164 |   |   |
| Balance  January 3, 2004                                            |       |           | $          | (475             | )          |                               |       | $                       | —     |                   |       |       | —     |   |   |   | $ | — |   |   |   | (35 | ) |   |   | $ | (765 | ) |   |   | $ | 256,457 |   |   |
| Net earnings                                                             |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 14,932 |   |   |
| Other comprehensive  income, net of tax                                  |       |           |       |             |       |                               |       |                    |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred gain on hedging activities                                      |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,186 |   |   |
| Unrealized gains  (losses) on investments in rabbi   trust               |       |           |       |             |       |                               |       |                    |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 87 |   |   |
| Minimum pension  liability adjustment                                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (565 | ) |   |
| Comprehensive  income                                                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 15,640 |   |   |
| Dividend declared  of $.54 per share                                     |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (6,673 | ) |   |
| Treasury stock  issued upon exercise of options                          |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 17 |   |   |   | 362 |   |   |   | 195 |   |   |
| Common stock  issued upon exercise of options                            |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,184 |   |   |
| Common stock  issued for employee stock purchase plan                    |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 653 |   |   |
| Common stock  issued to a rabbi trust                                    |       |           | —     |             |       |                               | 1,652      |                    |       |                   | (118       | )          |       |   | (1,652 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Tax benefit  associated with compensation plans                          |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,714 |   |   |
| Amortized  compensation under restricted stock plan                      |       |           | 251        |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 251 |   |   |
| Stock based  deferred compensation                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | 8 |   |   |   | 207 |   |   |   | 547 |   |   |
| Forfeiture of restricted  stock issued pursuant to                       |       |           |       |             |       |                               |       |                    |       |                   | —     |       |       |   | — |   |   |   |   |   |   |   |   |   |   |   | — |   |   |
| performance awards                                                       |       |           | —     |             |       |                               | —     |                    |       |                   | —     |       |       |   | — |   |   |   | (1 | ) |   |   | (10 | ) |   |   | (40 | ) |   |
| Balance January 1,  2005                                            |       |           | $          | (224             | )          |                               |       | $                       | 1,652      |                   |       |       | (118       | ) |   |   | $ | (1,652 | ) |   |   | (11 | ) |   |   | $ | (206 | ) |   |   | $ | 273,928 |   |   |
|                                                                          |            |                |            |                  |            |                                    |            |                         |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

39

----

**NASH FINCH COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(1)   Summaryof Significant Accounting Policies**

*Fiscal Year*

Nash Finch Company’sfiscal year ends on the Saturday nearest to December 31. Fiscal year 2004consisted of 52 weeks, while fiscal year 2003 consisted of 53 weeks and fiscalyear 2002 consisted of 52 weeks. The Company’s interim quarters consist of 12weeks except for the third quarter which has 16 weeks. For fiscal 2003, theCompany’s fourth quarter consisted of 13 weeks.

*Principles ofConsolidation*

The accompanying financialstatements include the accounts of Nash Finch Company (the “Company”) and itsmajority-owned subsidiaries. All material intercompany accounts andtransactions have been eliminated in the consolidated financial statements.

*Reclassifications*

Certain reclassificationswere made in the consolidated statements of cash flows for prior periods. Thesereclassifications did not have an impact on operating earnings, earnings beforeincome taxes, net earnings, total cash flows or the financial position for anyperiod.

*Cash and CashEquivalents*

In the accompanyingfinancial statements and for purposes of the statements of cash flows, cash andcash equivalents include cash on hand and short-term investments with originalmaturities of three months or less.

*Revenue Recognition*

Revenues for the food distribution and militarysegments are recognized when product orders placed by customers are shipped. Retailsegment revenues are recognized at the point of sale.

In fiscal 2002, theCompany reclassified its treatment of facilitated services, which includeinvoicing and payment services, where it acts as a processing agent for itsindependent retailers. Prior to the reclassification, amounts invoiced toindependent retailers by the Company for facilitated services were recorded assales and the related amounts due and paid by the Company to its vendors wererecorded as costs of sales. The reclassification reduced sales and costs ofsales by $117.9 million for fiscal 2002, but did not have an impact on grossprofit, earnings from continuing operations before income taxes, net earnings,cash flows or financial position for any period or their respective trends.

*Cost of sales*

Cost of sales includes thecost of inventory sold during the period, including distribution costs andshipping and handling fees. Advertising costs, included in cost of goods sold,are expensed as incurred and were $44.9 million, $47.1 million and $45.4million for fiscal 2004, 2003 and 2002, respectively. Advertising vendor incomeoffsetting advertising expense wasapproximately $46.5 million, $48.8 million and $49.4 million for fiscal 2004,2003 and 2002, respectively.

40

----

*Vendor Allowancesand Credits*

The Company reflectsvendor allowances and credits, which include allowances and incentives similarto discounts, as a reduction of cost of sales when the related inventory hasbeen sold, based on the underlying arrangement with the vendor. Theseallowances primarily consist of promotional allowances, quantity discounts andpayments under merchandising arrangements. Amounts received under promotionalor merchandising arrangements that require specific performance are recognizedwhen the performance is satisfied and the related inventory has been sold.Discounts based on the quantity of purchases from the Company’s vendors orsales to customers are recognized as the product is sold. When payment isreceived prior to fulfillment of the terms, the amounts are deferred andrecognized according to the terms of the arrangement. (Refer to Part II,Item 8 of this report under Note 2, “Vendor Allowances and Credits”.)

*Inventories*

Inventories are stated atthe lower of cost or market. At both January 1, 2005 and January 3,2004, approximately 82% of the Company’s inventories were valued on the last-in,first-out (LIFO) method. During fiscal 2004, the Company recorded a LIFOcharge of $3.5 million compared to a LIFO credit of $1.1 million in fiscal 2003.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 $47.9 million and $44.4 million higher at January 1,2005 and January 3, 2004, respectively.

*Capitalization,Depreciation and Amortization*

Property, plant and equipment are stated at cost. Assetsunder capitalized leases are recorded at the present value of future leasepayments or fair market value, whichever is lower. Expenditures which improveor extend the life of the respective assets are capitalized while maintenanceand repairs are expensed as incurred.

Property, plant andequipment are depreciated on a straight-line basis over the estimateduseful lives of the assets which generally range from 10-40 years forbuildings and improvements and 3-10 years for furniture, fixtures andequipment. Capitalized leases and leasehold improvements are amortized on astraight-line basis over the shorter of the term of the lease or theuseful life of the asset.

*Impairment of Long-livedAssets*

An impairment loss isrecognized whenever events or changes in circumstances indicate the carryingamount of an asset is not recoverable. In applying Statement of FinancialAccounting Standards (SFAS) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets,*assets aregrouped and evaluated at the lowest level for which there are identifiable cashflows that are largely independent of the cash flows of other groups of assets.The Company has generally identified this lowest level to be individual storesor distribution centers; however, there are limited circumstances where, forevaluation purposes, stores could be considered with the distribution centerthey support. The Company allocates the portion of the profit retained at theservicing distribution center to the individual store when performing theimpairment analysis in order to determine the store’s total contribution to theCompany. The Company considers historical performance and future estimatedresults in its evaluation of potential impairment. If the carrying amount ofthe asset exceeds expected undiscounted future cash flows, the Company measuresthe amount of the impairment by comparing the carrying amount of the asset toits fair value, generally measured by discounting expected future cash flows atthe rate the Company utilizes to evaluate potential investments. In fiscal2004, 2003 and 2002, the Company recorded impairment charges, other thanamounts separately classified as special charges, of $0.9 million, $2.7million, and $6.6 million, respectively, within the “selling, general andadministrative” caption of the consolidated statements of income.

41

----

*DiscontinuedOperations*

On July 31, 1999, theCompany sold the outstanding stock of its wholly-owned produce growing andmarketing subsidiary, Nash-De Camp. Nash-De Camp had previously been reportedas a discontinued operation following a fourth quarter of fiscal 1998 decisionto sell the subsidiary. The gains of $0.06 million in fiscal 2004 and $0.4million in fiscal 2003 reported under the caption “Discontinued operations”were a result of the resolution of a contingency associated with the sale.

*Reserves for SelfInsurance*

The Company is primarilyself-insured for workers’ compensation, general and automobile liability andhealth insurance costs. It is the Company’s policy to record its self insuranceliabilities based on claims filed and an estimate of claims incurred but notyet reported. Worker’s compensation and general and automobile liabilities areactuarially determined on a discounted basis. The Company has purchasedstop-loss coverage to limit its exposure to any significant exposure on a perclaim basis. Any projection of losses concerning workers’ compensation, generaland automobile and health insurance liability is subject to a considerabledegree of variability. Among the causes of this variability are unpredictableexternal factors affecting future inflation rates, litigation trends, legalinterpretations, benefit level changes and claim settlement patterns.

*Goodwill andIntangible Assets*

Intangible assets,consisting primarily of goodwill resulting from business acquisitions, arecarried at cost. The Company re-evaluates the carrying value of intangibleassets for impairment annually and/or when factors indicating impairment arepresent, using an undiscounted operating cash flow assumption.

Goodwill and intangible assets with indefinite usefullives are tested for impairment at least annually. Separable intangible assetsthat are not deemed to have an indefinite life are amortized over their usefullives. The Company performed the required impairment test of goodwill as of theend of the Company’s third fiscal quarter in2004,2003and 2002 and determined that noimpairment issues existed. The Company had no intangible assets with indefiniteuseful lives as of January 1, 2005, January 3, 2004 or December 28,2002. At January 1, 2005, the Company had $147.4 million of goodwill onits consolidated balance sheet, of which $23.2 million related to the fooddistribution segment, $25.8 million related to the military segment, and $98.4million related to the retail segment. At January 3, 2004, the Company had$149.8 million of goodwill on its consolidated balance sheet, of which $23.2million related to the food distribution segment, $25.8 million related to themilitary segment and $100.8 million related to the retail segment.

Changesin the net carrying amount of goodwill were as follows (in thousands):
| ** **                                                | ** ** | **Food  Distribution** | ** ** | **Military** | ** ** | **Retail** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|-----------|------------|
| Goodwill as of  December 29, 2001                    |       |                   | $          | 23,158       |       |       | 25,754     |      | 88,425     |   | 137,337 |   |
| Retail  acquisitions                                      |       |                   | —     |         |       | —     |       | 10,691    |       | 10,691 |   |
| Goodwill as of  December 28, 2002                    |       |                   | $          | 23,158       |       |       | 25,754     |      | 99,116     |   | 148,028 |   |
| Retail  acquisitions                                      |       |                   | —     |         |       | —     |       | 3,530     |       | 3,530 |   |
| Resolution of  disputed retail acquisition purchase price |       |                   | —     |         |       | —     |       | (1,766    | )          | (1,766 | ) |
| Goodwill as of  January 3, 2004                      |       |                   | $          | 23,158       |       |       | 25,754     |      | 100,880    |   | 149,792 |   |
| Resolution of  disputed retail acquisition purchase price |       |                   | —     |         |       | —     |       | (140      | )          | (140 | ) |
| Sale of retail  stores                                    |       |                   | —     |         |       | —     |       | (1,145    | )          | (1,145 | ) |
| Retail impairment                                         |       |                   | —     |         |       | —     |       | (1,072    | )          | (1,072 | ) |
| Goodwill as of  January 1, 2005                      |       |                   | $          | 23,158       |       |       | 25,754     |      | 98,523     |   | 147,435 |   |

 

42

----

Otherintangible assets included in other assets on the consolidated balance sheetswere as follows (in thousands):
| ** **                       | ** ** | **January 1, 2005** | ** ** | **January 3, 2004** | ** ** |
|----------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Gross  Carrying  Value**    | ** ** | **Accum.  Amort.**            | ** ** | **Net   Carrying   Amount** | ** ** | **Gross  Carrying  Value** | ** ** | **Accum.  Amort.** | ** ** | **Net  Carrying  Amount** | ** ** |
| Service contracts                |       | $                             | 11,110     |                          | 7,051      |   |   | 4,059 |   |   | 11,110 |   | 6,110 |   | 5,000 |   |
| Tradenames                       |       | 3,300                         |       | 1,056                         |       |   | 2,244 |   |   | 3,300 |   | 924 |   | 2,376 |   |
| Franchise  agreements            |       | 2,703                         |       | 860                           |       |   | 1,843 |   |   | 2,703 |   | 752 |   | 1,951 |   |
| Non-compete  agreements          |       | 2,444                         |       | 1,665                         |       |   | 779 |   |   | 2,444 |   | 1,310 |   | 1,134 |   |
| Leasehold  interests             |       | 1,209                         |       | 1,208                         |       |   | 1 |   |   | 1,209 |   | 1,195 |   | 14 |   |
| Consulting  agreements and other |       | 418                           |       | 418                           |       |   | — |   |   | 418 |   | 400 |   | 18 |   |
| Total                            |       | $                             | 21,184     |                          | 12,258     |   |   | 8,926 |   |   | 21,184 |   | 10,691 |   | 10,493 |   |

 

Aggregate amortizationexpense recognized for fiscal 2004, 2003, and 2002 was $1.6 million, $1.5million, and $1.8 million, respectively. The aggregate amortization expense forthe five succeeding fiscal years is expected to approximate $5.2 million. Intangibleassets with a definite life are amortized on a straight-line basis overestimated useful lives ranging from 3-25 years.

*Income Taxes*

Deferred income taxes arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax basis. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Thecompany maintains valuation allowances where it is more likely than not all ora portion of the deferred tax asset will not be realized. Changes in valuationallowances from period to period are included in the Company’s tax provision inthe period of change.

*FinancialInstruments*

The Company accounts for derivative financialinstruments pursuant to SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities* as amended. SFAS No. 133requires derivatives be carried at fair value on the balance sheet and providesfor hedge accounting when certain conditions are met.

The Company has marketrisk exposure to changing interest rates primarily as a result of its borrowingactivities. The Company’s objective in managing its exposure to changes ininterest rates is to reduce fluctuations in earnings and cash flows. To achievethese objectives, the Company uses derivative instruments, primarily interestrate swap agreements, to manage risk exposures when appropriate, based onmarket conditions. The Company does not enter into derivative agreements for tradingor other speculative purposes, nor is it a party to any leveraged derivativeinstrument.

43

----

*Stock Option Plans*

Aspermitted by the provisions of SFAS No. 123, “*Accountingfor Stock-Based Compensation” (SFAS No. 123),*theCompany has chosen to continue to apply Accounting Principles Board Opinion No. 25*(APB 25), Accounting for Stock Issued to Employees*andrelated interpretations in accounting for its stock option plans. As a result,the Company does not recognize****compensationcosts if the option price equals or exceeds market price at date of grant. Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation ($ in thousands, except per shareamounts):
| ** **                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Reported net  income                                                                                                           |       | $        | 14,932     |     | 35,092     |     | 23,620     |   |
| Add: stock-based  compensation expense from restricted stock plan included in net income                                       |       | 251      |       | 419      |       | 562      |       |
| Deduct:  stock-based compensation expense from restricted stock plan included in net  income                                   |       | (251     | )          | (419     | )          | (562     | )          |
| Deduct: total  stock-based employee compensation expense determined under fair value method  for all option awards, net of tax |       | (1,112   | )          | (1,214   | )          | (1,489   | )          |
| Adjusted net income                                                                                                            |       | $        | 13,820     |     | 33,878     |     | 22,131     |   |
| Reported basic  earnings per share                                                                                             |       | $        | 1.20       |     | 2.90       |     | 2.00       |   |
| Adjusted basic  earnings per share                                                                                             |       | $        | 1.11       |     | 2.80       |     | 1.88       |   |
| Reported diluted  earnings per share                                                                                           |       | $        | 1.18       |     | 2.88       |     | 1.95       |   |
| Adjusted diluted  earnings per share                                                                                           |       | $        | 1.09       |     | 2.78       |     | 1.83       |   |

 

*ComprehensiveIncome*

The Company reportscomprehensive income in accordance with SFAS No. 130, “*Reporting Comprehensive Income*.” Other comprehensive incomerefers to revenues, expenses, gains and losses that are not included in netearnings, but rather are recorded directly in the Consolidated Statements ofStockholders’ Equity.

*Use of Estimates*

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

*New AccountingStandards*

In December 2004, the FASB issued Statement No. 123R(Revised 2004), *“Share-Based Payment”*. Therevisions to SFAS No 123 require compensation costs related to share-basedpayment transactions to be recognized in the financial statements. With limitedexceptions, the amount of compensation cost will be measured based on thegrant-date fair value of the equity or liability instruments issued. Inaddition, liability awards will be remeasured each reporting period. Compensationcost will be recognized over the period that an employee provides service inexchange for the award. Statement 123R replaces FASB Statement No. 123, *“Accounting for Stock Based Compensation”*, and supercedesAPB Opinion No. 25, *“Accounting for StockIssued to Employees*”. For public entities, the provisions of thestatement are effective as of the beginning of the first interim or annualreporting period that begins after June 15, 2005, however early adoptionis allowed. Nash Finch Company expects to adopt the provisions of the newstatement in the third fiscal quarter of 2005. The Company does not currently expect that the impacton net income on a full year basis will be significantly different from thehistorical pro forma impacts as previously disclosed in the “Stock Option Plans”policy description above.

44

----

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)became law in the United States. The Act introduces a prescription drug benefitunder Medicare as well as a federal subsidy to sponsors of retiree health carebenefit plans that provide a benefit that is at least “actuarially equivalent”to Medicare. The benefit and subsidy introduced by the Act begin in 2006. In May 2004,the FASB issued FASB Staff Position (FSP) No. 106-2, *“Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003”*. FSP 106-2requires an employer to initially account for any subsidy received under theAct as an actuarial experience gain to the accumulated postretirement benefitobligation (APBO), which would be amortized over future service periods. Futuresubsidies would reduce service cost each year. FSP 106-2 was effectivefor Nash Finch in the third fiscal quarter ended October 9, 2004. NashFinch believes that its postretirement benefit plan is not actuariallyequivalent to Medicare Part D under the Act and consequently will notreceive significant subsidies under the Act.

**(2)**   Vendor Allowances and Credits

The Company participates with its vendors in a broadmenu of promotions to increase sales of products. These promotions fall intotwo main categories: off-invoice allowances and performance-based allowancesand are often subject to negotiation with vendors.In the case of off-invoice allowances, discounts are typically offered byvendors with respect to certain merchandise purchased by the Company during a specified period oftime. The Company uses off-invoice allowances to support a variety of marketingprograms such as reduced price offerings for specific time periods, food shows,pallet promotions and private label promotions. The discounts are eitherreflected directly on the vendor invoice, as a reduction from the normalwholesale prices for merchandise to which the allowance applies, or the Companyis allowed to deduct the allowance as an offset against the vendor’s invoicewhen it is paid.

In the case of performance-based allowances, theallowance or rebate is based on the Company’s completion of some specificactivity, such as purchasing or selling product during a certain time period. Thisbasic performance requirement may be accompanied by an additional performancerequirement such as providing advertising or special in-store promotion,tracking specific shipments of goods to retailers, or to customers in the caseof the Company’s own retail stores, during a specified period (count-recountpromotions), slotting (adding a new item to the system) and merchandising a newitem, or achieving certain minimum purchase quantities. The billing for theseperformance-based allowances is normally in the form of a “bill-back” in whichcase the Company is invoiced at the regularprice with the understanding that theCompany maybill back the vendor for the requisite allowance when the performance issatisfied. The Company also assesses an administrative fee, reflected on theinvoices sent to vendors, to recoup the Company’s reasonable costs ofperforming the tasks associated with administering count-recount promotions.

The Company collectivelyplans promotions with its vendors and arrive at the amount the respective vendorplans to spend on promotions with the Company. Each vendor has its own methodfor determining the amount of promotional funds budgeted to be spent with theCompany during the period. In most situations, the vendor allowances are basedon units the Company purchased from the vendor. In other situations, theallowances are based on the Company’s past or anticipated purchases and/or theanticipated performance of the planned promotions. Forecasting promotionalexpenditures is a critical part of the Company’s frequently scheduled planningsessions with its vendors. As individual promotions are completed and theassociated billing is processed, the vendors track the Company’s promotionalprogram execution and spend rate, and discuss the tracking, performance andspend rate with the Company on a regular basis throughout the year, variouslyon a weekly, monthly, quarterly or annual basis. These communications includefuture promotions, product cost, targeted retails and price points, anticipatedvolume, promotion expenditures, vendor maintenance, billing issues andprocedures, new items/discontinued items, and trade spend levels relative tobudget per event and per year, as well as the resolution of any issues thatarise between the vendor and the Company. In the future, the nature and 

45

----

menu ofpromotional programs and the allocation of dollars among them may change as aresult of ongoing negotiations and commercial relationships between vendors andthe Company.

**(3)**   Business Acquisitions

On February 10, 2003, the Company acquired onestore in Cannon Falls, Minnesota through a cash purchase of 100% of the netassets. The acquisition of this store resulted in goodwill of $2.0 million inthe retail segment. Results of operations are included in the consolidatedstatements from the date of acquisition. The pro forma effects of theacquisition are immaterial for disclosure.

On March 5, 2002, theCompany acquired two stores in Chilton and Kiel, Wisconsin through a cash purchaseof 100% of the net assets. The acquisition of these stores resulted in goodwillof $1.9 million in the retail segment. Results of operations are included inthe consolidated statements from the date of acquisition. The pro forma effectsof the acquisition are immaterial for disclosure.

**(4)   SpecialCharges**

During the second quarter of 2004, the Companycompleted a strategic review that identified certain retail stores that did notmeet return objectives, provide long-term strategic opportunities or justifyadditional capital investments. Consequently, the Company announced that it wasclosing or selling 21 retail outlets. The Company had closed 18 stores by theend of the second quarter of 2004 and is continuing to market the three Denverarea AVANZA stores. As a result of these store dispositions, the Companyrecorded a pre-tax special charge of $36.5 million which was reflected in the “Specialcharges” line within the consolidated statements of income, and $3.3 million ofcosts reflected in operating earnings, primarily involving inventory markdownsrelated to the store closures. The special charge included $21.7 million forasset impairments (including $1.1 million of goodwill allocated to the storesbeing sold), $14.1 million for future lease obligations, $0.1 million inseverance and $0.6 million in other charges based on management’s estimates offair value of assets, lease subsidies, future payments on exited real estate,lease terminations and other related costs.

During the fourth fiscal quarter of 2004, the Companyrecorded a net reversal of $1.6 million of the special charge because theCompany was able to settle five leases for less than initially estimated andadjusted the estimate needed on four other properties for which more currentmarket information was available.

Followingis a summary of the activity in the 2004 reserve established for storedispositions:
| ** **                    | ** ** | **Write-  Down of  Tangible  Assets** | ** ** | **Write-  Down of   Intangible   Assets** | ** ** | **Lease  Commitments** | ** ** | **Severance** | ** ** | **Other  Exit  Costs** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|---------------|------------|------------------------|------------|-----------|------------|
| 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  January 1, 2005 |       | $                                          | —     |                                                     |       | —                 |       |          |       | 9,474                  |       |      |       | — |   |   | 227 |   | 9,701 |   |

 

The Company recorded special charges totaling $31.3million in fiscal 1997 and $71.4 million (offset by $2.9 million of fiscal 1997charge adjustments) in fiscal 1998. These charges affected the Company’s fooddistribution and retail segments and were also designed to redirect the Company’stechnology efforts. All actions contemplated by the charges are complete. At January 1,2005, the remaining accrued liability was $1.7 million and consisted primarilyof lease commitments.

46

----

During fiscal 2004, theCompany reversed $0.08 million of its fiscal 1998 and 1997 special charges dueto agreements reached to settle certain leases for less than what the Companyhad originally estimated. During fiscal 2002, the Company reversed $0.63 millionand $0.13 million of its fiscal 1998 and 1997 special charges, respectively,due to agreements reached to settle certain leases for less than what theCompany had originally estimated.

**(5)   Impairment Charges**

Impairment charges of $0.9million, $2.7 million, and $6.6 million were recorded for asset impairments infiscal 2004, 2003 and 2002, respectively. These charges related primarily to three stores in fiscal 2004, sixstores in fiscal 2003 and fifteen stores in fiscal 2002 that were impaired as aresult of increased competition within the stores’ respective market areas. Theestimated undiscounted cash flows related to these facilities indicated thatthe carrying value of the assets may not be recoverable based on currentexpectations, therefore these assets were written down in accordance with SFAS No. 144.

**(6)   Accounts and Notes Receivable**

Accountsand notes receivable at the end of fiscal 2004 and 2003 are comprised of thefollowing components (in thousands):
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Customer notes  receivable, current        |       | $        | 5,911      |     | 12,341     |   |
| Customer accounts  receivable              |       | 136,083  |       | 129,560  |       |
| Other receivables                          |       | 22,438   |       | 20,838   |       |
| Allowance for  doubtful accounts           |       | (7,035   | )          | (16,837  | )          |
| Net current  accounts and notes receivable |       | 157,397  |       | 145,902  |       |
| Long-term customer notes receivable        |       | 31,043   |       | 33,585   |       |
| Other noncurrent  receivables              |       | 3,393    |       | 3,626    |       |
| Allowance for  doubtful accounts           |       | (7,882   | )          | (6,033   | )          |
| Net long-term  notes receivable            |       | $        | 26,554     |     | 31,178     |   |

 

Operating results include bad debt expense totaling$4.2 million, $8.7 million, and $9.0 million during fiscal 2004, 2003 and 2002,respectively.

Substantially all notesreceivable are based on floating interest rates which adjust to changes inmarket rates. As a result, the carrying value of notes receivable approximatesmarket value.

**(7)   Long-termDebt and Bank Credit Facilities**

Long-termdebt at the end of the fiscal 2004 and 2003 is summarized as follows (inthousands):
| ** **                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revolving credit                                                                         |       | $        | 10,000     |     | —     |   |
| Term loan                                                                                |       | 175,000  |       | 100,000  |       |
| Senior subordinated  debt, 8.5% due in 2008                                              |       | —   |       | 164,442  |       |
| Industrial development bonds,  5.20% to 7.75% due in various installments through 2014   |       | 5,625    |       | 6,545    |       |
| Notes payable and  mortgage notes, 4.0% to 8.0% due in various installments through 2018 |       | 11,435   |       | 13,687   |       |
|                                                                                     |       | 202,060  |       | 284,674  |       |
| Less current maturities                                                                  |       | 2,817    |       | 2,730    |       |
|                                                                                     |       | $        | 199,243    |     | 281,944    |   |

 

47

----

On November 12, 2004, the Company concluded therefinancing of its senior secured bank credit facility which had been scheduledto mature on December 19, 2005 and had provided a $100 million term loanand $150 million in revolving line of credit, of which $40 million could beused for letters of credit. The new credit facility consists of $125 million inrevolving credit, all of which may be utilized for loans and up to $40 millionof which may be utilized for letters of credit, and a $175 million Term Loan B,and is secured by asecurity interest in substantially all assets of the Company and itswholly-owned subsidiaries that are not pledged under other debt agreements.The revolving credit portion of the facility has a five year term and the TermLoan B has a six year term. Borrowings under the bank credit agreement bearinterest at the Eurodollar rate plus a margin increase that is dependent on ourtotal leverage ratio and a commitment commission on the unused portion of therevolver. The Term Loan B was subject to a commitment commission only until theloan was activated. The margin increase and the commitment commission are resetquarterly based on movement of a leverage ratio defined by the agreement. At January 1,2005 the margin for the revolver and Term Loan B were 1.75% and 2.25%,respectively and the commitment commission was 0.375%. The margin increase andthe commitment commission were 1.75% and 0.375%, respectively under the priorcredit facility at the end of fiscal 2003.

On December 13, 2004, the company redeemed the$165 million in 8.5% Senior Subordinated Notes Due 2008 (the “Notes”) at aredemption price of 102.833%, plus accrued and unpaid interest on the Notes asof the redemption date. The Company drew under the Term Loan B to fund theredemption of the Notes. Charges recorded during the fourth fiscal quarter forredemption of the Notes and the refinancing of the credit facility include acall premium of $4.7 million and $2.5 million for unamortized finance costs andoriginal issue discount charge.

The Company has outstanding letters of credit in theamounts of $17.2 million and $22.6 million at January 1, 2005 and January 3,2004, respectively, primarily supporting workers’ compensation obligations.

At January 1, 2005, land in the amount of $1.4million and buildings and other assets with a depreciated cost of approximately$5.1 million are pledged to secure obligations under issues of industrialdevelopment bonds.

Aggregateannual maturities of long-term debt for the five fiscal years after January 1,2005 are as follows (in thousands):
| 2005       |   | $       | 2,817  |   |
|------------|--------|---------|--------|--------|
| 2006       |   | 2,861   |   |
| 2007       |   | 1,544   |   |
| 2008       |   | 1,535   |   |
| 2009       |   | 13,533  |   |
| Thereafter |   | 179,770 |   |

 

Interest paid was $27.2 million, $33.1 million, and$28.4 million in fiscal 2004, 2003 and 2002, respectively.

In February 2003,the Company was notified by the Trustee for its 8.5% Senior Subordinated Notesthat a default had occurred under the related Indenture as a result of theCompany’s failure to file its Form 10-Q for the third quarter ended October 5,2002 with the SEC. If the default was not remedied within the 30 day cureperiod, an event of default would occur under the Indenture and the Company’s bank credit facility.Later that month the Company obtained a waiver of the default under theIndenture, for which itpaid a fee to the note holders equal to 1.5% of the outstanding principalamount of the notes. In March 2003the Company obtained an extension of time from its bank lenders to submit tothem its audited fiscal 2002 financialstatements, for which it paid afee to the bank lenders equal to 0.5% of the sum of its revolving loan commitments andaggregate outstanding term loans as of the effective date of the 

48

----

extension. The waiver under the Indenture and the extension from the banks wereconditioned upon the Company receiving audited financial statements for fiscal2002 and making specified filings with the Securities and Exchange Commission(SEC) by specified deadlines. The Company subsequently complied with the extendeddeadlines.

**(8)   Investments**

Investments in marketable securities are recorded atfair value based on quoted market prices, and are classified asavailable-for-sale. All investments in marketable securities are held in abenefits protection trust and relate to deferred compensation plans. The Companyestablished the benefits protection trust during fiscal 2004. A summary of thecarrying values and fair values of the Company’s investments is as follows:

January 1,2005:
| **(dollars in thousands)** | ** ** | ** ** | ** ** | **Cost Basis** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|---------------------|------------|------------------------------|------------|---------------------|------------|
| Equity securities                    |       |       | $          | 877                 |       |                         |       | 142                 |       |   |   | 1,019 |   |   |
| Fixed income                         |       |       | 259        |                |       |                         | —     |                |       |   | 259 |   |   |
| Other short term  investments        |       |       | 383        |                |       |                         | —     |                |       |   | 383 |   |   |
|                                 |       |       | $          | 1,519               |       |                         |       | 142                 |       |   |   | 1,661 |   |   |

 

**(9)   Derivative Instruments****

The Company has market risk exposure to changinginterest rates primarily as a result of its borrowing activities and commodityprice associatedwith anticipated purchases of diesel fuel. The Company’s objective in managingour exposure to changes in interest rates and commodity prices is to reducefluctuations in its earnings and cash flows. To achieve these objectives, theCompany uses derivative instruments, primarily interest rate and commodity swapagreements, to manage risk exposures when appropriate, based on marketconditions. The Company does not enter into derivative agreements for tradingor other speculative purposes, nor is the Company a party to any leveragedderivative instrument.

The interest rate swap and commodity swap agreementsare designated as cash flow hedges and are reflected at fair value in theCompany’s consolidated balance sheet and the related gains or losses on thesecontracts are deferred in stockholders’ equity as a component of othercomprehensive income. However, to the extent that any of these contracts arenot considered to be perfectly effective in offsetting the change in the valueof the items being hedged, any changes in fair value relating to theineffective portion of these contracts are immediately recognized in income. AtJanuary 1, 2005, the Company did not have any ineffectiveness in itsderivatives requiring current income recognition.

49

----

Interestrate swap agreements are entered into for periods consistent with relatedunderlying exposures and do not constitute positions independent of thoseexposures. At January 1, 2005, the Company had seven outstanding interestrate swap agreements. The agreements call for an exchange of interest paymentswith the Company making payments based on fixed rates for the respective timeintervals and receiving payments based on floating rates, without an exchangeof notional amount upon which the payments are based. Notional, commencementdate, expiration and fixed rates payable by the Company are as follows:
| **Notional**       | ** ** | ** ** | ** ** | **Effective Date** | ** ** | **Termination Date** | ** ** | **Fixed Rate** | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| $50,000            |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 2.985      | % |   |
|   40,000 |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 3.010      | % |   |
|   50,000 |       | 12/13/2004 |       |                    | 12/13/2005 |                      |       |                | 2.992      | % |   |
|   45,000 |       | 12/13/2005 |       |                    | 12/13/2006 |                      |       |                | 3.809      | % |   |
|   20,000 |       | 12/13/2005 |       |                    | 12/13/2006 |                      |       |                | 3.825      | % |   |
|   20,000 |       | 12/13/2006 |       |                    | 12/13/2007 |                      |       |                | 4.095      | % |   |
|   30,000 |       | 12/13/2006 |       |                    | 12/13/2007 |                      |       |                | 4.100      | % |   |

 

At January 3, 2004, the Company had threeoutstanding interest rate swap agreements which commenced on July 26, 2002,December 6, 2002 and June 6, 2003, respectively. Those threeagreements expired on September 25, 2004, October 6, 2004 and October 6,2004 with notional amounts of $50 million, $35 million and $35 million,respectively.

The interest rate swap agreements described abovetotaled $255 million in notional amounts as of January 1, 2005 and $120million in notional amounts as of January 3, 2004, which are used tocalculate the contractual cash flows to be exchanged under the contract. Interestrate swap agreements outstanding at year end and their fair value at that dateare summarized as follows (in thousands):

InterestRate Swaps:
| ** **                                | ** ** | **1/1/05** | ** ** | **1/3/04** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Pay fixed /  receive variable             |       | $          | 255,000    |       | 120,000    |   |
| Fair value                                |       | (82        | )          | (1,955     | )          |
| Average receive  rate for effective swaps |       | 2.4%       |       | 1.2%       |       |
| Average pay rate for  effective swaps     |       | 3.0%       |       | 3.3%       |       |
|                                           |            |            |            |            |            |  |

 

Inaddition, the Company is using commodity swap agreements to reduce price riskassociated with anticipated purchases of diesel fuel. The agreements call foran exchange of payments with the Company making payments based on fixed priceper gallon and receiving payments based on floating prices, without an exchangeof the underlying commodity amount upon which the payments are based. At January 1,2005, the Company had two outstanding commodity swap agreements which commencedand expire as follows:
| **Notional**           | ** ** | ** ** | ** ** | **Effective Date** | ** ** | **Termination Date** | ** ** | **Fixed Rate** | ** ** |
|------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| 100,000 gallons/month  |       |       | 12/7/2004  |                    |       |                      | 11/30/2006 |                |       |   | $ | 1.18 |   |   |
| 100,000  gallons/month |       |       | 1/1/2005   |                    |       |                      | 12/31/2006 |                |       |   | $ | 1.16 |   |   |

 

Interest rate swap and commodity swap agreements arereflected at fair value in the Company’s consolidated balance sheet and relatedlosses,net of income taxes, aredeferred in stockholders’ equity as a component of other comprehensive income. TheCompany expects the losses deferred in other comprehensive income to reverseduring fiscal 2005.

 

50

----

**(10)**   Income Taxes

Incometax expense is made up of the following components (in thousands):
| ** **  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|
| Current:    |       |     |       |     |       |     |       |
| Federal     |       | $        | 11,830     |     | 3,054      |     | 5,409      |   |
| State       |       | 1,361    |       | 341      |       | 992      |       |
| Tax credits |       | (212     | )          | (168     | )          | (62      | )          |
| Deferred:   |       |     |       |     |       |     |       |
| Federal     |       | (7737    | )          | 12,860   |       | 7,212    |       |
| State       |       | (884     | )          | 1,432    |       | 1,551    |       |
| Total       |       | $        | 4,358      |     | 17,519     |     | 15,102     |   |

 

Totalincome tax expense is allocated as follows (in thousands):
| ** **                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax  expense from continuing operations                      |       | $        | 4,322      |     | 17,254     |     | 19,552     |   |
| Tax effect of  discontinued operations                              |       | 36       |       | 265      |       | —   |       |
| Tax effect of  cumulative effect of change in accounting  principle |       | —   |       | —   |       | (4,450   | )          |
| Total income tax  expense                                           |       | $        | 4,358      |     | 17,519     |     | 15,102     |   |

 

Incometax expense differed from amounts computed by applying the federal income taxrate to pre-tax income as a result of the following:
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  tax rate                     |       |     | 35.0       | %        |       |     | 35.0       | % |   |   | 35.0 | % |   |
| State taxes, net  of federal income tax benefit |       |     | 3.9        |     |       |     | 3.9        |   |   |   | 3.9 |   |   |
| Resolution of various outstanding tax  issues   |       |     | (13.0      | )        |       |     | (5.7       | ) |   |   | — |   |   |
| Other net                                       |       |     | (3.3       | )        |       |     | 0.1        |   |   |   | 0.1 |   |   |
| Effective tax  rate                             |       |     | 22.6       | %        |       |     | 33.3       | % |   |   | 39.0 | % |   |

 

Income taxes paid were $15.4 million, $2.7 million,and $9.2 million during fiscal 2004, 2003 and 2002, respectively. An income taxbenefit through stockholders’ equity of $1.7 million will be recognized ascompensation expense for tax purposes in excess of amounts recognized forfinancial reporting purposes.

Income tax provided for fiscal 2004 was 22.6% comparedto 33.3% for fiscal 2003. During 2004 and 2003, the company recognizedreductions of income tax expense of $2.5 million and $3.0 million,respectively, as a result of resolution of various state and federal taxissues.

51

----

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at January 1, 2005and January 3, 2004 are presented below (in thousands):
| ** **                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                       |       |     |       |     |       |
| Provision for obligations to be settled in future  periods |       | $        | 24,570     |     | 26,498     |   |
| Closed locations                                           |       | 6,115    |       | 2,512    |       |
| Total deferred tax assets                                  |       | 30,685   |       | 29,010   |       |
| Deferred tax  liabilities:                                 |       |     |       |     |       |
| Depreciation and amortization                              |       | 4,629    |       | 16,194   |       |
| Acquired asset adjustments for fair values                 |       | 10,354   |       | 10,286   |       |
| Accelerated tax deductions                                 |       | 1,106    |       | 743      |       |
| Inventories                                                |       | 2,057    |       | 2,295    |       |
| Other                                                      |       | 685      |       | 124      |       |
| Total deferred tax liabilities                             |       | 18,831   |       | 29,642   |       |
| Net deferred tax  (asset)/liability                        |       | $        | (11,854    | )        | 632        |   |

 

Temporary differences forobligations to be settled in the future consist of deferred compensation,vacation, health benefits and other expenses which are not deductible for taxpurposes until paid.

**(11)**   StockholderRights Plan

Under the Company’s 1996 Stockholder Rights Plan, oneright is attached to each outstanding share of common stock. Each rightentitles the holder to purchase, under certain conditions, one-half shareof common stock at a price****of $30.00($60.00 per full share). The rights are not yet exercisable and no separaterights certificates have been distributed. All rights expire on March 31,2006.

The rights become exercisable 20 days after a “flip-inevent” has occurred or 10 business days (subject to extension) after a personor group makes a tender offer for 15% or more of the Company’s outstandingcommon stock. A flip-in event would occur if a person or group acquires (1) 15%of the Company’s outstanding common stock, or (2) an ownership level setby the Board of Directors at less than 15% if the person or group is deemed bythe Board of Directors to have interests adverse to those of the Company andits stockholders. The rights may be redeemed by the Company at any time priorto the occurrence of a flip-in event at $.01 per right. The power toredeem may be reinstated within 20 days after a flip-in event occurs ifthe cause of the occurrence is removed.

When the rights becomeexercisable, subject to certain adjustments or alternatives, each right wouldentitle the****holder (other than the acquiringperson or group, whose rights become void) to purchase a number of shares ofthe Company’s common stock having a market value of twice the exercise price ofthe right. If the Company is involved in a merger or other businesscombination, or certain other events occur, each right would entitle the holderto purchase common shares of the acquiring company having a market value oftwice the exercise price of the right. Within 30 days after the rights becomeexercisable following a flip-in event, the Board of Directors mayexchange shares of Company common stock or cash or other property forexercisable rights.

**(12)**   Stock-BasedCompensation Plans

The Company follows APB 25 and related interpretationsin accounting for its employee stock options. Under APB 25, when the exerciseprice of employee stock options equals the market price of the underlying stockon the date of the grant, no compensation expense is recognized.

52

----

The Company has three stock incentive plans underwhich incentive stock options, non-qualified stock options and other forms ofstock-based compensation have been, or may be, granted primarily to keyemployees and non-employee members of the Board of Directors. Under the 1995 Director Stock Option Plan (“1995Plan”), each non-employee director received a non-qualified stock optioncovering 5,000 shares of the Company’s common stock in 2002 and 2003. Eachoption has an exercise price equal to the fair market value of a share of theCompany’s stock on the date of grant, becomes fully exercisable six monthsafter the date of grant, and has a five year term. As of December 27,2004, the Company has terminated the 1995 Plan. Under the 1997 Non-EmployeeDirector Stock Compensation Plan (“1997 Plan”), each non-employee directorreceived prior to 2004 one-half of his or her annual retainer in shares ofCompany stock. As of December 31, 2003, the 1997 Plan was amended toremove this feature. Participation in the 1997 Plan was frozen as of December 31,2004.

Under the 2000 Stock Incentive Plan (“2000 Plan”),employees, non-employee directors and consultants may be awarded incentive ornon-qualified stock options, shares of restricted stock, stock appreciationrights, performance units or stock bonuses. As of January 1, 2005, onlyemployees and non-employee directors have received awards under the 2000 Plan. Awardsto employees have commonly been non-qualified stock options, each with anexercise price equal to the fair market value of a share of the Company’scommon stock on the date of grant and a term of 5 years, becoming exercisablein 20% increments 6, 12, 24, 36 and 48 months after the date of the grant. Awardsof unrestricted stock in lieu of cash have been made under the 2000 Plan tocertain employees in connection with the Company’s annual bonus program forexecutives. In such cases, additional awards of restricted stock equal to 15%of the number of shares received in lieu of cash have been made to theseemployees, with such shares subject to a two-year vesting period. In addition,an award of 50,000 restricted shares was made to the Company’s CEO in February 2002,with 20% of such shares vesting on each of the first five anniversaries of thegrant date. Under terms of the award, he has voting power over all of theshares, and is entitled to receive ordinary cash dividends paid generally toshareholders. The award also provides for a cash payment on each vesting datein an amount equal to forty percent of the fair market value of the sharesvesting at that time to partially offset the taxes due upon vesting. Compensationexpense is recognized over the periods during which the restrictions lapse. Performanceunits have also been granted under the 2000 Plan to two executives in exchangefor phantom stock units those executives had accrued under a now discontinuedbonus and deferred compensation plan.

Awards to non-employee directors under the 2000 Planbegan in 2004 and have taken the form of performance units, also referred to asrestricted stock units, that are granted annually to each non-employee directoras part of his or her annual compensation for service as a director. The numberof such units awarded to each director is determined by dividing $30,000 by thefair market value of a share of the Company’s common stock on the date of grant.Each of these units vest six months after issuance and will entitle a directorto receive one share of the Company’s common stock six months after thedirector’s service on the Company’s Board ends.

The Company also maintains the 1999 Employee StockPurchase Plan under which Company employees may purchase shares of Companycommon stock at the end of each offering period at a price equal to 85% of thelesser of the fair market value of a share of the Company’s common stock at thebeginning or end of such offering period. An offering period under the plan istypically six months. Employees purchased 28,758, 71,854 and 43,026 shares infiscal 2004, 2003 and 2002 respectively, under this plan. At January 1,2005, 78,907 shares of additional common stock were available for purchaseunder this plan.

53

----

Changesin outstanding options under the 1995 Plan and the 2000 Plan (including apredecessor 1994 Stock Incentive Plan) during the three fiscal years ended January 1,2005 are summarized as follows:
| ** **                                  | ** ** | **Shares**              | ** ** | **Weighted  Average  Option Price  Per Share** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** | ** **                                               | ** ** |
| Options  outstanding December 29, 2001 |       |                    | 1,146      |                                                     |       |   | $ | 15.04 |   |   |
| Exercised                                   |       |                    | (29        | )                                                        |       |   | 11.94 |   |   |
| Forfeited                                   |       |                    | (126       | )                                                        |       |   | 21.22 |   |   |
| Granted                                     |       |                    | 354        |                                                     |       |   | 29.93 |   |   |
| Options outstanding December 28, 2002  |       |                    | 1,345      |                                                     |       |   | 18.45 |   |   |
| Exercised                                   |       |                    | (105       | )                                                        |       |   | 8.20 |   |   |
| Forfeited                                   |       |                    | (215       | )                                                        |       |   | 21.23 |   |   |
| Granted                                     |       |                    | 328        |                                                     |       |   | 16.91 |   |   |
| Options outstanding January 3, 2004    |       |                    | 1,353      |                                                     |       |   | 18.43 |   |   |
| Exercised                                   |       |                    | (365       | )                                                        |       |   | 14.76 |   |   |
| Forfeited                                   |       |                    | (166       | )                                                        |       |   | 22.45 |   |   |
| Granted                                     |       |                    | 195        |                                                     |       |   | 24.90 |   |   |
| Options  outstanding January 1, 2005   |       |                    | 1,017      |                                                     |       |   | $ | 20.33 |   |   |

 

Stock options totaling 629,700 and 767,000 wereexercisable at January 1, 2005 and January 3, 2004, respectively.

The followingtables summarize information concerning currently outstanding and exercisablestock options at January 1, 2005:

**Options Outstanding**
| **Ranges of Exercise Prices** | ** ** | ** ** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| $  5.68  – 11.22              |       | 140,700    |       |                    | 1.37       |                                                |       |                                   | $          | 9.18 |   |   |
|   12.00  – 16.84              |       | 207,350    |       |                    | 2.41       |                                                |       |                                   | 16.74      |   |   |
|   17.35  – 22.19              |       | 394,000    |       |                    | 2.89       |                                                |       |                                   | 20.41      |   |   |
|   22.78 – 27.52               |       | 124,000    |       |                    | 3.96       |                                                |       |                                   | 25.09      |   |   |
|   30.46  – 35.36              |       | 151,100    |       |                    | 2.94       |                                                |       |                                   | 31.62      |   |   |
|                                         |       | 1,017,150  |       |                    | 2.72       |                                                |       |                                   | $          | 20.33 |   |   |

 

**Options Exercisable**
| **Ranges of Exercise Prices** | ** ** | ** ** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------|------------|----------------------------------------|------------|
| $  5.68  – 11.22              |       |       | 114,900    |                    |       |                                   | $          | 8.75 |   |   |
|   12.00  – 16.84              |       |       | 203,150    |                    |       |                                   | 16.79      |   |   |
|   17.25  – 22.19              |       |       | 214,750    |                    |       |                                   | 20.72      |   |   |
|   22.78 – 27.52               |       |       | 18,200     |                    |       |                                   | 26.69      |   |   |
|   30.46  – 35.36              |       |       | 78,700     |                    |       |                                   | 31.45      |   |   |
|                                         |       |       | 629,700    |                    |       |                                   | $          | 18.78 |   |   |

 

54

----

Theweighted average fair value of options granted during fiscal 2004, 2003 and2002 are $9.88, $6.97 and $8.42, respectively. The fair value of each optiongrant is estimated as of the date of grant using the Black-Scholes singleoption pricing model using the following assumptions.
| **Assumption:**                           | ** ** | ** ** | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|----------|------------|
| Weighted average  risk-free interest rate |       | 3.40       | %          | 3.24      | %          | 2.74      | %          |
| Expected dividend  yield                  |       | 1.56       | %          | 1.53      | %          | 4.66      | %          |
| Expected option  lives                    |       | 2.5 years  |       | 2.5 years |       | 2.5 years |       |
| Volatility                                |       | 67         | %          | 72        | %          | 55        | %          |

 

Pro forma compensationcost for the stock incentive plans would reduce net income as described in the “Summaryof Significant Accounting Policies” as required by SFAS No. 148.

**(13)   Earnings per Share**

Thefollowing table sets forth the computation of basic and diluted earnings pershare for continuing operations (in thousands, except per share amounts):
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                                                     |       |     |       |     |       |     |       |
| Earnings from continuing operations                                            |       | $        | 14,877     |     | 34,679     |     | 30,580     |   |
| Denominator:                                                                   |       |     |       |     |       |     |       |
| Denominator for basic earnings per share  (weighted-average shares)            |       | 12,450   |       | 12,082   |       | 11,796   |       |
| Effect of dilutive options and awards                                          |       | 207      |       | 113      |       | 318      |       |
| Denominator for diluted earnings per share (adjusted  weighted-average shares) |       | 12,657   |       | 12,195   |       | 12,114   |       |
| Basic earnings per share                                                       |       | $        | 1.20       |     | 2.87       |     | 2.59       |   |
| Diluted earnings  per share                                                    |       | $        | 1.18       |     | 2.85       |     | 2.52       |   |

 

**(14)**   Leases

Asubstantial portion of the store and warehouse properties of the Company areleased. The following table summarizes assets under capitalized leases (inthousands):
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Buildings and  improvements          |       | $        | 40,171     |     | 41,661     |   |
| Less accumulated  amortization       |       | (18,947  | )          | (17,039  | )          |
| Net assets under  capitalized leases |       | $        | 21,224     |     | 24,622     |   |

 

55

----

Totalfuture minimum sublease rents receivable related to operating and capital leaseobligations as of January 1, 2005 are $39.7 million and $22.6 million,respectively. Future minimum payments for operating and capital leases have notbeen reduced by minimum sublease rentals receivable under non-cancelablesubleases. At January 1, 2005, future minimum****rentalpayments by the Company under non-cancelable leases (including withrespect to properties that have been subleased) are as follows (in thousands):
| ** **                                                | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------|------------|
| ** **                                                | ** ** | **Leases**    | ** ** | **leases**  | ** ** |
| 2005                                                      |       | $             | 23,158     |        | $          | 7,346 |   |
| 2006                                                      |       | 20,548        |       | 7,363       |       |
| 2007                                                      |       | 18,399        |       | 7,317       |       |
| 2008                                                      |       | 13,755        |       | 7,313       |       |
| 2009                                                      |       | 12,427        |       | 7,190       |       |
| Thereafter                                                |       | 47,676        |       | 41,822      |       |
| Total minimum  lease payments                             |       | $             | 135,963    |        | $          | 78,351 |   |
| Less imputed interest (rates ranging from 8.3% to  24.6%) |       |          |       | 35,368      |       |
| Present value of net minimum lease payments               |       |          |       | 42,983      |       |
| Less current maturities                                   |       |          |       | (2,623      | )          |
| Capitalized lease  obligations                            |       |          |       | $           | 40,360     |   |

 

Totalrental expense under operating leases for fiscal 2004, 2003 and 2002 was asfollows (in thousands):
| ** **                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total rentals                                                |       | $        | 42,742     |     | 45,002     |     | 43,858     |   |
| Less real estate  taxes, insurance and other occupancy costs |       | (4,284   | )          | (4,399   | )          | (3,805   | )          |
| Minimum rentals                                              |       | 38,458   |       | 40,603   |       | 40,053   |       |
| Contingent  rentals                                          |       | (159     | )          | (104     | )          | (175     | )          |
| Sublease rentals                                             |       | (8,596   | )          | (10,986  | )          | (14,092  | )          |
|                                                         |       | $        | 29,703     |     | 29,513     |     | 25,786     |   |

 

Mostof the Company’s leases provide that the Company must pay real estate taxes,insurance and other occupancy costs applicable to the leased premises. Contingentrentals are determined on the basis of a percentage of sales in excess ofstipulated minimums for certain store facilities. Operating leases oftencontain renewal options. Management expects that, in the normal course ofbusiness, leases that expire will be renewed or replaced by other leases.

**(15)   Concentration of Credit Risk**

The Company provides financial assistance in the formof loans to some of its independent retailers for inventories, store fixturesand equipment and store improvements. Loans are generally secured by liens onreal estate, inventory and/or equipment, personal guarantees and other types ofcollateral, and are generally repayable over a period of five to seven years. Allof the guarantees were issued prior to December 31, 2002 and thereforewere not subject to the recognition andmeasurement provisions of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requiremetns for Guarantees, Including IndirectGuarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5,57 and 107 and a recission of FASB Interpretation No. 34” (FIN 45). TheCompany establishes allowances for doubtful accounts based upon periodicassessments of the credit risk of specific customers, collateral value,historical trends and other information. The Company believes that adequateprovisions have been recorded for any doubtful accounts. In addition, theCompany may guarantee debt and lease obligations of 

56

----

retailers. In the eventthese retailers are unable to meet their debt service payments or otherwiseexperience an event of default, the Company would be unconditionally liable forthe outstanding balance of their debt and lease obligations, which would be duein accordance with the underlying agreements.

As of January 1,2005 and January 3, 2004, one retailer comprised 41.2% and 36.8%,respectively, of the Company’s notes receivable balance. In addition, as of January 1,2005, the Company has guaranteed outstanding debt and lease obligations of anumber of retailers in the amount of $10.6 million, including $4.6 million inloan guarantees to one retailer. In the normal course of business, the Companyalso subleases and assigns to third parties various leases. As of January 1,2005, the Company estimates that its maximum potential obligation with respectto the subleases and assigned leases to be approximately $62.3 million and$20.0 million, respectively.

**(16)   FairValue of Financial Instruments**

The estimated fair value of notes receivableapproximates the carrying value at January 1, 2005 and January 3,2004. Substantially all notes receivable are based on floating interest rateswhich adjust to changes in market rates.

The estimated fair value of the Company’s long-termdebt, including current maturities, was $202.7 million and $285.4 million at January 1,2005 and January 3, 2004, respectively, utilizing discounted cash flows.

Theestimated fair value of the Company’s interest rate swap agreements is theestimated amount the Company would have to pay or receive to terminate theagreements based upon quoted market prices as provided by the financialinstitutions which are counter parties to the agreements.

**(17)   Commitments and Contingencies**

*SEC Investigation*

As previously disclosed, on October 9, 2002, NashFinch received a letter from the staff of the Division of Enforcement of theSEC indicating that they were conducting an informal inquiry into the Company’sprocess for assessing count-recount charges to its vendors and how it accounts for those charges. Inresponse, the Company commenced an internal review of its practices inconjunction with the Audit Committee, special outside counsel and the Company’sprior and then-current auditors, and filed a written response to the inquiry onNovember 22, 2002. On February 4, 2003, the Company was notified bythe staff of the SEC’s Division of Enforcement that the SEC had approved aformal order of investigation of Nash Finch.

Also as previouslydisclosed, on February 3, 2003, the Company provided the Office of theChief Accountant of the SEC a written communication detailing the basis for themanner in which the Company assesses and accounts for count-recount charges, advisingthat it believes these charges were properly accounted for in accordance withgenerally accepted accounting principles, and seeking the SEC staff’sconcurrence with this conclusion. After a February 19, 2003 meeting withmembers of the staff of the SEC’s Office of the Chief Accountant and Divisionof Corporation Finance, Nash Finch received a letter dated March 7, 2003,from the staff of the SEC’s Office of the Chief Accountant and Division ofCorporation Finance indicating that, based on our oral and writtenrepresentations, they would not object at that time to the Company’s accountingfor the count-recount charges. The response by the staff of the Office of theChief Accountant and the Division of Corporation Finance does not preclude anyfurther action by the Division of Enforcement.

57

----

**(18)   Long-Term Compensation Plans**

The Company has a profit sharing plan which includes a401(k) feature, covering substantially all employees meeting specifiedrequirements. Profit sharing contributions, determined by the Board ofDirectors, are made to a noncontributory profit sharing trust based on profitperformance. Effective January 1, 2003, the Company added a Company matchto the 401(k) feature of this plan whereby the Company will make an annualmatching contribution to each participant’s plan account equal to 50% of thelesser of the participant’s contributions to the plan for the year or 6% of theparticipant’s eligible compensation for that year. The contribution expense forthe Company matching contributions to the 401(k) plan will reduce dollarfor dollar the profit sharing contributions that would otherwise be made to theprofit sharing plan. Profit sharing expense (including the matchingcontribution) for fiscal 2004 was $5.8 million and $4.7 million for fiscal 2003 and 2002.

On January 1, 2000, the Company adopted aSupplemental Executive Retirement Plan (“SERP”) for key employees and executiveofficers. On the last day of the calendar year, each participant’s SERP accountis credited with an amount equal to 20% of the participant’s base salary forthe year. Benefits payable under the SERP vest based on years of participationin the SERP, ranging from 0% vested for less than five years of participationto 100% vested at 10 years’ participation (or age 60 if that occurs sooner). Amountscredited to a SERP account, plus earnings, are distributed following theexecutive’s termination of employment. Earnings are based on the quarterlyequivalent of the average of the annual yield set forth for each month duringthe quarter in the Moody’s Corporate Bond Yield Averages. Compensation expenserelated to the plan was $0.6 million in fiscal 2004, 2003 and 2002.

TheCompany also has deferred compensation plans for a select group of managementor highly compensated employees and for non-employee directors. The plans areunfunded and permit participants to defer receipt of a portion of their basesalary, annual bonus or long-term incentive compensation in the case ofemployees, or cash compensation in the case of non-employee directors, thatwould otherwise be paid to them. The deferred amounts, plus earnings, aredistributed following the executive’s termination of employment or the director’stermination of service on the Board. Earnings are based on the performance of phantominvestments elected by the participant from a portfolio of investment options. Underthe plans available to non-employee directors, the investment options includeshare units that correspond to shares of the Company’s common stock. During fiscal 2004, the Company created andfunded a benefits protection trust to invest amounts deferred under theseplans. The trust is a grantor trust and accounted for in accordance withEmerging Issues Task Force Issue No. 97-14, *“Accountingfor Deferred Compensation Arrangements Where Amounts Earned are Held in a RabbiTrust and Invested.”* A benefits protection or rabbi trust holdsassets that would be available to pay benefits under a deferred compensationplan if the settler of the trust, such as the Company, is unwilling to paybenefits for any reason other than bankruptcy or insolvency. Assets in thetrust remain subject to the claims of the Company’s general creditors, and theinvestment in the rabbi trust is classified as an investment inavailable-for-sale securities on the Company’s balance sheet.

**(19)   Pensionand Other Post-retirement Benefits**

One of the Company’s subsidiaries has a qualified non-contributoryretirement plan to provide retirement income for certain eligible full-timeemployees who are not covered by a union retirement plan. Pension benefitsunder the plan are based on length of service and compensation. The Companysubsidiary contributes amounts necessary to meet minimum funding requirements. Thisplan has been curtailed and no new employees can enter the plan.

The Company provides certain health care benefits forretired employees not subject to collective bargaining agreements. Suchbenefits will not be provided to employees who leave the Company after December 31,2003. Employees who left the Company on or before that date become eligible forthose 

58

----

benefits when they reachearly retirement age if they have met minimum age and service requirements.Health care benefits for retirees are provided under a self-insuredprogram administered by an insurance company.

Effective December 31, 2003, the Company recordeda curtailment reduction in the benefit obligation of $2.5 million and a gain of$4.0 million due to the elimination of retiree medical benefits for all activenon-union and certain union employees, and the elimination of retiree lifeinsurance benefits for all active non-union employees. In fiscal 2002, theaccumulated postretirement benefit obligation was reduced by $9.1 million dueto a plan amendment which: (1) froze entry into the plan for employeeshired after June 30, 2002, (2) eliminated coverage for employeeswhose age plus service were less than 50 as of June 30, 2002, and (3) cappedthe medical benefits to be provided effective July, 1, 2002 at $175 a month forpre-65 retirees and $70 a month for post-65 retirees.

The estimated future cost of providing post-retirementhealth costs is accrued over the active service life of the employees. Thefollowing table sets forth the benefit obligations and funded status of thecurtailed pension plan and curtailed post-retirement benefits.

Theactuarial present value of benefit obligations and funded plan status as of andfor the years ended January 1, 2005 and January 3, 2004 were (inthousands):
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2004**                  | ** ** | **2003**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Change  in benefit obligation**               | ** ** | ** **                | ** ** |                    |       |   |   |   |   |
| Benefit  obligation at beginning of year        | ** ** | $                         | (39,394    | )                       | (41,114    | **)** | (5,605 | ) | (9,199 | ) |
| Service cost                                    |       | (1                        | )          | (20                     | )          | (4 | ) | (245 | ) |
| Interest cost                                   |       | (2,376                    | )          | (2,439                  | )          | (293 | ) | (507 | ) |
| Participant  contributions                      |       | —                    |       | —                  |       | (1,434 | ) | (1,058 | ) |
| Actuarial (loss)  gain                          |       | (1,071                    | )          | 1,528                   |       | 127 |   | 656 |   |
| Benefits paid                                   |       | 2,911                     |       | 2,651                   |       | 2,131 |   | 2,267 |   |
| Curtailments                                    |       | —                    |       | —                  |       | — |   | 2,481 |   |
| Benefit  obligation at end of year              |       | (39,931                   | )          | (39,394                 | )          | (5,078 | ) | (5,605 | ) |
| **Change  in plan assets**                      |       |                      |       |                    |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | 33,843                    |       | 32,912                  |       | — |   | — |   |
| Actual return on  plan assets                   |       | 2,157                     |       | 3,264                   |       | — |   | — |   |
| Employer  contributions                         |       | 439                       |       | 318                     |       | 697 |   | 1,209 |   |
| Plan  participants’ contributions          |       | —                    |       | —                  |       | 1,434 |   | 1,058 |   |
| Benefits paid                                   |       | (2,911                    | )          | (2,651                  | )          | (2,131 | ) | (2,267 | ) |
| Fair value of  plan assets at end of year       |       | 33,528                    |       | 33,843                  |       | — |   | — |   |
| Funded status                                   |       | (6,402                    | )          | (5,550                  | )          | (5,078 | ) | (5,605 | ) |
| Unrecognized  actuarial loss (gain)             |       | 8,831                     |       | 7,924                   |       | 1,675 |   | 1,871 |   |
| Unrecognized  prior service cost                |       | (47                       | )          | (62                     | )          | (203 | ) | (233 | ) |
| Prepaid (accrued)  benefit cost                 | ** ** | $                         | 2,382      |                    | 2,312      |   | (3,606 | ) | (3,967 | ) |

 

Amountsrecognized in the statement of financial position consist of (in thousands):
| ** **                              | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2004**                  | ** ** | **2003**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Prepaid benefit  cost                   | ** ** | $                         | 2,382      |                    | 2,312      |   | — |   | — |   |
| Accrued benefit  cost                   |       | (8,778                    | )          | (7,833                  | )          | (3,606 | ) | (3,967 | ) |
| Deferred tax  asset                     |       | 3,484                     |       | 3,055                   |       | — |   | — |   |
| Accumulated other  comprehensive income |       | 5,294                     |       | 4,778                   |       | — |   | — |   |
| Net amount recognized                   |       | 2,382                     |       | 2,312                   |       | (3,606 | ) | (3,967 | ) |
|                                         |            |                           |            |                         |            |  |  |  |  |  |

 

59

----

Theestimated projected benefit obligation, accumulated benefit obligation and fairvalue of assets for the pension plan as of January 1, 2005 and January 3,2004 were as follows (in thousands):
| ** **                      | ** ** | **January 1, 2005** | ** ** | **January 3, 2004** | ** ** |
|---------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Projected benefit  obligation   | ** ** |                          | $          | 39,931                        |       |   |   | 39,394 |   |   |
| Accumulated  benefit obligation |       |                          | 39,925     |                          |       |   | 39,363 |   |   |
| Fair value of plan  assets      |       |                          | 33,528     |                          |       |   | 33,843 |   |   |

 

Theaggregate costs for the Company’s retirement benefits included the followingcomponents (in thousands):

**Componentsof net periodic benefit cost (income)**
| ** **                                          | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2004**                  | ** ** | **2003**                | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                                        |       | $                         | 2          |                    | 20         |   | 42 |   | 4 |   | 245 |   | 402 |   |
| Interest cost                                       |       | 2,376                     |       | 2,439                   |       | 2,759 |   | 293 |   | 507 |   | 737 |   |
| Expected return  on plan assets                     |       | (2,156                    | )          | (2,236                  | )          | (2,448 | ) | — |   | — |   | — |   |
| Amortization of  prior service cost                 |       | (15                       | )          | (15                     | )          | (15 | ) | (30 | ) | (550 | ) | (550 | ) |
| Recognized  actuarial (gain) loss                   |       | 163                       |       | 128                     |       | 43 |   | 69 |   | 289 |   | 528 |   |
| Net periodic benefit  cost (income)                 |       | 370                       |       | 336                     |       | 381 |   | 336 |   | 491 |   | 1,117 |   |
| Curtailment (gain) loss                             |       | —                    |       | —                  |       | — |   | — |   | (4,005 | ) | — |   |
| Net periodic  benefit cost after curtailments  |       | $                         | 370        |                    | 336        |   | 381 |   | 336 |   | (3,514 | ) | 1,117 |   |

 

Weighted-averageassumptions used to determine benefit obligations at January 1, 2005 and January 3,2004:
| ** **                            | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|---------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003**            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Weighted-average assumptions** | ** ** | ** **            | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                         |       | 6.00                  | %          | 6.25                | %          | 6.00 | % | 6.25 | % |
| Rate of compensation  increase        |       | 3.00                  | %          | 4.00                | %          | — |   | — |   |

 

Weighted-averageassumptions used to determine net periodic benefit cost for years ended January 1,2005 and January 3, 2004:
| ** **                        | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003**            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Weighted-average  assumptions** |       |                  |       |                |       |   |   |   |   |
| Discount rate                     |       | 6.25                  | %          | 6.75                | %          | 6.25 | % | 6.75 | % |
| Expected return  on plan assets   |       | 7.50                  | %          | 8.00                | %          | — |   | — |   |
| Rate of compensation  increase    |       | 4.00                  | %          | 4.00                | %          | — |   | — |   |

 

Assumedhealth care cost trend rates at January 1, 2005 and January 3, 2004were as follows:
| ** **                   | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Current year  trend rate     |       |                      | 9.00       | %                         |       |   | 10.00 | % |   |
| Ultimate year  trend rate    |       |                      | 5.00       | %                         |       |   | 5.00 | % |   |
| Year of ultimate  trend rate |       |                      | 2009       |                      |       |   | 2009 |   |   |

 

60

----

Assumedhealth care cost trend rates have a significant effect on the fiscal 2004amounts reported for the health care plans. A one-percentage point change inassumed health care cost trend rates would have the following effects (inthousands):
| ** **                                               | ** ** | **1%**       | ** ** | **1%**       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                               | ** ** | **Increase** | ** ** | **Decrease** | ** ** |
| Effect on total  of service and interest cost components |       |         | $          | 2            |       |   |   | $ | (2 | ) |   |
| Effect on  post-retirement benefit obligation            |       |         | 42         |         |       |   | (38 | ) |   |

 

In December 2003, the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (the Act) became law in the UnitedStates. The Act introduces a prescription drug benefit under Medicare as wellas a federal subsidy to sponsors of retiree health care benefit plans that providea benefit that is at least “actuarially equivalent” to Medicare. The benefitand subsidy introduced by the Act begin in 2006. In May 2004, the FASBissued FASB Staff Position (FSP) No. 106-2, *“Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003.”* FSP 106-2 requiresan employer to initially account for any subsidy received under the Act as anactuarial experience gain to the accumulated postretirement benefit obligation(APBO), which would be amortized over future service periods. Future subsidieswould reduce service cost each year. FSP 106-2 was effective for the Company in the third fiscal quarterended October 9, 2004. The Company believes that its postretirementbenefit plan is not actuarially equivalent to Medicare Part D under theAct and consequently will not receive significant subsidies under the Act.

The Pension Funding EquityAct of 2004 (the Act), signed by President Bush on April 10, 2004,established new benchmark interest rates for determining the IRS defined 90%Current Liability Funded status. In its 2003 consolidated financial statementsreported on Form 10-K prior to the Act, the Company disclosed that itexpected to contribute between $925,000 and $1,460,000 to its pension planduring the measurement year ending December 31, 2004. Total contributionsto the Company’s pension plan in 2004 were $439,000 due to changes effected bythe Act.

**Pension Plan Assets**

Thepension plan’s weighted-average asset allocation at January 1, 2005 and January 3,2004, by asset category are as follows:
| ** **                       | ** ** | **Plan Assets** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **January 1,**  | ** ** | **January 3,** | ** ** |
| ** **                       | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Weighted-average assumptions** | ** ** |                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Equity securities                |       |                 | 28         | % |   |   | 25 | % |   |
| Debt securities                  |       |                 | 10         | % |   |   | 10 | % |   |
| Guaranteed investment  contract  |       |                 | 62         | % |   |   | 65 | % |   |

 

**Investment Policyand Strategy**

The Company’s investment policy is to invest inequity, fixed income and other securities to cover cash flow requirements ofthe plan and minimize long-term costs.

61

----

**Estimated Future Benefits:  **The followingbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid as follows: 
| ** **  | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------|------------|---------------------------|------------|-------------------------|------------|
| 2005        |       |                      | $          | 2,275                   |       |   |   | 697 |   |   |
| 2006        |       |                      | 2,781      |                    |       |   | 600 |   |   |
| 2007        |       |                      | 2,639      |                    |       |   | 547 |   |   |
| 2008        |       |                      | 2,677      |                    |       |   | 505 |   |   |
| 2009        |       |                      | 2,581      |                    |       |   | 473 |   |   |
| 2010 - 2014 |       |                      | 12,684     |                    |       |   | 2,008 |   |   |
|        |       |                      | $          | 25,637                  |       |   |   | 4,830 |   |   |

 

**Expected Long-Term Rate of Return**

The expected returnassumption was reviewed by external consultants, based on asset allocations andthe expected return and risk components of the various asset classes in theportfolio. This assumption is assumed to be reasonable over a long-term periodthat is consistent with the liabilities.

**Cash Flows**

**EmployerContributions**

*Pension Plan*

The Company anticipatesmaking contributions of $0 to $1.4 million during the measurement year ending December 31,2005.

*Multi-EmployerPlans*

Approximately 5.3% of theCompany’s employees are covered by collectively-bargained pension plans. Contributionsare determined in accordance with the provisions of negotiated union contractsand are generally based on the number of hours worked. The Company does nothave the information available to reasonably estimate its share of theaccumulated plan benefits or net assets available for benefits under themulti-employer plans. Amounts contributed to those plans were $1.9 million infiscal 2004 and 2003, and $2.3 million in fiscal 2002.

**(20)   Segment Information**

The Company and its subsidiaries sell and distributeproducts that are typically found in supermarkets. The Company has threereportable operating segments. The Company’s food distribution segment consistsof 15 distribution centers that sell to independently operated retail foodstores and other customers. The military distribution segment consistsprimarily of one distribution center that sells products exclusively tomilitary commissaries. The retail segment consists of corporate-owned storesthat sell directly to the consumer.

Information presented below relates only to results ofcontinuing segments. The Company evaluates segment performance and allocatesresources based on profit or loss before income taxes, general corporate expenses,interest and restructuring charges. The accounting policies of the reportablesegments are the same as those described in the summary of accounting policiesexcept the Company accounts for inventory on a FIFO basis at the segment levelcompared to a LIFO basis at the consolidated level.

62

----

Inter-segment salesare recorded on a market price-plus-fee and freight basis. For segmentfinancial reporting purposes, a portion of the operational profits recorded atthe Company’s distribution centers related to corporate-owned stores isallocated to the retail segment. Certain revenues and costs from the Company’sdistribution centers are specifically identifiable to either the independent orcorporate-owned stores that they serve. The revenues and costs that are specifically identifiable to corporate-ownedstores are allocated to the retail segment. Those that are specificallyidentifiable to independent customers are recorded in the food distributionsegment. The remaining revenues and costs that are not specificallyidentifiable to either the independent or corporate-owned stores are allocatedto the retail segment as a percentage of corporate-owned store distributionsales to total distribution center sales. For fiscal 2004, 27% of suchwarehouse operational profits were allocated to the retail operations comparedto 35% and 37% in 2003 and 2002, respectively.

***Schedules***

**Year end January 1,2005**

**(in thousands)**
| ** **                                          | ** ** | **Food  Distribution** | ** ** | **Military** | ** ** | **Retail** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|-----------|------------|
| Revenue from external  customers                    |       | $                      | 1,961,179  |         | 1,122,056  |       | 813,839    |      | 3,897,074  |   |
| Inter-segment revenue                               |       | 411,515                |       | —       |       | —     |       | 411,515   |       |
| Interest revenue                                    |       | (392                   | )          | —       |       | (315       | )          | (707      | )          |
| Interest expense  (includes capital lease interest) |       | (384                   | )          | —       |       | 3,213      |       | 2,829     |       |
| Depreciation and  amortization expense              |       | 8,666                  |       | 1,670        |       | 11,017     |       | 21,353    |       |
| Segment profit                                      |       | 73,603                 |       | 36,266       |       | 27,120     |       | 136,989   |       |
| Segment assets                                      |       | 361,072                |       | 143,231      |       | 119,491    |       | 623,794   |       |
| Expenditures for long-lived assets                  |       | 7,858                  |       | 2,689        |       | 4,666      |       | 15,213    |       |
|                                                     |            |                        |            |              |            |            |            |           |            |  |

 

**Year end January 3,2004**

**(in thousands)**
| ** **                                          | ** ** | **Food  Distribution** | ** ** | **Military** | ** ** | **Retail** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|-----------|------------|
| Revenue from external customers                     |       | $                      | 1,915,170  |         | 1,089,999  |       | 966,333    |      | 3,971,502  |   |
| Inter-segment revenue                               |       | 506,488                |       | —       |       | —     |       | 506,488   |       |
| Interest revenue                                    |       | (297                   | )          | —       |       | (332       | )          | (629      | )          |
| Interest expense  (includes capital lease interest) |       | (283                   | )          | —       |       | 3,199      |       | 2,916     |       |
| Depreciation and amortization  expense              |       | 8,982                  |       | 1,534        |       | 13,569     |       | 24,085    |       |
| Segment profit                                      |       | 63,898                 |       | 31,283       |       | 30,178     |       | 125,359   |       |
| Segment assets                                      |       | 360,962                |       | 126,434      |       | 168,323    |       | 655,719   |       |
| Expenditures for long-lived assets                  |       | 5,918                  |       | 1,264        |       | 25,414     |       | 32,596    |       |
|                                                     |            |                        |            |              |            |            |            |           |            |  |

 

**Year end December 28,2002**

**(in thousands)**
| ** **                                          | ** ** | **Food  Distribution** | ** ** | **Military** | ** ** | **Retail** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|-----------|------------|
| Revenue from external  customers                    |       | $                      | 1,825,788  |         | 1,020,710  |       | 1,028,174  |      | 3,874,672  |   |
| Inter-segment revenue                               |       | 553,287                |       | —       |       | —     |       | 553,287   |       |
| Interest revenue                                    |       | (454                   | )          | —       |       | (338       | )          | (792      | )          |
| Interest expense (includes  capital lease interest) |       | (443                   | )          | —       |       | 3,302      |       | 2,859     |       |
| Depreciation and  amortization expense              |       | 10,507                 |       | 1,420        |       | 12,851     |       | 24,778    |       |
| Segment profit                                      |       | 61,493                 |       | 30,336       |       | 33,738     |       | 125,567   |       |
| Segment assets                                      |       | 379,166                |       | 132,170      |       | 160,673    |       | 672,009   |       |
| Expenditures for long-lived assets                  |       | 8,126                  |       | 1,604        |       | 22,894     |       | 32,624    |       |
|                                                     |            |                        |            |              |            |            |            |           |            |  |

 

63

----

***Reconciliation (Inthousands)***
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ***Revenues***                                  |       |     |       |     |       |     |       |
| Total external  revenue for segments            |       | $        | 3,897,074  |     | 3,971,502  |     | 3,874,672  |   |
| Inter-segment  revenue from reportable segments |       | 411,515  |       | 506,488  |       | 553,287  |       |
| Elimination of  intra-segment revenue           |       | (411,515 | )          | (506,488 | )          | (553,287 | )          |
| Total consolidated revenues                     |       | $        | 3,897,074  |     | 3,971,502  |     | 3,874,672  |   |
| ***Profit***                                    |       |     |       |     |       |     |       |
| Total profit for  segments                      |       | $        | 136,989    |     | 125,359    |     | 125,567    |   |
| Unallocated amounts:                            |       |     |       |     |       |     |       |
| Adjustment of LIFO to inventory                 |       | (3,525   | )          | 1,120    |       | 2,234    |       |
| Unallocated corporate overhead                  |       | (79,486  | )          | (74,546  | )          | (78,434  | )          |
| Special charges                                 |       | (34,779  | )          | —   |       | 765      |       |
| Income before  income taxes                     |       | $        | 19,199     |     | 51,933     |     | 50,132     |   |
| ***Assets***                                    |       |     |       |     |       |     |       |
| Total assets for  segments                      |       | $        | 623,794    |     | 655,719    |     | 672,009    |   |
| Unallocated  corporate assets                   |       | 240,673  |       | 278,189  |       | 328,643  |       |
| Accumulated LIFO  reserves                      |       | (47,924  | )          | (44,399  | )          | (45,519  | )          |
| Elimination of  intercompany receivables        |       | (915     | )          | (3,157   | )          | (7,141   | )          |
| Total  consolidated assets                      |       | $        | 815,628    |     | 886,352    |     | 947,992    |   |

 

***Other SignificantItems—2004***
| ** **                             | ** ** | **Segment** | ** ** | ** **      | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|-------------|------------|-----------------|------------|------------------|------------|
| ** **                             | ** ** | **Totals**  | ** ** | **Adjustments** | ** ** | **Totals**       | ** ** |
| Depreciation and  amortization expense |       | $           | 21,353     |            |       | 18,888           |       |   |   | 40,241 |   |   |
| Interest expense                       |       | 2,829       |       |            | 22,969     |             |       |   | 25,798 |   |   |
| Expenditures for  long-lived assets    |       | 15,213      |       |            | 7,114      |             |       |   | 22,327 |   |   |
|                                        |            |             |            |                 |            |                  |            |  |  |  |  |  |

 

***Other SignificantItems—2003***
| ** **                             | ** ** | **Segment** | ** ** | ** **      | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|-------------|------------|-----------------|------------|------------------|------------|
| ** **                             | ** ** | **Totals**  | ** ** | **Adjustments** | ** ** | **Totals**       | ** ** |
| Depreciation and  amortization expense |       | $           | 24,085     |            |       | 18,327           |       |   |   | 42,412 |   |   |
| Interest expense                       |       | 2,916       |       |            | 30,953     |             |       |   | 33,869 |   |   |
| Expenditures for  long-lived assets    |       | 32,596      |       |            | 8,132      |             |       |   | 40,728 |   |   |
|                                        |            |             |            |                 |            |                  |            |  |  |  |  |  |

 

***Other SignificantItems—2002***
| ** **                             | ** ** | **Segment** | ** ** | ** **      | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|-------------|------------|-----------------|------------|------------------|------------|
| ** **                             | ** ** | **Totals**  | ** ** | **Adjustments** | ** ** | **Totals**       | ** ** |
| Depreciation and  amortization expense |       | $           | 24,778     |            |       | 15,210           |       |   |   | 39,988 |   |   |
| Interest expense                       |       | 2,859       |       |            | 26,631     |             |       |   | 29,490 |   |   |
| Expenditures for  long-lived assets    |       | 32,624      |       |            | 19,981     |             |       |   | 52,605 |   |   |
|                                        |            |             |            |                 |            |                  |            |  |  |  |  |  |

 

The reconciling items toadjust expenditures for depreciation, interest revenue, interest expense andexpenditures for long-lived assets are for unallocated general corporateactivities. All revenues are attributed to and all assets are held in theUnited States. The Company’s market areas are in the Midwest, Mid-Atlantic andSoutheast United States.

64

----

**(21)   Subsidiary Guarantees**

The following table presents summarized combinedfinancial information for certain wholly owned subsidiaries which guarantee ona full unconditional and joint and several basis borrowings under the $300million senior secured credit facility.

The guarantor subsidiariesare 100% owned subsidiaries of the Company. Condensed consolidating financialinformation for the Company and its guarantor subsidiaries is as follows:

**NASH FINCH COMPANY ANDSUBSIDIARIES**

**Consolidating Statementsof Income**

**Fiscal Year Ended January1, 2005**

**(in thousands)**
| ** **                                                | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** | **Nash Finch** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidation** | ** ** | **Company &**   | ** ** |
| ** **                                                | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Subsidiaries**    | ** ** |
| Sales                                                     |       | $          | 3,096,155  |             |       | 938,296           |       |              |       | 25,563              |       |   |   | (162,940 | ) |   |   | 3,897,074 |   |   |
| Cost and expenses:                                        |       |       |       |             |       |              |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Cost of sales                                             |       | 2,789,399  |       |             | 828,867    |              |       |              | 19,003     |                |       |   | (162,940 | ) |   |   | 3,474,329 |   |   |
| Selling, general and   administrative                     |       | 195,565    |       |             | 94,934     |              |       |              | 5,025      |                |       |   | — |   |   |   | 295,524 |   |   |
| Special charges                                           |       | 34,779     |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 34,779 |   |   |
| Extinguishment of debt                                    |       | 7,204      |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 7,204 |   |   |
| Depreciation and amortization                             |       | 30,342     |       |             | 9,677      |              |       |              | 222        |                |       |   | — |   |   |   | 40,241 |   |   |
| Equity in consolidated   subsidiaries                     |       | (2,749     | )          |             | —     |              |       |              | —     |                |       |   | 2,749 |   |   |   | — |   |   |
| Interest expense                                          |       | 24,417     |       |             | 1,338      |              |       |              | 43         |                |       |   | — |   |   |   | 25,798 |   |   |
| Total cost and expenses                                   |       | 3,078,957  |       |             | 934,816    |              |       |              | 24,293     |                |       |   | (160,191 | ) |   |   | 3,877,875 |   |   |
| Earnings from continuing operations before income   taxes |       | 17,198     |       |             | 3,480      |              |       |              | 1,270      |                |       |   | (2,749 | ) |   |   | 19,199 |   |   |
| Income tax expense                                        |       | 2,321      |       |             | 2,001      |              |       |              | —     |                |       |   | — |   |   |   | 4,322 |   |   |
| Earnings from continuing operations                       |       | 14,877     |       |             | 1,479      |              |       |              | 1,270      |                |       |   | (2,749 | ) |   |   | 14,877 |   |   |
| Discontinued  operations                                  |       |       |       |             |       |              |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Resolution of contingency                                 |       | 91         |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 91 |   |   |
| Tax expense                                               |       | 36         |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 36 |   |   |
| Net earnings from discontinued operations                 |       | 55         |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 55 |   |   |
| Net earnings                                              |       | $          | 14,932     |             |       | 1,479             |       |              |       | 1,270               |       |   |   | (2,749 | ) |   |   | 14,932 |   |   |

 

65

----

**Fiscal Year Ended Janauary3, 2004**

**(in thousands)**
| ** **                                                | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** | **Nash Finch** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidation** | ** ** | **Company &**   | ** ** |
| ** **                                                | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Subsidiaries**    | ** ** |
| Sales                                                     |       | $          | 3,148,360  |             |       | 989,587           |       |              |       | 28,343              |       |   |   | (194,788 | ) |   |   | 3,971,502 |   |   |
| Cost and expenses:                                        |       |       |       |             |       |              |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Cost of sales                                             |       | 2,819,801  |       |             | 870,115    |              |       |              | 21,332     |                |       |   | (194,788 | ) |   |   | 3,516,460 |   |   |
| Selling, general and   administrative                     |       | 213,899    |       |             | 107,675    |              |       |              | 5,254      |                |       |   | — |   |   |   | 326,828 |   |   |
| Special charges                                           |       | —     |       |             | —     |              |       |              |       |                |       |   | — |   |   |   | — |   |   |
| Extinguishment of debt                                    |       | —     |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | — |   |   |
| Depreciation and  amortization                            |       | 32,398     |       |             | 9,817      |              |       |              | 197        |                |       |   | — |   |   |   | 42,412 |   |   |
| Equity in consolidated   subsidiaries                     |       | (174       | )          |             | —     |              |       |              | —     |                |       |   | 174 |   |   |   | — |   |   |
| Interest expense                                          |       | 32,322     |       |             | 1,437      |              |       |              | 110        |                |       |   | — |   |   |   | 33,869 |   |   |
| Total cost and expenses                                   |       | 3,098,246  |       |             | 989,044    |              |       |              | 26,893     |                |       |   | (194,614 | ) |   |   | 3,919,569 |   |   |
| Earnings from continuing operations before income   taxes |       | 50,114     |       |             | 543        |              |       |              | 1,450      |                |       |   | (174 | ) |   |   | 51,933 |   |   |
| Income tax expense                                        |       | 15,435     |       |             | 1,819      |              |       |              | —     |                |       |   | — |   |   |   | 17,254 |   |   |
| Earnings from continuing operations                       |       | 34,679     |       |             | (1,276     | )                 |       |              | 1,450      |                |       |   | (174 | ) |   |   | 34,679 |   |   |
| Discontinued  operations                                  |       |       |       |             |       |              |       |              |       |                |       |   |   |   |   |   |   |   |   |
| Resolution of contingency                                 |       | 678        |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 678 |   |   |
| Tax expense                                               |       | 265        |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 265 |   |   |
| Net earnings from discontinued operations                 |       | 413        |       |             | —     |              |       |              | —     |                |       |   | — |   |   |   | 413 |   |   |
| Net earnings                                              |       | $          | 35,092     |             |       | (1,276            | )          |              |       | 1,450               |       |   |   | (174 | ) |   |   | 35,092 |   |   |

 

66

----

**Fiscal Year Ended December28, 2002**

**(in thousands)**
| ** **                                                                                 | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** | **Nash Finch** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                                                                 | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidation** | ** ** | **Company &**   | ** ** |
| ** **                                                                                 | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Subsidiaries**    | ** ** |
| Sales                                                                                      |       | $          | 3,027,101  |             | 1,027,874  |              |       | 29,866            |       |                |       | (210,169 | ) |   |   | 3,874,672 |   |   |
| Cost and expenses:                                                                         |       |       |       |             |       |              |       |              |       |                |       |   |   |   |   |   |   |
| Cost of sales                                                                              |       | 2,696,673  |       | 899,532          |       |              | 22,373     |              |       |                | (210,169   | ) |   |   | 3,408,409 |   |   |
| Selling, general and  administrative                                                       |       | 228,359    |       | 113,380          |       |              | 5,679      |              |       |                | —     |   |   |   | 347,418 |   |   |
| Special charges                                                                            |       | (765       | )          | —           |       |              | —     |              |       |                | —     |   |   |   | (765 | ) |   |
| Depreciation and  amortization                                                             |       | 29,015     |       | 10,806           |       |              | 167        |              |       |                | —     |   |   |   | 39,988 |   |   |
| Equity in consolidated   subsidiaries                                                      |       | (1,780     | )          | —           |       |              | —     |              |       |                | 1,780      |   |   |   | — |   |   |
| Interest expense                                                                           |       | 27,990     |       | 1,408            |       |              | 92         |              |       |                | —     |   |   |   | 29,490 |   |   |
| Total cost and expenses                                                                    |       | 2,979,492  |       | 1,025,126        |       |              | 28,311     |              |       |                | (208,389   | ) |   |   | 3,824,540 |   |   |
| Earnings from continuing operations before income  taxes                              |       | 47,609     |       | 2,748            |       |              | 1,555      |              |       |                | (1,780     | ) |   |   | 50,132 |   |   |
| Income tax expense                                                                         |       | 17,029     |       | 2,523            |       |              | $          | —            |       |                |       | — |   |   |   | 19,552 |   |   |
| Earnings before cumulative effect of change in  accounting principle                       |       | $          | 30,580     |             | 225        |              |       | 1,555             |       |                |       | (1,780 | ) |   |   | 30,580 |   |   |
| Cumulative effect of change in accounting principle,  net of income tax benefits of $4,450 |       | (6,960     | )          | —           |       |              | —     |              |       |                | —     |   |   |   | (6,960 | ) |   |
| Net earnings                                                                               |       | $          | 23,620     |             | 225        |              |       | 1,555             |       |                |       | (1,780 | ) |   |   | 23,620 |   |   |
|                                                                                            |            |            |            |                  |            |                   |            |                   |            |                     |            |  |  |  |  |  |  |  |  |

 

67

----

**NASH FINCH COMPANYAND SUBSIDIARIES**

**CondensedConsolidating Balance Sheets**

**January 1, 2005**

**(in thousands)**
| ** **                                                                   | ** **   | **Nash  Finch** | ** **   | **Guarantor  Subsidiaries** | ** **   | **Non-Guarantor  Subsidiaries** | ** **   | **Consolidation  Adjustments** | ** **   | **Nash Finch  Company &  Subsidiaries** | ** **   |
|------------------------------------------------------------------------------|--------------|-----------------|--------------|-----------------------------|--------------|---------------------------------|--------------|--------------------------------|--------------|-------------------------------------------------------|--------------|
| *Assets*                                                                     | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Current assets:                                                              | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Cash and cash equivalents                                                    |         | $               | 4,543        |                        |         | 162                             | *** *** |                           |         | 324                                                   | *** *** |   |   | — | *** *** |   |   | 5,029 | *** *** |   |
| Accounts and notes receivable, net                                           |         | 123,431         |         |                        | 34,354       | *** ***                    |         |                           | 145          | *** ***                                          |         |   | (533 | ) |   |   | 157,397 | *** *** |   |
| Accounts receivable/payable Subs                                             |         | 43,688          |         |                        | (45,827      | )                               |         |                           | 2,139        | *** ***                                          |         |   | — | *** *** |   |   | — | *** *** |   |
| Inventories                                                                  |         | 135,661         |         |                        | 75,707       | *** ***                    |         |                           | 1,975        | *** ***                                          |         |   | — | *** *** |   |   | 213,343 | *** *** |   |
| Prepaid expenses                                                             |         | 14,061          |         |                        | 1,460        | *** ***                    |         |                           | 3            | *** ***                                          |         |   | — | *** *** |   |   | 15,524 | *** *** |   |
| Deferred tax assets                                                          |         | 14,749          |         |                        | (5,455       | )                               |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 9,294 | *** *** |   |
| Total current assets                                                         |         | 336,133         |         |                        | 60,401       | *** ***                    |         |                           | 4,586        | *** ***                                          |         |   | (533 | ) |   |   | 400,587 | *** *** |   |
| Investment in subsidiary                                                     |         | 200,619         |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | (200,619 | ) |   |   | — | *** *** |   |
| Investments in  marketable securities                                        |         | 1,661           |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 1,661 | *** *** |   |
| Notes receivable,  net                                                       |         | 18,141          |         |                        | 8,413        | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 26,554 | *** *** |   |
| Net property, plant and equipment                                            |         | 135,045         |         |                        | 77,150       | *** ***                    |         |                           | 1,474        | *** ***                                          |         |   | — | *** *** |   |   | 213,669 | *** *** |   |
| Deferred tax asset, net                                                      |         | 12,195          |         |                        | (9,635       | )                               |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 2,560 | *** *** |   |
| Goodwill                                                                     |         | 30,643          |         |                        | 114,689      | *** ***                    |         |                           | 2,103        | *** ***                                          |         |   | — | *** *** |   |   | 147,435 | *** *** |   |
| Investment in  direct financing leases                                       |         | 2,494           |         |                        | 8,382        | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 10,876 | *** *** |   |
| Other assets                                                                 |         | 12,272          |         |                        | 14           | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 12,286 | *** *** |   |
| Total assets                                                                 |         | $               | 749,203      |                        |         | 259,414                         | *** *** |                           |         | 8,163                                                 | *** *** |   |   | (201,152 | ) |   |   | 815,628 | *** *** |   |
| *Liabilities  and Stockholders’ Equity*                                 | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Current liabilities:                                                         | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Outstanding checks                                                           |         | $               | 11,344       |                        |         | —                          | *** *** |                           |         | —                                                | *** *** |   |   | — | *** *** |   |   | 11,344 | *** *** |   |
| Current maturities of long-term debt and capitalized  lease obligations |         | 1,858           | *** *** |                        | 3,113        | *** ***                    |         |                           | 469          | *** ***                                          |         |   | — | *** *** |   |   | 5,440 | *** *** |   |
| Accounts payable                                                             |         | 146,548         |         |                        | 33,783       | *** ***                    |         |                           | 561          | *** ***                                          |         |   | (533 | ) |   |   | 180,359 | *** *** |   |
| Accrued expenses                                                             |         | 66,913          |         |                        | 5,029        | *** ***                    |         |                           | 258          | *** ***                                          |         |   | — | *** *** |   |   | 72,200 | *** *** |   |
| Income taxes payable                                                         |         | 10,819          |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 10,819 | *** *** |   |
| Total current liabilities                                                    |         | 237,482         |         |                        | 41,925       | *** ***                    |         |                           | 1,288        | *** ***                                          |         |   | (533 | ) |   |   | 280,162 | *** *** |   |
| Long-term debt                                                               |         | 190,902         |         |                        | 8,033        | *** ***                    |         |                           | 308          | *** ***                                          |         |   | — | *** *** |   |   | 199,243 | *** *** |   |
| Capitalized lease  obligations                                               |         | 27,092          |         |                        | 13,268       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 40,360 | *** *** |   |
| Deferred tax  liability, net                                                 |         | —          |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | — | *** *** |   |
| Other liabilities                                                            |         | 19,799          |         |                        | 1,495        | *** ***                    |         |                           | 641          | *** ***                                          |         |   | — | *** *** |   |   | 21,935 | *** *** |   |
| Stockholders’  equity                                                   |         | 273,928         |         |                        | 194,693      | *** ***                    |         |                           | 5,926        | *** ***                                          |         |   | (200,619 | ) |   |   | 273,928 | *** *** |   |
| Total liabilities and stockholders’ equity                              |         | $               | 749,203      |                        |         | 259,414                         | *** *** |                           |         | 8,163                                                 | *** *** |   |   | (201,152 | ) |   |   | 815,628 | *** *** |   |

 

68

----

**January 3, 2004**

**(in thousands)**
| ** **                                                                        | ** **   | **Nash  Finch** | ** **   | **Guarantor  Subsidiaries** | ** **   | **Non-Guarantor  Subsidiaries** | ** **   | **Consolidation  Adjustments** | ** **   | **Nash Finch  Company &  Subsidiaries** | ** **   |
|-----------------------------------------------------------------------------------|--------------|-----------------|--------------|-----------------------------|--------------|---------------------------------|--------------|--------------------------------|--------------|-------------------------------------------------------|--------------|
| *Assets*                                                                          | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Current assets:                                                                   | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Cash and cash equivalents                                                         |         | $               | 12,182       |                        |         | 211                             | *** *** |                           |         | 364                                                   | *** *** |   |   | — | *** *** |   |   | 12,757 | *** *** |   |
| Accounts and notes receivable, net                                                |         | 113,497         |         |                        | 34,750       | *** ***                    |         |                           | 166          | *** ***                                          |         |   | (2,511 | ) |   |   | 145,902 | *** *** |   |
| Accounts receivable/payable Subs                                                  |         | 71,312          |         |                        | (73,478      | )                               |         |                           | 2,166        | *** ***                                          |         |   | — | *** *** |   |   | — | *** *** |   |
| Inventories                                                                       |         | 150,718         |         |                        | 83,558       | *** ***                    |         |                           | 2,013        | *** ***                                          |         |   | — | *** *** |   |   | 236,289 | *** *** |   |
| Prepaid expenses                                                                  |         | 13,564          |         |                        | 1,563        | *** ***                    |         |                           | 9            | *** ***                                          |         |   | — | *** *** |   |   | 15,136 | *** *** |   |
| Deferred tax assets                                                               |         | 11,523          |         |                        | (5,797       | )                               |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 5,726 | *** *** |   |
| Total current assets                                                              |         | 372,796         |         |                        | 40,807       | *** ***                    |         |                           | 4,718        | *** ***                                          |         |   | (2,511 | ) |   |   | 415,810 | *** *** |   |
| Investment in subsidiary                                                          |         | 196,496         |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | (196,476 | ) |   |   | 20 | *** *** |   |
| Investments in  marketable securities                                             |         | 1,395           |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | (1,395 | ) |   |   | — | *** *** |   |
| Notes receivable,  net                                                            |         | 20,832          |         |                        | 10,346       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 31,178 | *** *** |   |
| Net property, plant and equipment                                                 |         | 170,085         |         |                        | 90,852       | *** ***                    |         |                           | 1,414        | *** ***                                          |         |   | — | *** *** |   |   | 262,351 | *** *** |   |
| Deferred tax asset, net                                                           |         | —          |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | — | *** *** |   |
| Goodwill                                                                          |         | 32,021          |         |                        | 115,668      | *** ***                    |         |                           | 2,103        | *** ***                                          |         |   | — | *** *** |   |   | 149,792 | *** *** |   |
| Investment in  direct financing leases                                            |         | 13,426          |         |                        | —       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 13,426 | *** *** |   |
| Other assets                                                                      |         | 2,647           |         |                        | 11,128       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 13,775 | *** *** |   |
| Total assets                                                                      |         | $               | 809,698      |                        |         | 268,801                         | *** *** |                           |         | 8,235                                                 | *** *** |   |   | (200,382 | ) |   |   | 886,352 | *** *** |   |
| *Liabilities  and Stockholders’ Equity*                                      | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Current liabilities:                                                              | *** *** | *** ***    | *** *** |                        | *** *** | *** ***                    |         |                           | *** *** | *** ***                                          |         |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Outstanding checks                                                                |         | $               | 23,350       |                        |         | —                          | *** *** |                           |         | —                                                | *** *** |   |   | — | *** *** |   |   | 23,350 | *** *** |   |
| Current maturities of long-term debt and capitalized  lease obligations | *** *** | 1,739           | *** *** |                        | 3,095        | *** ***                    |         |                           | 444          | *** ***                                          |         |   | — | *** *** |   |   | 5,278 | *** *** |   |
| Accounts payable                                                                  |         | 137,599         |         |                        | 31,044       | *** ***                    |         |                           | 610          | *** ***                                          |         |   | (2,511 | ) |   |   | 166,742 | *** *** |   |
| Accrued expenses                                                                  |         | 73,488          |         |                        | 5,061        | *** ***                    |         |                           | 219          | *** ***                                          |         |   | — | *** *** |   |   | 78,768 | *** *** |   |
| Income taxes payable                                                              |         | 10,626          |         |                        | (12          | )                               |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 10,614 | *** *** |   |
| Total current liabilities                                                         |         | 246,802         |         |                        | 39,188       | *** ***                    |         |                           | 1,273        | *** ***                                          |         |   | (2,511 | ) |   |   | 284,752 | *** *** |   |
| Long-term debt                                                                    |         | 271,653         |         |                        | 9,489        | *** ***                    |         |                           | 802          | *** ***                                          |         |   | — | *** *** |   |   | 281,944 | *** *** |   |
| Capitalized lease  obligations                                                    |         | 28,157          |         |                        | 16,482       | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 44,639 | *** *** |   |
| Deferred tax  liability, net                                                      |         | (3,333          | )            |                        | 9,691        | *** ***                    |         |                           | —       | *** ***                                          |         |   | — | *** *** |   |   | 6,358 | *** *** |   |
| Other liabilities                                                                 |         | 9,962           |         |                        | 1,677        | *** ***                    |         |                           | 563          | *** ***                                          |         |   | — | *** *** |   |   | 12,202 | *** *** |   |
| Stockholders’  equity                                                        |         | 256,457         |         |                        | 192,274      | *** ***                    |         |                           | 5,597        | *** ***                                          |         |   | (197,871 | ) |   |   | 256,457 | *** *** |   |
| Total liabilities  and stockholders’ equity                                  |         | $               | 809,698      |                        |         | 268,801                         | *** *** |                           |         | 8,235                                                 | *** *** |   |   | (200,382 | ) |   |   | 886,352 | *** *** |   |

 

69

----

**NASH FINCH COMPANY ANDSUBSIDIARIES**

**Consolidating Statementsof Cash Flows**

**Fiscal Year Ended January 1,2005**

**(in thousands)**
| ** **                                      | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** **   | ** **        | ** ** | **Nash Finch**    | ** **   |
|-------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|--------------|-------------------|------------|------------------------|--------------|
| ** **                                      | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** **   | **Consolidation** | ** ** | **Company &** | ** **   |
| ** **                                      | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** **   | **Adjustments**   | ** ** | **Subsidiaries**       | ** **   |
| Operating activities:                           |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Net cash provided by  operating activities      |       | $          | 105,429    |             |       | (4,246            | )            |              |       | 711                    | *** *** |   |   | — | *** *** |   |   | 101,894 | *** *** |   |
| Investing activities:                           |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Disposal of property,  plant and equipment      |       | 6,003      |       |             | 11,133     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 17,136 | *** *** |   |
| Additions to property,  plant and equipment     |       | (17,991    | )          |             | (4,054     | )                 |         |              | (282       | )                      |         |   | — | *** *** |   |   | (22,327 | ) |   |
| Loans to customers                              |       | (4,364     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (4,364 | ) |   |
| Payments from customers  on loans               |       | 2,760      |       |             | 156        | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 2,916 | *** *** |   |
| Purchase of marketable  securities              |       | (2,610     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (2,610 | ) |   |
| Sale of marketable  securities                  |       | 1,113      |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 1,113 | *** *** |   |
| Other                                           |       | (144       | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (144 | ) |   |
| Net cash used in  investing activities          |       | (15,233    | )          |             | 7,235      | *** ***      |         |              | (282       | )                      |         |   | — | *** *** |   |   | (8,280 | ) |   |
| Financing activities:                           |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Proceeds of revolving  debt                     |       | 14,674     |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 14,674 | *** *** |   |
| Dividends paid                                  |       | (6,673     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (6,673 | ) |   |
| Proceeds from exercise of  stock options        |       | 5,380      |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 5,380 | *** *** |   |
| Proceeds from employee  stock purchase  plan    |       | 654        |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 654 | *** *** |   |
| Proceeds of long-term  debt                     |       | 175,000    |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 175,000 | *** *** |   |
| Payments of long-term  debt                     |       | (265,674   | )          |             | (1,904     | )                 |         |              | (469       | )                      |         |   | — | *** *** |   |   | (268,047 | ) |   |
| Payments of capitalized  lease obligations      |       | (1,381     | )          |             | (1,134     | )                 |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (2,515 | ) |   |
| (Decrease) increase in  outstanding checks      |       | (12,006    | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (12,006 | ) |   |
| Premium paid for early  extinguishment  of debt |       | (4,674     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (4,674 | ) |   |
| Other                                           |       | (3,135     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (3,135 | ) |   |
| Net cash used by in  financing activities       |       | (97,835    | )          |             | (3,038     | )                 |         |              | (469       | )                      |         |   | — | *** *** |   |   | (101,342 | ) |   |
| Net (decrease) increase  in cash                |       | (7,639     | )          |             | (49        | )                 |         |              | (40        | )                      |         |   | — | *** *** |   |   | (7,728 | ) |   |
| Cash at beginning of year                       |       | 12,182     |       |             | 211        | *** ***      |         |              | 364        | *** ***           |         |   | — | *** *** |   |   | 12,757 | *** *** |   |
| Cash at end of year                             |       | $          | 4,543      |             |       | 162               | *** *** |              |       | 324                    | *** *** |   |   | — | *** *** |   |   | 5,029 | *** *** |   |

 

70

----

**FiscalYear Ended January 3, 2004**

**(inthousands)**
| ** **                                        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** | **Nash Finch**    | ** ** |
|---------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | **Consolidation** | ** ** | **Company &** | ** ** |
| ** **                                        | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Adjustments**   | ** ** | **Subsidiaries**       | ** ** |
| Operating activities:                             |       |       |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |
| Net cash provided  by operating activities        |       | $          | 93,800     |             |       | 19,796            |       |              |       | 906                    |       |   |   | — |   |   |   | 114,502 |   |   |
| Investing activities:                             |       |       |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |
| Disposal of  property, plant and equipment        |       | 8,110      |       |             | 892        |              |       |              | —     |                   |       |   | — |   |   |   | 9,002 |   |   |
| Additions to  property, plant and equipment  |       | (25,532    | )          |             | (14,747    | )                 |       |              | (449       | )                      |       |   | — |   |   |   | (40,728 | ) |   |
| Business acquired,  net of cash                   |       | (2,661     | )          |             | 607        |              |       |              | —     |                   |       |   | — |   |   |   | (2,054 | ) |   |
| Loans to customers                                |       | (7,577     | )          |             | (3,049     | )                 |       |              | —     |                   |       |   | — |   |   |   | (10,626 | ) |   |
| Payments from  customers on loans                 |       | 5,586      |       |             | 1,472      |              |       |              | —     |                   |       |   | — |   |   |   | 7,058 |   |   |
| Net cash used in  investing activities            |       | (22,074    | )          |             | (14,825    | )                 |       |              | (449       | )                      |       |   | — |   |   |   | (37,348 | ) |   |
| Financing activities:                             |       |       |       |             |       |              |       |              |       |                   |       |   |   |   |   |   |   |   |   |
| Proceeds of  revolving debt                       |       | (79,400    | )          |             | —     |              |       |              | —     |                   |       |   | — |   |   |   | (79,400 | ) |   |
| Dividends paid                                    |       | (4,320     | )          |             | —     |              |       |              | —     |                   |       |   | — |   |   |   | (4,320 | ) |   |
| Proceeds from  exercise of stock options          |       | 1,087      |       |             | —     |              |       |              | —     |                   |       |   | — |   |   |   | 1,087 |   |   |
| Proceeds from  employee stock purchase plan       |       | 638        |       |             | —     |              |       |              | —     |                   |       |   | — |   |   |   | 638 |   |   |
| Payments of  long-term debt                       |       | (3,247     | )          |             | (3,440     | )                 |       |              | (508       | )                      |       |   | — |   |   |   | (7,195 | ) |   |
| Payments of  capitalized lease obligations        |       | (1,432     | )          |             | (1,468     | )                 |       |              | —     |                   |       |   | — |   |   |   | (2,900 | ) |   |
| (Decrease)  increase in outstanding checks        |       | (3,726     | )          |             | —     |              |       |              | —     |                   |       |   | — |   |   |   | (3,726 | ) |   |
| Net cash used by  in financing activities         |       | (90,400    | )          |             | (4,908     | )                 |       |              | (508       | )                      |       |   | — |   |   |   | (95,816 | ) |   |
| Net (decrease)  increase in cash                  |       | (18,674    | )          |             | 63         |              |       |              | (51        | )                      |       |   | — |   |   |   | (18,662 | ) |   |
| Cash at beginning  of year                        |       | 30,856     |       |             | 148        |              |       |              | 415        |                   |       |   | — |   |   |   | 31,419 |   |   |
| Cash at end of  year                              |       | $          | 12,182     |             |       | 211               |       |              |       | 364                    |       |   |   | — |   |   |   | 12,757 |   |   |

 

**FiscalYear Ended December 28, 2002**

**(inthousands)**
| ** **                                        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** **   | ** **        | ** ** | **Nash Finch**    | ** **   |
|---------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|--------------|-------------------|------------|------------------------|--------------|
| ** **                                        | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** **   | **Consolidation** | ** ** | **Company &** | ** **   |
| ** **                                        | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** **   | **Adjustments**   | ** ** | **Subsidiaries**       | ** **   |
| Operating activities:                             |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Net cash provided by  operating activities        |       | $          | 47,838     |             |       | 12,216            | *** *** |              |       | 511                    | *** *** |   |   | — | *** *** |   |   | 60,565 | *** *** |   |
| Investing activities:                             |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Disposal of property,  plant and equipment        |       | 12,616     |       |             | 1,819      | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 14,435 | *** *** |   |
| Additions to property,  plant and equipment       |       | (39,458    | )          |             | (12,880    | )                 |         |              | (267       | )                      |         |   | — | *** *** |   |   | (52,605 | ) |   |
| Business acquired, net of  cash                   |       | (3,356     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (3,356 | ) |   |
| Loans to customers                                |       | (5,476     | )          |             | (75        | )                 |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (5,551 | ) |   |
| Payments from customers  on loans                 |       | 7,686      |       |             | 2,356      | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 10,042 | *** *** |   |
| Other                                             |       | 2,473      |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 2,473 | *** *** |   |
| Net cash used in  investing activities            |       | (25,515    | )          |             | (8,780     | )                 |         |              | (267       | )                      |         |   | — | *** *** |   |   | (34,562 | ) |   |
| Financing activities:                             |       |       |       |             |       | *** ***      |         |              |       | *** ***           |         |   |   | *** *** |   |   |   | *** *** |   |
| Proceeds of revolving  debt                       |       | 39,400     |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 39,400 | *** *** |   |
| Dividends paid                                    |       | (4,292     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (4,292 | ) |   |
| Proceeds from exercise of  stock options          |       | 266        |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 266 | *** *** |   |
| Proceeds from employee  stock purchase plan  |       | 878        |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 878 | *** *** |   |
| Proceeds of long-term  debt                       |       | —     |       |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | 0 | *** *** |   |
| Payments of long-term  debt                       |       | (1,752     | )          |             | (1,353     | )                 |         |              | (386       | )                      |         |   | — | *** *** |   |   | (3,491 | ) |   |
| Payments of capitalized  lease obligations        |       | (831       | )          |             | (2,014     | )                 |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (2,845 | ) |   |
| (Decrease) increase in  outstanding checks        |       | (30,674    | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (30,674 | ) |   |
| Other                                             |       | (4,293     | )          |             | —     | *** ***      |         |              | —     | *** ***           |         |   | — | *** *** |   |   | (4,293 | ) |   |
| Net cash used by in  financing activities         |       | (1,298     | )          |             | (3,367     | )                 |         |              | (386       | )                      |         |   | — | *** *** |   |   | (5,051 | ) |   |
| Net (decrease) increase  in cash                  |       | 21,025     |       |             | 69         | *** ***      |         |              | (142       | )                      |         |   | — | *** *** |   |   | 20,952 | *** *** |   |
| Cash at beginning of year                         |       | 9,831      |       |             | 79         | *** ***      |         |              | 557        | *** ***           |         |   | — | *** *** |   |   | 10,467 | *** *** |   |
| Cash at end of year                               |       | $          | 30,856     |             |       | 148               | *** *** |              |       | 415                    | *** *** |   |   | — | *** *** |   |   | 31,419 | *** *** |   |

 

71

----

**(22)   SubsequentEvent—Acquisition of Assets**

On February 24, 2005, the Company entered into anAsset Purchase Agreement (the “Asset Purchase Agreement”) with Roundy’s, Inc.(“Roundy’s”) whereby the Company agreed to purchase, with certain exceptions,all of the assets relating to two wholesale food and non-food distributioncenters located in Lima, Ohio and Westville, Indiana and the related wholesaledistribution business conducted by Roundy’s out of these distribution centers and an additional leased warehouse.In addition, the Company agreed to purchase two Pick ‘n Save®grocery stores located in Ironton, Ohio and Van Wert, Ohio and the retail grocerybusiness conducted from these stores, Roundy’s general merchandise and healthand beauty care products distribution business involving the customers of thetwo purchased distribution centers, inventory at the purchased facilities andall customer contracts related to the purchased facilities. The Company alsoagreed to offer employment to the approximately 1,150 full- and part-timeemployees related to the purchased facilities and to assume certain tradepayables, accrued expenses and receivables associated with the assets beingacquired. The Company has not agreed toassume any debt in connection with this acquisition. The aggregate purchaseprice for the acquisition is approximately $225 million in cash, subject tocertain post-closing adjustments.

The closing of this acquisition is subject tocustomary conditions, including the expiration or termination of the waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended, and financing. The Company intends to finance this acquisition withborrowings under it’s existing bank credit facilityand a debt or convertible debt financing and expects the acquisition to closein late March or April 2005.

On February 22, 2005,theCompany entered into a First Amendment to it’s Credit Agreement, dated as ofNovember 12, 2004, with the lenders party to that Credit Agreement andDeutsche Bank Trust Company Americas, as Administrative Agent. Subject to theterms and conditions therein, the First Amendment generally amends the CreditAgreement so as to permit the Company to enter into theAsset Purchase Agreement and to close and finance the acquisition.

72

----

**NASH FINCH COMPANY ANDSUBSIDIARIES**

**Quarterly FinancialInformation (Unaudited)**

**(In thousands, except pershare amounts)**
| ** **                                               | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **A summary of quarterly**                | ** ** | **12 Weeks**      | ** ** | **12 Weeks**       | ** ** | **16 Weeks**      | ** ** | **12 Weeks**       | ** ** | **13 Weeks** | ** ** |
| **financial information is presented.**   | ** ** | ** **             | **2004**   | ** **              | **2003**   | ** **             | **2004**   | ** **              | **2003**   | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales                                                    |       | $                      | 879,454    |                    | 856,664    |                   | 906,393    |                    | 888,612    |   | 1,191,187 |   | 1,214,781 |   | 920,040 |   | 1,011,445 |   |
| Cost of sales                                            |       | 781,607                |       | 756,640                 |       | 806,928                |       | 785,031                 |       | 1,063,911 |   | 1,077,363 |   | 821,883 |   | 897,426 |   |
| Earnings from  continuing operations before income taxes |       | 7,757                  |       | 5,346                   |       | (25,639                | )          | 11,910                  |       | 22,620 |   | 14,105 |   | 14,461 |   | 20,572 |   |
| Income taxes                                             |       | 3,025                  |       | 2,085                   |       | (9,999                 | )          | 4,645                   |       | 8,022 |   | 2,501 |   | 3,274 |   | 8,023 |   |
| Net earnings from  continuing operations                 |       | 4,732                  |       | 3,261                   |       | (15,640                | )          | 7,265                   |       | 14,598 |   | 11,604 |   | 11,187 |   | 12,549 |   |
| Discontinued  operations, net  of income tax expense     |       | —                 |       | —                  |       | —                 |       | —                  |       | — |   | — |   | 55 |   | 413 |   |
| Net earnings                                             |       | 4,732                  |       | 3,261                   |       | (15,640                | )          | 7,265                   |       | 14,598 |   | 11,604 |   | 11,242 |   | 12,962 |   |
| Percent to sales  and revenues                           |       | 0.54                   |       | 0.38                    |       | (1.73                  | )          | 0.82                    |       | 1.23 |   | 0.96 |   | 1.22 |   | 1.28 |   |
| Basic earnings per share                                 |       |                   |       |                    |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                   |       | $                      | 0.39       |                    | 0.27       |                   | (1.26      | )                       | 0.61       |   | 1.17 |   | 0.96 |   | 0.89 |   | 1.03 |   |
| Discontinued  operations                                 |       | $                      | —     |                    | —     |                   | —     |                    | —     |   | — |   | — |   | — |   | 0.03 |   |
| Net earnings                                             |       | $                      | 0.39       |                    | 0.27       |                   | (1.26      | )                       | 0.61       |   | 1.17 |   | 0.96 |   | 0.89 |   | 1.06 |   |
| Diluted earnings per share                               |       |                   |       |                    |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                   |       | $                      | 0.38       |                    | 0.27       |                   | (1.26      | )                       | 0.61       |   | 1.15 |   | 0.95 |   | 0.87 |   | 1.02 |   |
| Discontinued  operations                                 |       | $                      | —     |                    | —     |                   | —     |                    | —     |   | — |   | — |   | — |   | 0.03 |   |
| Net earnings                                             |       | $                      | 0.38       |                    | 0.27       |                   | (1.26      | )                       | 0.61       |   | 1.15 |   | 0.95 |   | 0.87 |   | 1.05 |   |
|                                                          |            |                        |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 9.   CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Information regarding achange in our principal independent accountants during fiscal 2003 waspreviously disclosed in our annual report on Form 10-K for thefiscal year ended December 28, 2002, and is also provided in our ProxyStatement to be filed with the Securities and Exchange Commission in connectionwith our 2005 Annual Meeting of Stockholders (the “2005 Proxy Statement”) underthe caption “Independent Auditors—Changes in Independent Auditors During theTwo Most Recent Fiscal Years.”

**ITEM 9A.**   CONTROLSAND PROCEDURES

DisclosureControls and Procedures

Management of the Company,with the participation and under the supervision of the Chief Executive Officerand Chief Financial Officer has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))as of the end of the period covered by this annual report. Based on thisevaluation the Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effective asof the end of the period covered by this annual report to provide reasonableassurance that material information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified by theSecurities and Exchange Commission’s rules and forms. A controls system, no matter how well designed and operated,cannot provide absolute assurance that the objectives of the controls are met,and no evaluation of controls can provide absolute assurance that all controlsand instances of fraud, if any, within a company have been detected.

73

----

 

**ManagementReport On Internal Control Over Financial Reporting**

Themanagement of the Company is responsible forestablishing and maintaining adequate internal control over financial reporting.Internal control over financial reporting is defined in Rule 13a-15(f)or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as aprocess designed by, or under the supervision of, the Company’sprincipal executive and principal financial officers and effected by the Company’sboard of directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Companyare being made only in accordance with authorizations of management anddirectors of the Company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

The Company’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of January 1, 2005. In making this assessment, the Company’smanagement used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in Internal Control-IntegratedFramework.

Based on our assessment,management believes that, as of January 1, 2005, the Company’sinternal control over financial reporting is effective based on those criteria.

The Company’sindependent auditors have issued an audit report on our assessment of the Company’sinternal control over financial reporting. This report appears on Part II, Item 8 of this report.

There wasno change in the Company’s internal control over financial reporting thatoccurred during the Company’s most recently completed fiscal quarter thatmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

**ITEM 9B**.   OTHER INFORMATION

Not applicable.

**PART III**

**ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

The information called forby Item 10 that appears in the 2005 Proxy Statement under the captions “Proposal1: Election of Directors—Information About Directors and Nominees,” “Proposal 1:Election of Directors—Information About the Board of Directors and ItsCommittees,” “Corporate Governance—Governance Guidelines” and “Section 16(a)Beneficial Ownership Reporting Compliance” is incorporated herein by reference.Certain information regarding executive officers of the Registrant is includedin Part I immediately following Item 4 above.

74

----

 

**ITEM 11.**   EXECUTIVE COMPENSATION

The information called forby Item 11 that appears in the 2005 Proxy Statement under the captions “Proposal1: Election of Directors—Compensation of Directors” and “Executive Compensationand Other Benefits” is incorporated herein by reference.

**ITEM 12.**   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called forby Item 12 that appears in the 2005 Proxy Statement under the captions “SecurityOwnership of Certain Beneficial Owners,” “Security Ownership of Management” and“Equity Compensation Plan Information” is incorporated herein by reference.

**ITEM 13.**   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Notapplicable, as there are no reportable relationships or transactions.

**ITEM 14.**   PRINCIPALACCOUNTANT FEES AND SERVICES

Theinformation called for by Item 14 that appears in the 2005 Proxy Statementunder the captions “Independent Auditors—Fees Paid to Independent Auditors” and“Independent Auditors—Pre-Approval of Audit and Non-Audit Services” is incorporatedherein by reference.

**PART IV**

**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**
|        | ** **                                                                                                                                                                     | Page       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **1.** | **Financial  Statements.**                                                                                                                                                     | ** ** |   |
|   | The following financial statements are included in this report on the  pages indicated:                                                                                   |       |   |
|   | Independent Auditors’ Report                                                                                                                                              |       | 34 |
|   | Consolidated Statements of  Income for the fiscal years ended January 1, 2005, January 3, 2004,  and December 28, 2002                                          |       | 35 |
|   | Consolidated Balance Sheets as of  January 1, 2005 and January 3, 2004                                                                                               |       | 36 |
|   | Consolidated Statements of  Cash Flows for the fiscal years ended January 1, 2005, January 3,  2004, and December 28, 2002                                      |       | 37 |
|   | Consolidated Statements of Stockholders’  Equity for the fiscal years ended January 1,  2005, January 3, 2004, and December 28, 2002                       |       | 38 to 39 |
|   | Notes to Consolidated  Financial Statements                                                                                                                                    |       | 40 to 73 |
| **2.** | **Financial  Statement Schedules.**                                                                                                                                            | ** ** |   |
|   | The following financial statement schedule is included herein and  should be read in conjunction with the consolidated financial statements  referred to above:                |       |   |
|   | Valuation and Qualifying  Accounts                                                                                                                                             |       | 78 |
|   | Other Schedules. Other schedules  are omitted because the required information is either inapplicable or  presented in the consolidated financial statements or related notes. |       |   |

 

75

----

| **3.** | **Exhibits.** | ** ** |   |
|--------|---------------|------------|--------|

 
| Exhibit No.                         | ** ** | **Description**                                                                                                                                                                                                                                                                                                        |
|------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        3.1 |       | Restated Certificate of  Incorporation of the Company, effective May 16, 1985 (incorporated by  reference to Exhibit 3.1 to the Company’s Annual Report on Form-10 K for the  fiscal year ended December 28, 1985 (File No. 0-785)).                                                                              |
|        3.2 |       | Certificate of Amendment to  Restated Certificate of Incorporation of the Company, effective May 15, 1987  (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement  on Form S 3 (File No. 33-14871)).                                                                                   |
|        3.3 |       | Certificate of Amendment to  Restated Certificate of Incorporation of the Company, effective May 16, 2002  (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 15, 2002 (File No. 0-785)).                                                       |
|        3.4 |       | Bylaws  of the Company, Restated April 15, 2003 (incorporated by reference to Exhibit  3.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 28, 2002 (File No. 0-785)).                                                                                                  |
|        4.1 |       | Stockholder  Rights Agreement, dated February 13, 1996, between the Company and Wells  Fargo Bank, N.A. (formerly known as Norwest Bank Minnesota, National  Association) (incorporated by reference to Exhibit 4 to the Company’s Current  Report on Form 8-K dated February 13, 1996 (File No. 0-785)).         |
|        4.2 |       | Amendment  to Stockholder Rights Agreement dated as of October 30, 2001 (incorporated by  reference to Exhibit 4.2 to Amendment No. 1 to the Company’s Registration  Statement on Form 8-A (filed July 26, 2002) (File No. 0-785)).                                                                          |
|     10.1                  |       | Credit Agreement dated as of  November 12, 2004 among the Company, Various Lenders and Deutsche Bank Trust  Company Americas, as administrative agent, (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the sixteen  weeks ended October 9, 2004 (File No. 0-785)). |
|   *10.2                             |       | Form  of Change in Control Agreement (incorporated by reference to Exhibit 10.5 to  the Company’s Annual Report on Form 10-K for the fiscal year ended December  28, 2002 (File No. 0-785)).                                                                                                            |
|   *10.3                             |       | Nash-Finch  Company Income Deferral Plan (as amended through May 21, 2004) (incorporated  by reference to Exhibit 4.1 to the Company’s Registration Statement on Form  S-8 filed May 25, 2004 (File No. 333-115849)).                                                                                             |
|   *10.4                             |       | Second  Declaration of Amendment to Nash-Finch Company Income Deferral Plan (as  amended through May 21, 2004) (filed herewith).                                                                                                                                                                                       |
|   *10.5                             |       | Nash  Finch Company Deferred Compensation Plan (incorporated by reference to  Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on  December 30, 2004 (File No. 333-121755)).                                                                                                            |
|   *10.6                             |       | Nash-Finch  Company 2000 Stock Incentive Plan (as amended effective February 19, 2002)  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 15, 2002 (File No. 0-785)).                                                                         |
|   *10.7                             |       | Form  of Non-Statutory Stock Option Agreement (for employees under the Nash-Finch  Company 2000 Stock Incentive Plan, (filed herewith).                                                                                                                                                                                |
|   *10.8                             |       | Nash-Finch  Company 1995 Director Stock Option Plan (as amended on February 22, 2000 and  February 19, 2002) (incorporated by reference to Exhibit 10.2 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 15, 2002 (File No.  0-785)).                                                   |

76

----

 
|   *10.9            |   | First Declaration of Amendment  to the Nash-Finch Company 1995 Director Stock Option Plan (as amended on  February 22, 2000 and February 19, 2002) (filed herewith).                                                                                                                                                                                |
|-------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   *10.10           |   | Form of Non-Statutory Stock  Option Agreement (for non-employee directors under the Nash-Finch Company  1995 Director Stock Option Plan) (filed herewith).                                                                                                                                                                                          |
|   *10.11           |   | Nash-Finch Company 1997  Non-Employee Director Stock Compensation Plan (2003 Revision) (incorporated  by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for  the fiscal year ended January 3, 2004 (File No. 0-785)).                                                                                                   |
|   *10.12           |   | Nash-Finch Company 1997  Non-Employee Director Stock Compensation Plan (2003 Revision)—First  Declaration of Amendment (filed herewith).                                                                                                                                                                                                       |
|   *10.13           |   | Nash-Finch Company 1997  Non-Employee Director Stock Compensation Plan (2003 Revision)—Second Declaration  of Amendment (filed herewith).                                                                                                                                                                                                      |
|   *10.14           |   | Nash-Finch Company Director  Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to the  Company’s Registration Statement on Form S-8 filed on December 30, 2004 (File  No. 333-121754)).                                                                                                                                     |
|    *10.15     |   | Nash-Finch Company  Supplemental Executive Retirement Plan (incorporated by reference to Exhibit  10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended  January 1, 2000 (File No. 0-785)).                                                                                                                              |
|   *10.16           |   | Non-Statutory Stock Option Agreement  dated as of June 1, 1998 between the Company and Ron Marshall (incorporated  by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 29, 2001 (File No. 0-785)).                                                                                   |
|   *10.17           |   | Restricted Stock Award Agreement  between the Company and Ron Marshall, effective as of February 19, 2002  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended October 5, 2002 (File No. 0-785)).                                                                                 |
|   *10.18           |   | Nash-Finch Company Performance  Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 15, 2002 (File No. 0-785)).                                                                                                                                     |
|   *10.19           |   | Form of Restricted Stock Unit  Award Agreement (for non-employee directors under the 2000 Stock Incentive  Plan) (filed herewith).                                                                                                                                                                                                                  |
|   *10.20           |   | Nash-Finch Company 2000 Stock  Incentive Plan Performance Unit Award Agreement dated as of October 1, 2002  between the Company and Ron Marshall (filed herewith).                                                                                                                                                                                  |
|   *10.21           |   | Nash-Finch Company 2000 Stock  Incentive Plan Performance Unit Award Agreement dated as of October 1, 2002  between the Company and Bruce A. Cross (filed herewith).                                                                                                                                                                                |
|     21.1 |   | Subsidiaries of the Company  (filed herewith).                                                                                                                                                                                                                                                                                                      |
|     23.1 |   | Consent of Ernst & Young  LLP (filed herewith).                                                                                                                                                                                                                                                                                                 |
|     24.1 |   | Power of Attorney (filed  herewith).                                                                                                                                                                                                                                                                                                                |
|     31.1 |   | Rule 13a-14(a) Certification  of the Chief Executive Officer (filed herewith).                                                                                                                                                                                                                                                                      |
|     31.2 |   | Rule 13a-14(a) Certification  of the Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                                      |
|     32.1 |   | Section 1350 Certification of  Chief Executive Officer and Chief Financial Officer (furnished herewith).                                                                                                                                                                                                                                            |
|                    |   | A copy of any of these  exhibits will be furnished at a reasonable cost to any stockholder of the  Company, upon receipt from any such person of a written request for any such exhibit.  Such request should be sent to Nash Finch Company, 7600 France Avenue South,  P.O. Box 355, Minneapolis, Minnesota, 55440-0355, and Attention: Secretary. |

----

*                    Items that are management contracts orcompensatory plans or arrangements required to be filed as exhibits pursuant toItem 15(a)(3) of Form 10-K.

77

----

**NASH FINCH COMPANY and SUBSIDIARIESValuation and QualifyingAccountsFiscal Years ended January 1, 2005, January 3, 2004 andDecember 28, 2002(in thousands)**
| **Description**                                              | ** ** | ** ** | ** ** | **Balance at  beginning  of year** | ** ** | **Charged to  costs and  expenses** | ** ** | **Charged  (credited)  to other  accounts** | ** ** | **Deductions** | ** ** | **Balance  at end  of year** | ** ** |   |
|--------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|----------------|------------|----------------------------------------|------------|--------|
| 52 weeks ended  December 28, 2002:                      |       |       |       |                                         |       |                                          |       |                                             |       |           |       |                                   |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful receivables(c)                        |       |       | $          | 31,489                                       |       |                                          |       | 8,997                                            |       |           |       | 956                                    | (a)        |   |   | 14,418 | (b) |   |   | 27,024 |   |   |
| Provision for losses relating to leases on closed locations  |       |       | 5,000      |                                         |       |                                          | 1,454      |                                             |       |           |       |                                   |       |   | 678 | (d) |   |   | 5,776 |   |   |
|                                                         |       |       | $          | 36,489                                       |       |                                          |       | 10,451                                           |       |           |       | 956                                    |       |   |   | 15,096 |   |   |   | 32,800 |   |   |
| 53 weeks ended  January 3, 2004:                        |       |       |       |                                         |       |                                          |       |                                             |       |           |       |                                   |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful receivables(c)                        |       |       | $          | 27,024                                       |       |                                          |       | 8,707                                            |       |           |       | 173                                    | (a)        |   |   | 13,034 | (b) |   |   | 22,870 |   |   |
| Provision for losses relating to leases on closed  locations |       |       | 5,776      |                                         |       |                                          | 1,156      |                                             |       |           |       |                                   |       |   | 490 | (d) |   |   | 6,442 |   |   |
|                                                         |       |       | $          | 32,800                                       |       |                                          |       | 9,863                                            |       |           |       | 173                                    |       |   |   | 13,524 |   |   |   | 29,312 |   |   |
| 52 weeks ended  January 1, 2005:                        |       |       |       |                                         |       |                                          |       |                                             |       |           |       |                                   |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful receivables(c)                        |       |       | $          | 22,870                                       |       |                                          |       | 4,220                                            |       |           |       | 240                                    | (a)        |   |   | 12,413 | (b) |   |   | 14,917 |   |   |
| Provision for losses relating to leases on closed  locations |       |       | 6,442      |                                         |       |                                          | 4,871      |                                             |       |           |       |                                   |       |   | 2,278 | (d) |   |   | 9,035 |   |   |
|                                                         |       |       | $          | 29,312                                       |       |                                          |       | 9,091                                            |       |           |       | 240                                    |       |   |   | 14,691 |   |   |   | 23,952 |   |   |
|                                                              |            |            |            |                                              |            |                                               |            |                                                  |            |                |            |                                        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)           Recoveries on accountspreviously charged off

(b)          Accounts charged off

(c)           Includes current andnon-current receivables

(d)          Net payments of leaseobligations & termination fees

78

----

 

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: March 2, 2005 | NASH-FINCH  COMPANY |
|--------------------------------|---------------------|
|                           | By                  | /s/  RON  MARSHALL |
|                           |                | Ron Marshall |
|                           |                | *Chief Executive Officer and  Director* |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this Report has been signed below on March 2, 2005 by the following personson behalf of the Registrant and in the capacities indicated.
| /s/ RON MARSHALL                              |   | /s/ LEANNE M. STEWART                                                       |   |
|-----------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
| Ron Marshall, *Chief Executive Officer*       |   | LeAnne M. Stewart, *Senior Vice President*                                  |   |
| *(Principal Executive Officer)  and Director* |   | *and Chief Financial Officer  (Principal Financial and Accounting Officer)* |   |
| /s/ CAROLE F. BITTER*                         |   | /s/  JOHN H.  GRUNEWALD*                                                    |
| Carole F. Bitter, *Director*                  |   | John H. Grunewald, *Director*                                               |
| /s/  RICHARD  FISHER*                         |   | /s/  LAURA  STEIN*                                                          |
| Richard Fisher, *Director*                    |   | Laura Stein, *Director*                                                     |
| /s/  JERRY L.  FORD*                          |   | /s/  WILLIAM  R. VOSS*                                                      |
| Jerry L. Ford, *Director*                     |   | William R. Voss, *Director*                                                 |
| /s/  ALLISTER  P. GRAHAM*                     |   | /s/  WILLIAM  H. WEINTRAUB*                                                 |
| Allister P. Graham, *Chairman*                |   | William H. Weintraub, *Director*                                            |

 
| *By:   | /s/ KATHLEEN E. MCDERMOTT |   |
|--------|------------------------------------------|--------|
|   | Kathleen E. McDermott                    |
|   | *Attorney-in-fact*                       |

 

79

----

**NASHFINCH COMPANY**

**EXHIBITINDEX TO ANNUAL REPORTON FORM 10-K**

**ForFiscal Year Ended January 1, 2005**
| Exhibit   No. | ** **                                                                                                                                                                     | ** ** | **Description**                  | ** ** | **Method of Filing** |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------|
| 3.1           | Restated Certificate of  Incorporation of the Company, effective May 16, 1985                                                                                             |       | Incorporated by reference  (IBR) |
| 3.2           | Certificate  of Amendment to Restated Certificate of Incorporation of the Company,  effective May 15, 1987                                                                |       | IBR                              |
| 3.3           | Certificate  of Amendment to Restated Certificate of Incorporation of the Company,  effective May 16, 2002                                                                |       | IBR                              |
| 3.4           | Bylaws  of the Company, Restated April 15, 2003                                                                                                                           |       | IBR                              |
| 4.1           | Stockholder  Rights Agreement, dated February 13, 1996, between the Company and Wells  Fargo Bank, N.A. (formerly known as Norwest Bank Minnesota, National  Association) |       | IBR                              |
| 4.2           | Amendment  to Stockholder Rights Agreement dated as of October 30, 2001                                                                                                   |       | IBR                              |
| 10.1          | Credit  Agreement, dated as of November 12, 2004 among the Company, Various  Lenders and Deutsche Bank Trust Company Americas, as administrative agent                    |       | IBR                              |
| 10.2          | Form of  Change in Control Agreement                                                                                                                                      |       | IBR                              |
| 10.3          | Nash-Finch  Company Income Deferral Plan (as amended through May 21, 2004)                                                                                                |       | IBR                              |
| 10.04         | Second  Declaration of Amendment to Nash-Finch Company Income Deferral Plan (as  amended through May 21, 2004)                                                            |       | Electronically  (E)              |
| 10.05         | Nash-Finch  Company Deferred Compensation Plan                                                                                                                                 |       | IBR                              |
| 10.6          | Nash-Finch  Company 2000 Stock Incentive Plan (as amended effective February 19,  2002)                                                                                   |       | IBR                              |
| 10.7          | Form of  Non-Statutory Stock Option Agreement (for employees under 2000 Stock  Incentive Plan)                                                                            |       | E                                |
| 10.8          | Nash-Finch  Company 1995 Director Stock Option Plan (as amended on February 22, 2000  and February 19, 2002)                                                         |       | IBR                              |
| 10.9          | First  Declaration of Amendment to Nash-Finch Company 1995 Director Stock Option  Plan (as amended on February 22, 2000 and February 19, 2002)                       |       | E                                |
| 10.10         | Form of  Non-Statutory Stock Option Agreement (for non-employee directors under 1995  Director Stock Option Plan)                                                         |       | E                                |
| 10.11         | Nash-Finch  Company 1997 Non-Employee Director Stock Compensation Plan (2003 Revision)                                                                                         |       | IBR                              |

80

----

 
| 10.12 | Nash-Finch Company 1997  Non-Employee Director Stock Compensation Plan (2003 Revision)—First  Declaration of Amendment                             |   | E   |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|
| 10.13 | Nash-Finch  Company 1997 Non-Employee Director Stock Compensation Plan (2003 Revision)—Second  Declaration of Amendment                            |   | E   |
| 10.14 | Nash-Finch  Company Director Deferred Compensation Plan                                                                                                 |   | IBR |
| 10.15 | Nash-Finch  Company Supplemental Executive Retirement Plan                                                                                              |   | IBR |
| 10.16 | Non-Statutory  Stock Option Agreement dated as of June 1, 1998 between the Company and  Ron Marshall                                               |   | IBR |
| 10.17 | Restricted  Stock Award Agreement between the Company and Ron Marshall, effective as of  February 19, 2002                                         |   | IBR |
| 10.18 | Nash-Finch  Company Performance Incentive Plan                                                                                                          |   | IBR |
| 10.19 | Form of  Restricted Stock Unit Award Agreement (for non-employee directors under 2000  Stock Incentive Plan)                                       |   | E   |
| 10.20 | Nash-Finch  Company 2000 Stock Incentive Plan Performance Unit Award Agreement dated as  of October 1, 2002 between the Company and Ron Marshall   |   | E   |
| 10.21 | Nash-Finch  Company 2000 Stock Incentive Plan Performance Unit Award Agreement dated as  of October 1, 2002 between the Company and Bruce A. Cross |   | E   |
| 21.1  | Subsidiaries  of the Company                                                                                                                            |   | E   |
| 23.1  | Consent  of Ernst & Young LLP                                                                                                                  |   | E   |
| 24.1  | Power  of Attorney                                                                                                                                      |   | E   |
| 31.1  | Rule 13a-14(a) Certification  of the Chief Executive Officer                                                                                  |   | E   |
| 31.2  | Rule 13a-14(a) Certification  of the Chief Financial Officer                                                                                  |   | E   |
| 32.1  | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer                                                                 |   | E   |

 

81

----