**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

**Forthe fiscal year ended: January 3, 2004**

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

**Forthe 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 SouthP.O. Box 355Minneapolis, Minnesota**                 | ** ** | **55440-0355**                       |
| (Address of principal executive offices)                                            |       | (Zip Code)                           |
|                                                                                |       |                                 |
| Registrant’s telephone number, including area code: **(952) 832-0534**    |
|                                                                                |       |                                 |
| Securities registered pursuant to Section 12(b) of the Act: **None** |
|                                                                                |       |                                 |
| Securities registered pursuant to Section 12(g) of the Act:               |
|                                                                                |       |                                 |
| Common Stock, par value $1.66-2/3 per share  Common Stock Purchase Rights           |
|                                                                                |       |                                 |

Indicate by check mark 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 preceding 12months, and (2) has been subject to such filing requirements for the past90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this 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 13,2003 (the last business day of the Registrant’s most recently completed secondfiscal quarter) was $155,143,090 based on the last reported sale price of$13.23 on the NASDAQ National Market on that date.

Asof March 5, 2004, 12,220,137 shares of Common Stock of the Registrant wereoutstanding.

DOCUMENTS INCORPORATED BYREFERENCE

Portions of the Registrant’s definitive Proxy Statementfor its Annual Meeting of Stockholders to be held on May 18, 2004 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                                                                                                                      |       | 9                 |
| Item 3.         |       | Legal Proceedings                                                                                                               |       | 10                |
| Item 4.         |       | Submission of Matters to a Vote of  Security Holders                                                                            |       | 11                |
| *Part II*  |       |                                                                                                                            |       |              |
| Item 5.         |       | Market for Company’s Common Equity  and Related Stockholder Matters                                                        |       | 13                |
| Item 6.         |       | Selected  Financial Data                                                                                                        |       | 14                |
| Item 7.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |       | 15                |
| Item  7A.       |       | Quantitative and Qualitative  Disclosures about Market Risk                                                                     |       | 31                |
| Item 8.         |       | Financial Statements and  Supplementary Data                                                                                    |       | 32                |
| Item 9.         |       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                  |       | 72                |
| Item  9A.       |       | Controls and Procedures                                                                                                         |       | 72                |
| *Part III* |       |                                                                                                                            |       |              |
| Item  10.       |       | Directors and Executive Officers  of the Registrant                                                                             |       | 72                |
| Item  11.       |       | Executive Compensation                                                                                                          |       | 72                |
| Item  12.       |       | Security Ownership of Certain  Beneficial Owners and Management                                                                 |       | 72                |
| Item  13.       |       | Certain Relationships and Related  Transactions                                                                                 |       | 72                |
| Item  14.       |       | Principal Accounting Fees and  Services                                                                                         |       | 73                |
| *Part IV*  |       |                                                                                                                            |       |              |
| Item  15.       |       | Exhibits, Financial Statement  Schedules, and reports on Form 8-K                                                          |       | 74                |
| SIGNATURES      |       | 79                                                                                                                              |

 

 

----

**Nash Finch Company**

**PART I**

*Throughout this report, we referto Nash Finch Company, together with its subsidiaries, as “we,” “us,” “NashFinch” 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: *AVANZATM*,*Buy·**n·Save*®,*Econofoods*®, *Sun Mart*®, *Family Thrift CenterTM*, *OurFamily®, Fame®, Value ChoiceTM, Food Pride®*and*Fresh Place*®. Thetrademark *IGA*®, referred to inthis report, is the registered trademark of another.

**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 $4.0billion in annual sales. Our business consists of three primary operatingsegments: food distribution, military food distribution and food retailing. Financial information about our business segmentsfor the three most recent fiscal years is contained in Part II, Item 8 ofthis report under Note (20)—“Segment Information” of Notes to ConsolidatedFinancial Statements.

**Food DistributionSegment**

Our food distribution segment sells and distributes awide variety of nationally branded and private label grocery products from 15distribution centers to more than 1,800 grocery stores and institutionalcustomers located in 25 states across the United States. Our customers arerelatively diverse, with the largest customer consisting of a consortium ofstores representing approximately 11.2%, and four others representingapproximately 4.0%, 3.8%, 3.4% and 3.3% of our fiscal 2003 food distributionsales. No other customer represents more than 3% of our food distributionbusiness. Approximately 54% of our food distribution sales in fiscal 2003 weregenerated through customers with whom we have long-term sales and serviceagreements. Several of our distribution centers also distribute products tomilitary commissaries located in their geographic areas.

Our distribution centers arestrategically located to efficiently serve our corporate-owned stores, ourindependent customer stores and other institutional customers. The distributioncenters are equipped with modern materials handling equipment for receiving,storing and shipping merchandise and are designed for high-volume operations atlow unit costs. Our distribution centers had an on-time delivery rate,defined as being within 1⁄2 hour of our committed delivery time, of 98.6% forfiscal 2003 along with a fill rate, defined as the percentage of cases shippedrelative to the number of cases ordered, of 96.0% for fiscal 2003. We continueto implement operating initiatives to enhance productivity and expandprofitability while providing a higher level of service to our distributioncustomers. Our distribution centers have 

1

----

varyinglevels of excess capacity to serve additional customers without materiallyincreasing our costs, while enhancing 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 the two distribution centers locatedin Sioux Falls, South Dakota. We currently have a fleet of 232 tractors and 694semi-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 first quality privatelabel products under the proprietary trademark *Our Family*,a long-standing private label of Nash Finch that offers a high qualityalternative to national brands. In 2002, we introduced *AVANZA*,a first quality private label, to address the tastes of our Hispanic customers.In addition, we sell and distribute two lower-priced lines of private labelproducts under the *Fame* and *Value Choice* trademarks.  Under our private label line of products, weoffer over 2,500 stock keeping units of competitively priced high qualitygrocery products, which compete with national branded and other value brandproducts.

*Services*

To furtherstrengthen our relationships with our food distribution customers, we offer awide variety of support services to help them develop and operate stores, aswell as compete more effectively. These services include:

·  promotional, advertising and merchandisingprograms;

·  installation of computerized ordering,receiving and scanning systems;

·  establishment and supervision of retailaccounting, budgeting and payroll processes;

·  personnel management assistance and employeetraining;

·  retail equipment procurement assistance;

·  consumer and market research;

·  remodeling and store development services;

·  negotiating real estate transactions;

·  securing existing grocery stores that are forsale or lease in the market areas we serve and, occasionally, acquiring orleasing existing stores for resale or sublease to these customers; and

·  NashNet, which provides supply chainefficiencies 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 3, 2004, wehad approximately $46.0 million of loans outstanding to 73 of our fooddistribution customers, and guaranteed outstanding debt and lease obligationsof food distribution customers in the amount of $13.0 million. We typicallyenter into long-term supply agreements with independent customers, ranging from2 to 20 years. Approximately 54% of food distribution revenues in fiscal 2003were 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 3, 2004, our maximumcontingent liability exposure with respect to the subleased and assigned leasesto be approximately $74.4 million and $10.2 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 3, 2004, weserved approximately 84retail storesunder our *Food Pride* banner and 194stores under the *IGA* banner.

**Military Food Distribution Segment**

Our military fooddistribution segment contracts with manufacturers, processors and vendors todistribute a wide variety of grocery products to military commissaries andmilitary distribution centers supporting over 100 military commissaries locatedin the continental U.S., Europe, Cuba, Puerto Rico and Iceland. Contracts withvendors are obtained through competitive bidding processes. We primarilyconduct our military distribution operations in the Mid-Atlantic region of theUnited States, consisting of the states along the border of the Atlantic Oceanfrom New York to North Carolina. During2003 we completed the consolidation of two large warehouses into one located inNorfolk, Virginia, which is exclusively dedicated to supplying products tomilitary commissaries. We have consistently received the highest availableservice ratings from the Defense Commissary Agency, which performs monthlyassessments of service to military commissaries. The ratings are based onservice metrics which include fill rate, on-time delivery and handling of orderadjustments.

**Retail Segment**

*Overview*

Our food retailing segmentis made up of 110 corporate-owned stores located primarily in the Upper Midweststates of Colorado, Illinois, Iowa, Kansas, Minnesota, Nebraska, North Dakota,South Dakota and Wisconsin. We believe that approximately 61% of ourconventional grocery stores are #1 or #2 in their respective local markets,which includes all supermarkets and supercenters within the respective citylimits in which our stores are located, based on sales. Our corporate-ownedstores, which range from conventional stores in rural trade areas to modernsupermarkets in growing urban areas, principally operate under the *AVANZA*, *Buy·**n·Save,**Econofoods*, *Sun Mart*,*Family Thrift Center* and *Wholesale Food Outlet* banners. Our stores are typicallylocated close to our distribution centers in order to create certain operatingand logistical efficiencies. As of January 3, 2004, we operated 94conventional grocery stores, 6 *AVANZA* grocerystores, 5 *Buy·**n·**Save*grocery stores, 3 *Wholesale Food Outlet* grocerystores, and 2 other retail stores.  Wecontinue to focus on operating and customer service initiatives to improve thefinancial performance of our retail segment.

3

----

*ConventionalGrocery Stores*

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 stores is an umbrella banner thatemphasizes our high-quality perishable products, such as fresh produce, deli,meats, seafood, baked goods, and takeout foods for today’s busy consumer.

*Hispanic Stores*

Our Hispanic storescurrently operate under the *AVANZA* and *Wholesale Food Outlet* banners and offer products designed tomeet the specific tastes and needs of Hispanic shoppers, whom we believe areunderserved by conventional grocery stores. *AVANZA* storesfocus on the products most frequently purchased by Hispanic shoppers such asproduce, meat, baked goods and imported products from Mexico. In addition to avast selection of familiar Hispanic products, these stores have bilingual signsand product packaging, national magazines in both English and Spanish andSpanish-speaking personnel in a clean, festive environment. These stores alsoprovide services such as check cashing, fax services, money wiring and phonecards. Our *AVANZA* and *WholesaleFood Outlet*stores are located in Colorado, Illinois, Iowa andNebraska. During 2003, we continued to expand our *AVANZA*supermarket concept by opening four new stores, two in Colorado (in Denver andPueblo) and two in Chicago, Illinois.

**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 utilize technology to increase distribution efficiencies. We competewith local, regional and national food distributors, as well as withvertically-integrated national and regional chains utilizing a variety offormats, 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 we believe to beindustry leading, such as our on-time delivery rate and fill rate, which were98.6% and 96.0%, respectively, for fiscal 2003, will be essential inmaintaining our competitive advantage.

*Military FoodDistribution Segment*

We face competition in ourmilitary food distribution business from large national and regional fooddistributors as well as from smaller local distributors. We believe we competeeffectively based on customer service, operating efficiencies and the locationof our military distribution centers.

*Food RetailingSegment*

Competition in the retail grocery business in ourgeographic markets is intense. We compete with many organizations of varioussizes, ranging from national and regional chains that operate a variety of 

4

----

formats (such assupercenters, supermarkets, extreme value food stores and membership warehouseclub stores) to local grocery store chains and privately owned unaffiliatedgrocery stores. Although our target geographic areas have a relatively lowpresence of national and multi-regional grocery store chains, we are facingincreasing competitive pressure from the expansion of national and regionalsupercenter chains. During 2003, there were nine new supercenters opened in ourcomparable markets. In 2004, we expect an additional five supercenters to openwithin our markets. These competitive pressures, occurring in the context of alow margin industry, have contributed to the current trend toward consolidationin the retail grocery business. Depending upon the product and locationinvolved, 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.

Our *AVANZA*and *Wholesale Food Outlet* stores competeprimarily with small independent Hispanic retailers, which we believe lack thescale to have a meaningful impact on our targeted markets, as well as withnational grocery store chains and supercenters.

**Vendor Allowancesand 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 andperformance-based allowances. These promotional arrangements are often subjectto negotiation with our vendors.

In the case of off-invoice allowances, discounts aretypically offered by vendors with respect to certain merchandise purchased byus during a specified period of time. We use off-invoice allowances to supporta variety of marketing programs such as reduced price offerings for specifictime periods, food shows, pallet promotions and private label promotions. Thediscounts are either reflected directly on the vendor invoice, as a reductionfrom the normal wholesale prices for merchandise to which the allowanceapplies, or we are allowed to deduct the allowance as an offset against thevendor’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 performance  requirement such as providing advertising orspecial in-store promotion, tracking quantities of product sold (as is the casewith count-recount promotions discussed below), slotting (adding a new item tothe system) and merchandising a new item, or achieving certain minimum purchasequantities. The billing for these performance-based allowances is normally inthe form of a “bill-back” in which case we are invoiced at the regular pricewith the understanding that we may bill back the vendor for the requisiteallowance when the performance is satisfied.

We collectively plan promotions with our vendors andarrive at the amount the respective vendor plans to spend on promotions with us.We and the vendors then monitor, review and discuss the results of suchpromotions, and resolve issues relating to promotions and billings. Each vendorhas its own method for determining the amount of promotional funds budgeted tobe spent with us during the period. In most situations, the vendor allowancesare based on units we purchased from the vendor. In other situations, theallowances are based on our past or anticipated purchases and/or theanticipated performance of the planned promotions.

We jointly negotiate withour vendors the promotional calendar that governs all promotions. Forecastingpromotional expenditures is a critical part of our twice yearly planningsessions with our vendors. Most vendors work with us to project not justoverall spending, but also spending on a category and regional basis. Asindividual promotions are completed and the associated billing is processed,the vendors track our promotional program execution and spend rate. The vendorsdiscuss the tracking, performance and spend rate with us on a regular basisthroughout the year. Depending upon the vendor 

5

----

arrangements,such discussions can occur on a weekly, monthly, quarterly or annual basis. Thesecommunications include future promotions, product cost, targeted retails andprice points, anticipated volume, promotion expenditures, vendor maintenance,billing issues and procedures, new items/discontinued items, and trade spendlevels relative to budget per event and per year, as well as the resolution ofany issues that arise between the vendor and us. In the future, the nature andmenu of promotional programs and the allocation of dollars among them maychange as a result of ongoing negotiations and commercial relationships betweenvendors and us.

**Count-RecountCharges**

As discussed above, we participate with our vendors ina broad menu of promotions to increase sales of products. Certain promotionsrequire us to track specific shipments of goods to retailers, or to customersin the case of our own retail stores, during a specified period. At the end ofthe promotional period, we invoice our vendors for the total promotionalallowance based on the quantity of goods sold. This type of promotion, which isoften referred to as “count-recount,” requires wholesalers and retailers suchas us to incur significant administrative and other costs to manage suchprograms.

As a result of the increased costs associated withcount-recount program administration and implementation, we historically, butnot uniformly, assessed an administrative fee to recoup our reasonable costs ofperforming the tasks associated with administering these promotions. In someinstances this fee was separately identified on the invoice to the vendor andin other instances we raised the invoice amounts by adding additional cases tothe quantity of goods sold reflected on the invoices to vendors. Although weattempted to standardize the latter practice at a range of between 15% and 20%on wholesale movement billings and approximately 12% on retail scan billingsfor our retail stores, the application of the practice was uneven across timeand divisions. The aggregate fees charged to vendors, represented as a percentof total count-recount promotional dollars, were approximately 17% in fiscal2000 and 23% in fiscal 2001 and 2002. Our costs associated with administeringthis program are estimated at approximately 20% of the total count-recountpromotional dollars.

The count-recount practicedescribed above was established against a backdrop of what we believe was acommon industry practice, of which vendors generally were aware. We believethat our efforts to recapture count-recount costs by adding additional cases tothe invoices in lieu of a separately delineated administrative fee were appropriate.The arrangements between us and our vendors did not separately address orprovide for the addition of such charges in lieu of a separately invoicedadministrative fee. Our conclusion that our accounting for such charges hasbeen correct, that the charges were appropriately recognized as a reduction ofcost of sales in the period the product was sold and in which the count-recountpromotions were actually performed by us, is based on our overall relationshipand method of doing business with our vendors.

*HistoricalAccounting Treatment and Impact on Financial Statements*

Count-recount allowancesare recorded as a reduction to cost of sales as performance has been completedand as the related inventory is sold. Count-recount charges in lieu ofadministrative fees were approximately $6.7 million in fiscal 2000, $8.6million in fiscal 2001 and $6.7 million through November 17, 2002 when we,as a uniform practice across all divisions, began stating the administrativefee separately on the invoices to the vendor.

*Communications withVendors*

In November 2002, wemet with our vendors, and brokers representing vendors, collectively comprisingapproximately 88% of all purchases from vendors who were subject tocount-recount charges in lieu of an administrative fee. In those meetings, weadvised the vendors and brokers that (i) we had a 

6

----

historicalpractice of charging an administrative fee either separately or, in mostinstances, by adding amounts to actual quantities sold in the range of 15% to20% in lieu of an administrative fee, (ii) such fee had not always beenseparately disclosed on invoices to vendors, (iii) we had attempted tostandardize the practice in late 1999 at a range of 15% to 20%, (iv) wehad not been successful in standardizing such practice in that in somesituations the application of the practice had been uneven across time anddivisions resulting in a move away from a fixed percentage and sometimesresulting in an uneven percentage being applied, and (v) in the future wewill charge a flat fee set at a fixed percentage of sales, which would beseparately itemized on invoices. In those meetings, substantially all thevendors acknowledged the fees previously charged and none indicated that theywould seek any refund based upon the past practice. Subsequently, on November 26,2002, we notified all of our vendors and brokers (including but not limited tothose with whom we had met in person) in writing of our prior and currentpractices related to count-recount. As of the date of the filing of thisreport, none of our vendors or brokers is requesting a return of any of thehistorical count-recount charges assessed, and none has indicated they willmake a reduction in future promotional funding.

*SEC Investigation*

As previously disclosed, on October 9, 2002, wereceived a letter from the staff of the Division of Enforcement of the SECindicating that they were conducting an informal inquiry into our process forassessing 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. We filed a written response to the inquiry on November 22,2002.

On February 3, 2003, we provided the Office ofthe Chief Accountant of the SEC a written communication detailing the basis forthe manner in which we assess and account for count-recount charges, advisingthat we believe these charges were properly accounted for in accordance withgenerally accepted accounting principles, seeking the SEC staff’s concurrencewith this conclusion, and requesting a meeting with the staff of the Office ofChief Accountant at which these matters could be discussed. On February 4,2003, we were notified by the staff of the SEC’s Division of Enforcement thatthe SEC had approved a formal order of investigation of Nash Finch.

Our representatives metwith members of the staff of the SEC’s Office of the Chief Accountant andDivision of Corporation Finance on February 19, 2003. In a letter dated March 7,2003, the staffs of the SEC’s Office of the Chief Accountant and Division ofCorporation Finance indicated that, based on our oral and writtenrepresentations, they would not object at that time to our accounting for thecount-recount charges. The investigation by the SEC’s Division of Enforcementis, however, ongoing and the response by the staffs of the Office of the ChiefAccountant and the Division of Corporation Finance does not preclude anyfurther action by the Division of Enforcement.

**Trademarks andServicemarks**

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 to be of material value to ourbusiness, and we actively defend and enforce such trademarks, tradenames andservicemarks.

**Employees**

As of January 3,2004, we employed 10,570 persons, of whom 5,807 were employed on a full-time basisand 4,763 were employed on a part-time basis. We consider our employeerelations to be good. Only 471 of 

7

----

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

**AvailableInformation**

Our internet website is *www.nashfinch.com*.The references to our website in this report are inactive references only, andthe information on our website is not incorporated by reference in this report.Through the Investor Relations portion of our website and a link to athird-party content provider (under the tab “SEC Filings”), you may access,free of charge, our annual reports on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and amendmentsto such reports filed or furnished pursuant to Sections 13(a)  or 15(d) ofthe Securities Exchange Act of 1934 as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC. We have alsoposted on our website, under the caption “Corporate Governance,” our *Code of Business Conduct* that is applicable to all ourdirectors and employees, as well as our *Code of Ethics for SeniorFinancial Management*that is applicable to our Chief ExecutiveOfficer, Chief Financial Officer and Corporate Controller. Any amendment to orwaiver from the provisions of either of these Codes that is applicable to anyof these three executive officers will be disclosed on our website under the “CorporateGovernance” caption.

8

----

**ITEM2**.  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 3, 2004, 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(1)      |       |       | 340,400    |                                      |       |
| Sioux Falls, South Dakota(2) |       |       | 303,400    |                                      |       |
| Fargo, North Dakota          |       |       | 288,800    |                                      |       |
| Rapid City, South Dakota(3)  |       |       | 195,100    |                                      |       |
| Minot, North Dakota          |       |       | 185,200    |                                      |       |
| Southeast Region:            |       |       |       |                                      |       |
| Lumberton, North Carolina(4) |       |       | 336,500    |                                      |       |
| Statesboro, Georgia(4)       |       |       | 230,500    |                                      |       |
| Bluefield, Virginia          |       |       | 187,500    |                                      |       |
| Central Region:              |       |       |       |                                      |       |
| Bellefontaine, Ohio(5)       |       |       | 706,600    |                                      |       |
| Cincinnati, Ohio             |       |       | 403,300    |                                      |       |
| Bridgeport, Michigan(4)      |       |       | 604,500    |                                      |       |
| Total Square Footage         |       |       | 4,760,600  |                                      |       |

----

(1)           Includes 11,400 squarefeet that we lease.

(2)          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.

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

(4)          Leased facility.

(5)          Includes40,500 square feet that we lease. This facility includes two separatedistribution operations, one that distributes dry groceries, frozen foods,fresh and processed meat products, and a variety of non-food products, and theother that distributes health and beauty care products, general merchandise andspecialty grocery products. The general merchandise services distributioncenter uses approximately 254,000 square feet of the total owned and leasedspace.

9

----

**MilitaryDistribution Segment**

Thetable below lists, as of January 3, 2004, the locations and sizes of ourdistribution centers exclusively used in our military distribution business. Unlessotherwise indicated, we lease each of these distribution centers.
| **Location**          | ** ** | ** ** | ** ** | **Approx. Size  (Square Feet)** | ** ** |
|-----------------------|------------|------------|------------|-------------------------------------------|------------|
| Jessup, Maryland      |       |       | 67,200     |                                      |       |
| Norfolk,  Virginia(1) |       |       | 787,500    |                                      |       |
| Total Square Footage  |       |       | 854,700    |                                      |       |

----

(1)          Includes54,359 square feet that we own.

**Food RetailingSegment**

Thetable below sets forth, as of January 3, 2004, selected informationregarding our 110 corporate-owned stores. We own 32 and lease 78 of thesestores.
| **Banner**                 | ** ** | ** ** | ** ** | **Number  of Stores** | ** ** | **Areas  of Operation** | ** ** | **Average  Square Feet** | ** ** |
|----------------------------|------------|------------|------------|----------------------------|------------|------------------------------|------------|-------------------------------|------------|
| *Econofoods*               |       |       | 55         |                       |       | IA,  IL, MN, SD, WI, WY      |       |                          | 38,505     |   |   |
| *Sun  Mart*                |       |       | 33         |                       |       | CO,  KS, MN, NE, ND          |       |                          | 33,263     |   |   |
| *AVANZA*                   |       |       | 6          |                       |       | CO, IL                       |       |                          | 35,679     |   |   |
| *Family Thrift Center*     |       |       | 6          |                       |       | SD                           |       |                          | 33,188     |   |   |
| *Buy·**n·**Save* |       |       | 5          |                       |       | MN                           |       |                          | 13,742     |   |   |
| Wholesale Food  Outlet     |       |       | 3          |                       |       | CO,  IA, NE                  |       |                          | 28,784     |   |   |
| Other Stores               |       |       | 2          |                       |       | MN, WI                       |       |                          | 5,436      |   |   |

 

Asof January 3, 2004, the aggregate square footage of our 110 retail grocerystores totaled 3,794,555 square feet.

**ITEM 3**.  LEGAL PROCEEDINGS

*ShareholderLitigation*

Eightclass action lawsuits have been filed against the Company and certain of itsexecutive officers in the United States District Court for the District ofMinnesota on behalf of purchasers of the Company’s common stock during theperiod from February 23, 2000 through February 4, 2003. Thecomplaints generally allege that the defendants violated  the Securities ExchangeAct of 1934 by issuing false statements, including false financial results inwhich the Company included income from vendor promotions to which the Companywas not entitled, so as to maintain favorable credit ratings on its debt. Theseactions were consolidated in a complaint filed in June 2003. Threederivative actions have also been filed in state court in Minnesota during January andFebruary 2003 by shareholders alleging that certain officers and directorsviolated duties to the Company to oversee and administer the Company’saccounting. These actions are directly tied to the allegations in the federalsecurities action. We believe that the lawsuits are without merit and intend tovigorously defend the actions. No damages have been specified. We do notbelieve that the eventual outcome will have a material impact on our financialposition or results of operations.

10

----

*SEC Investigation*

On October 9, 2002, we received a letter from thestaff of the Division of Enforcement of the SEC indicating that they wereconducting an informal inquiry into our process for assessing count-recountcharges to our vendors and how we account for those charges. In response, wecommenced an internal review of our practices in conjunction with the AuditCommittee, special outside counsel and our prior and then-current auditors. Wefiled a written response to the inquiry on November 22, 2002.

On February 3, 2003, we provided the Office ofthe Chief Accountant of the SEC a written communication detailing the basis forthe manner in which we assess and account for count-recount charges, advisingthat we believe these charges were properly accounted for in accordance withgenerally accepted accounting principles, seeking the SEC staff’s concurrencewith this conclusion, and requesting a meeting with the staff of the Office ofChief Accountant at which these matters could be discussed. On February 4,2003, we were notified by the staff of the SEC’s Division of Enforcement thatthe SEC had approved a formal order of investigation of Nash Finch.

Our representatives metwith members of the staff of the SEC’s Office of the Chief Accountant andDivision of Corporation Finance on February 19, 2003. In a letter dated March 7,2003, the staffs of the SEC’s Office of the Chief Accountant and Division ofCorporation Finance indicated that, based on our oral and writtenrepresentations, they would not object at that time to our accounting for thecount-recount charges. The investigation by the SEC’s Division of Enforcementis, however, ongoing and the response by the staffs 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 the pending legal proceedings not discussed above will havea material impact on the business or financial condition of the Company and itssubsidiaries, taken as a whole.

**ITEM 4**.  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

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

**ITEM 4A**.  EXECUTIVE OFFICERS OF THEREGISTRANT

Thefollowing table sets forth information about our executive officers as of March 5,2004:
| **Name**              | ** ** | ** ** | ** ** | **Age** | ** ** | **Year First Elected  or Appointed as an  Executive Officer** | ** ** | **Title**                                                            | ** ** |
|-----------------------|------------|------------|------------|---------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Ron Marshall          |       | 49         |       |    | 1998       |                                                                                        |       | Chief Executive Officer                                              |       |
| Robert B. Dimond      |       | 42         |       |    | 2000       |                                                                                        |       | Executive Vice President, Chief Financial Officer and Treasurer |       |
| Michael J. Lewis      |       | 53         |       |    | 2003       |                                                                                        |       | Executive Vice President, President of Retail                        |       |
| James M. Patitucci    |       | 53         |       |    | 2004       |                                                                                        |       | Executive Vice President, Merchandising and Marketing                |       |
| David J. Bersie       |       | 52         |       |    | 2002       |                                                                                        |       | Sr. Vice President, Food Distribution                                |       |
| Bruce A. Cross        |       | 51         |       |    | 1998       |                                                                                        |       | Sr. Vice President, Business Transformation                          |       |
| Kathleen E. McDermott |       | 54         |       |    | 2002       |                                                                                        |       | Sr. Vice President, General Counsel &  Secretary            |       |
| Joe R. Eulberg        |       | 46         |       |    | 2003       |                                                                                        |       | Sr. Vice President, Human Resources                                  |       |
| William F. Harbecke   |       | 59         |       |    | 2002       |                                                                                        |       | Vice President, Real Estate and Construction                         |       |
| Jeffrey E. Poore      |       | 45         |       |    | 2001       |                                                                                        |       | Vice President, Distribution and Logistics                           |       |
| LeAnne  M. Stewart    |       | 39         |       |    | 1999       |                                                                                        |       | Vice  President and Corporate Controller                             |       |

 

11

----

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.

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

*Robert B. Dimond*has servedas our Executive Vice President since May 2002, as Treasurer since May 2001,as our Chief Financial Officer since October 2000 and as our Senior VicePresident from October 2000 to May 2002.  He previously served as Group Vice Presidentand Chief Financial Officer for the western region of Kroger Company, a groceryretailer, from March 1999 to September 2000. From February 1992until March 1999, he served as Group Vice President, Administration andController, for Smith’s Food & Drug Centers, Inc., a groceryretailer.

*Michael J. Lewis*has servedas our Executive Vice President, and President of Retail since November 2003.He previously served as President of Conquest Management Corporation, aconsulting firm specializing in growth strategies for retail companies, from August 1995to November 2003.

*James M.Patitucci*has servedas our 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, and from June 1998 to December 1999served as Group Vice President-Non-Perishable Division for Ralph’s Grocery.

*David J. Bersie*has served asour Senior 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. Priorto joining us, he served in various positions with Fleming Companies, Inc.,a wholesale grocery distributor, including Division President—Peoria Divisionand Director of Merchandising and Director of Grocery—Minneapolis Division,from 1977 to 1999.

*Bruce A. Cross*has served asour Senior Vice President, Business Transformation since May 2000. Heserved as our Senior Vice President and Chief Information Officer from September 1998to May 2000. Mr. Cross previously served as Senior Project Executivefor IBM Global Services, a strategic technical outsourcing and businessconsulting firm, from January 1995 to September 1998.

*Kathleen E. McDermott*hasserved as our Senior Vice President, General Counsel since March 2002. Shepreviously served as a Partner with Collier Shannon Scott, PLLC, a law firm,from January 2001 to March 2002. From June 1993 to June 1996,she served as Executive Vice President and Chief Legal Officer at AmericanStores Company, a food and drug retailer. From 1980 to 1993, she served as aPartner with the Collier, Shannon, Rill & Scott law firm.

*Joe R. Eulberg*has served asour Senior Vice President, Human Resources since November 2003.  He previously served as Vice President of HumanResources with 7-Eleven Incorporated, a convenience store operator andfranchisor, from August 2000 to August 2003. From September 1998to August 2000, he served as Senior Vice President, Human Resources at theAccor Economy Lodging division of Accor S.A., an operator and franchisor ofeconomy lodging properties.

*William F. Harbecke*hasserved as our Vice President, Real Estate and Construction since May 2002.He previously served as Regional Vice President of Real Estate for Albertson’s, Inc.,a food and drug retailer, from 1999 to 2002. From 1986 to 1999, he served invarious positions with American Stores Company ranging from Director of RealEstate to Senior Vice President of Real Estate.

12

----

*Jeffrey E. Poore*has servedas our Vice President, Distribution and Logistics since May 2001. From1996 to April 2001, Mr. Poore served in various positions withSuperValu Inc., a food wholesaler and retailer, most recently as VicePresident, Logistics from January 1999 to April 2001. Before joiningSuperValu, Mr. Poore served as the Director of Logistics for SUN TV &Appliance, Inc. from December 1995 to September 1996.

*LeAnne M. Stewart*hasserved as our Vice President since July 1999, as Controller since April 2000,and served as Treasurer from May 2000 to May 2001. Prior to herelection as Controller, Ms. Stewart served as our Vice President,Financial Planning and Analysis. Prior to joining us, she served as Manager,Corporate Finance for Enron Europe Limited, an international energy company,from August 1997 to March 1999. From December 1987 to July 1995,she served in various positions ranging from staff accountant to senior managerat Ernst & Young LLP.

**PART II**

**ITEM5**.  MARKET FOR COMPANY’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

Ourcommon stock is listed 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 3, 2004 there were2,841 stockholders of record.
| ** **     | ** ** | **2003** | ** ** | **2002** | ** ** | **Dividends  Per Share** | ** ** |
|----------------|------------|----------|------------|----------|------------|-------------------------------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High**                      | ** ** | **Low** | ** ** | **2003** | ** ** | **2002** | ** ** |
| First Quarter  |       | $        | 9.86       |     | $          | 4.26                          |       | $ | 31.10 |   | $ | 25.22 |   | $ | 0.00 |   | $ | 0.09 |   |
| Second Quarter |       | 13.90    |       | 6.90     |       | 32.20                         |       | 23.55 |   | 0.18 |   | 0.09 |   |
| Third Quarter  |       | 18.70    |       | 13.33    |       | 33.18                         |       | 12.50 |   | 0.09 |   | 0.09 |   |
| Fourth Quarter |       | 24.70    |       | 15.97    |       | 15.34                         |       | 7.12 |   | 0.09 |   | 0.09 |   |
|                |            |          |            |          |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On February 24, 2004, the Nash Finch Board ofDirectors declared a cash dividend of $0.135 per common share, payable on March 19,2004 to stockholders of record as of March 5, 2004.

13

----

**ITEM 6. SELECTED FINANCIAL DATA**

**NASHFINCH COMPANY and SUBSIDIARIESConsolidated Summary of OperationsFive years ended January 3, 2004 (not covered by Independent Auditors’Report)**
| ** **                                                                                    | ** ** | **2003**            | ** ** | **2002**            | ** ** | **2001**            | ** ** | **2000**            | ** ** | **1999**            | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| **(Dollar amounts in thousands except per share amounts)** | ** ** | **(53 weeks)** | ** ** | **(52 weeks)** | ** ** | **(52 weeks)** | ** ** | **(52 weeks)** | ** ** | **(52 weeks)** | ** ** |
| Sales(1)                                                                                      |       | $                   | 3,971,502  |                | $          | 3,874,672           |       | $                   | 3,982,206  |                | $          | 3,839,499 |   | $ | 3,922,701 |   |
| Cost of sales including warehousing and transporation  expenses(1)                            |       | 3,516,460           |       | 3,408,409           |       | 3,529,124           |       | 3,409,778           |       | 3,535,066           |       |
| Selling, general and adminstrative, and other  operating expenses                             |       | 326,828             |       | 347,418             |       | 335,886             |       | 322,448             |       | 296,733             |       |
| Special charges                                                                               |       | —              |       | (765                | )          | —              |       | —              |       | (7,045              | )          |
| Interest expense                                                                              |       | 33,869              |       | 29,490              |       | 34,303              |       | 34,444              |       | 29,931              |       |
| Depreciation and amortization                                                                 |       | 42,412              |       | 39,988              |       | 46,601              |       | 45,330              |       | 41,563              |       |
| Provision for income taxes                                                                    |       | 17,254              |       | 19,552              |       | 15,025              |       | 11,659              |       | 11,216              |       |
| Net earnings from continuing operations                                                       |       | $                   | 34,679     |                | $          | 30,580              |       | $                   | 21,267     |                | $          | 15,840 |   | $ | 15,237 |   |
| Earnings on disposal of discontinued operations, net  of income tax                           |       | 413                 |       | —              |       | —              |       | —              |       | 4,566               |       |
| 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                                                                                  |       | $                   | 35,092     |                | $          | 23,620              |       | $                   | 21,267     |                | $          | 15,471 |   | $ | 19,803 |   |
| Basic earnings per share:                                                                     |       |                |       |                |       |                |       |                |       |                |       |
| Earnings from continuing operations                                                           |       | $                   | 2.87       |                | $          | 2.59                |       | $                   | 1.83       |                | $          | 1.38 |   | $ | 1.35 |   |
| Earnings from discontinued operations                                                         |       | 0.03                |       | —              |       | —              |       | —              |       | 0.40                |       |
| Extraordinary charge from early extinguishment of  debt                                       |       | —              |       | —              |       | —              |       | (0.03               | )          | —              |       |
| Cumulative effect of change in accounting  principle(2)                                       |       | —              |       | (0.59               | )          | —              |       | —              |       | —              |       |
| Basic earnings per share                                                                      |       | $                   | 2.90       |                | $          | 2.00                |       | $                   | 1.83       |                | $          | 1.35 |   | $ | 1.75 |   |
| Diluted earnings per  share:                                                                  |       |                |       |                |       |                |       |                |       |                |       |
| Earnings from continuing operations                                                           |       | $                   | 2.85       |                | $          | 2.52                |       | $                   | 1.78       |                | $          | 1.38 |   | $ | 1.34 |   |
| Earnings from discontinued operations                                                         |       | 0.03                |       | —              |       | —              |       | —              |       | 0.40                |       |
| Extraordinary charge from early extinguishment of  debt                                       |       | —              |       | —              |       | —              |       | (0.03               | )          | —              |       |
| Cumulative effect of change in accounting principle(2)                                        |       | —              |       | (0.57               | )          | —              |       | —              |       | —              |       |
| Diluted earnings per share                                                                    |       | $                   | 2.88       |                | $          | 1.95                |       | $                   | 1.78       |                | $          | 1.35 |   | $ | 1.74 |   |
| Cash dividends declared per common share                                                      |       | $                   | .36        |                | $          | .36                 |       | $                   | .36        |                | $          | .36 |   | $ | .36 |   |
| Pretax earnings from continuing operations as a  percent of  sales                            |       | 1.31                | %          | 1.29                | %          | 0.91                | %          | 0.72                | %          | 0.67                | %          |
| Net earnings as a percent of sales                                                            |       | 0.88                | %          | 0.61                | %          | 0.53                | %          | 0.40                | %          | 0.50                | %          |
| Effective income tax rate                                                                     |       | 33.3                | %          | 39.0                | %          | 41.4                | %          | 42.4                | %          | 42.4                | %          |
| Current assets                                                                                |       | $                   | 415,810    |                | $          | 468,281             |       | $                   | 479,364    |                | $          | 433,539 |   | $ | 465,563 |   |
| Current liabilities                                                                           |       | $                   | 284,752    |                | $          | 309,256             |       | $                   | 383,624    |                | $          | 324,786 |   | $ | 327,327 |   |
| Net working capital                                                                           |       | $                   | 131,058    |                | $          | 159,025             |       | $                   | 95,740     |                | $          | 108,753 |   | $ | 138,236 |   |
| Ratio of current assets to current liabilities                                                |       | 1.46                |       | 1.51                |       | 1.25                |       | 1.33                |       | 1.42                |       |
| Total assets                                                                                  |       | $                   | 886,352    |                | $          | 947,922             |       | $                   | 970,245    |                | $          | 880,828 |   | $ | 862,443 |   |
| Capital expenditures                                                                          |       | $                   | 40,728     |                | $          | 52,605              |       | $                   | 43,924     |                | $          | 54,066 |   | $ | 52,282 |   |
| Long-term obligations (long-term debt and capitalized  lease  obligations)                    |       | $                   | 326,583    |                | $          | 405,376             |       | $                   | 368,807    |                | $          | 353,664 |   | $ | 347,809 |   |
| Stockholders’ equity                                                                     |       | $                   | 256,457    |                | $          | 221,479             |       | $                   | 203,408    |                | $          | 184,540 |   | $ | 172,674 |   |
| Stockholders’ equity per share(3)                                                        |       | $                   | 21.36      |                | $          | 18.61               |       | $                   | 17.43      |                | $          | 16.12 |   | $ | 15.22 |   |
| Return on stockholders’ equity(4)                                                        |       | 13.52               | %          | 13.81               | %          | 10.46               | %          | 8.58                | %          | 8.82                | %          |
| Number of common stockholders of record at year-end                                           |       | 2,841               |       | 2,797               |       | 2,710               |       | 2,786               |       | 2,348               |       |
| Common stock high price(5)                                                                    |       | $                   | 24.70      |                | $          | 33.18               |       | $                   | 35.54      |                | $          | 13.56 |   | $ | 14.50 |   |
| Common stock low  price(5)                                                                    |       | $                   | 4.26       |                | $          | 7.12                |       | $                   | 11.81      |                | $          | 6.00 |   | $ | 5.88 |   |

----

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

(2)     See Item 8, Note 1 of this report under the caption“New Accounting Standards” regarding the adoption of EITF No. 02-16.

(3)     Based on average outstanding shares at year-end.

(4)     Return based on continuing operations.

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

14

----

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

**OVERVIEW**

We are one of the leading food distribution and retailcompanies in the United States, with approximately $4.0 billion in annual sales.Approximately 48% 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 1,800 grocery storesand institutional customers located in 25 states, primarily in the Midwest andSoutheast. Approximately 28% 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 and Iceland. Theremaining 24% of our annual sales come from our retail segment, which operates110 corporate-owned stores primarily in the Upper Midwest.

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 ourindependent retail customer base. Largely as a result of this trend, but alsoas a result of difficult economic conditions in 2002 and the first part of2003, over the three years discussed in this report we have experienceddecreasing same store sales in our retail segment and, to a lesser degree,attrition among the existing customer base in our food distribution segment. Despitethese competitive pressures, our annual sales over this three-year period havebeen relatively flat as a result of new business gained by our fooddistribution and military distribution businesses.

During 2003, competitive conditions in the fooddistribution industry were affected by the bankruptcy filing of FlemingCompanies, Inc., at the time one of the largest independent foodwholesalers in the United States, and the subsequent sale of its wholesalebusiness (including its customer contracts) to several competitors. Although wedid not purchase any portion of the Fleming wholesale business, during thesecond half of 2003 sales in our food distribution segment increased in largemeasure because we were able to obtain the business of former Fleming wholesalecustomers who were not under contract to Fleming. In the fourth fiscal quarterof 2003, food distribution sales increased 12.4% over the year earlier quarter(after adjusting for the extra week in the 2003 quarter), as a result ofgaining former Fleming customers and other new accounts, as well as growth fromour existing customer base.

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 the highratings we consistently receive on key service metrics from the DefenseCommissary Agency have helped us win new business. During 2003, we completedthe consolidation of our two large military distribution warehouses into onelocated in Norfolk, Virginia. Although this project included transitionexpenses that had an impact on 2003 earnings, in the fourth quarter of thatyear we began to realize the efficiencies expected when that project wasundertaken, and expect those benefits to continue.

Despite the decrease in same store sales in our retailsegment, we believe that we have a defensible market position in the UpperMidwest. We believe that approximately 61% of our conventional grocery storesare number 1 or number 2 by sales in their respective local markets, whichinclude all supermarkets and supercenters within the respective city limits inwhich our stores are located. To defend and improve upon our position, werecognize that we must successfully undertake and complete various initiatives,such as more consistent store-level execution across the store base, refocusingon perishables, and providing more attractive promotional programs. We are alsocarefully studying the competitive position of each of our stores in each localmarket in which we operate.

15

----

During 2003, we reducedtotal debt (including capital lease obligations) by $81 million as part of acontinuing effort to reduce the Company’s leverage, and we believe that doingso reduces the risk profile of the Company. In February 2004, our Boardincreased our quarterly dividend from $0.09 per share to $0.135 per share. Withthe 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 during2004. Reducing dependence on debt also frees up borrowing capacity to enable usto take advantage of potential acquisition or investment opportunities thatpresent themselves.

**RESULTS OFOPERATIONS**

The following discussionsummarizes our operating results for fiscal 2003 compared to fiscal 2002 andfiscal 2002 compared to fiscal 2001. However, fiscal 2003 results are notdirectly comparable to fiscal 2002 or 2001 because fiscal 2003 contained anadditional week.

*Sales*

Thefollowing tables summarize our sales activity for fiscal 2003, 2002 and 2001(in millions).
| ** **              | ** ** | **2003**   | ** ** | **2002**  | ** ** | **2001**                   | ** ** |
|-------------------------|------------|------------|------------|-----------|------------|----------------------------|------------|
| **Segment sales:** | ** ** | ** ** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** | **Percent  Change** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** | **Percent  Change** | ** ** | **Sales** | ** ** | **Percent  of Sales** | ** ** |
| Food Distribution       |       | $          | 1,915.2    |      |       | 48.2                       | %          |   |   | 4.9 | % |   | $ | 1,825.8 |   |   | 47.1 | % |   |   | (6.4 | )% |   | $ | 1,951.4 |   |   | 49.0 | % |   |
| Military                |       | 1,090.0    |       |      | 27.5       | %                          |       |   | 6.8 | % |   | 1,020.7 |   |   | 26.4 | % |   |   | 2.5 | % |   | 995.7 |   |   | 25.0 | % |   |
| Retail                  |       | 966.3      |       |      | 24.3       | %                          |       |   | (6.0 | )% |   | 1,028.2 |   |   | 26.5 | % |   |   | (0.7 | )% |   | 1,035.1 |   |   | 26.0 | % |   |
| **Total  Sales**        |       | $          | 3,971.5    |      |       | 100.0                      | %          |   |   | 2.5 | % |   | $ | 3,874.7 |   |   | 100.0 | % |   |   | (2.7 | )% |   | $ | 3,982.2 |   |   | 100.0 | % |   |
|                         |            |            |            |           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following tablesummarizes the impact on Company and segment sales of the additional week inthe fourth fiscal quarter of 2003:

**Adjusted Fiscal 2003 Sales for the Effect of an Additional Week of Sales(in millions)**
| **Segment sales:** | ** ** | ** ** | ** ** | **Sales** | ** ** | **53rd  Week  Sales** | ** ** | **Comparable  52 Weeks  of Sales** | ** ** | **Comparable  Percent Change  from 2002** | ** ** |
|-------------------------|------------|------------|------------|-----------|------------|-----------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| Food Distribution       |       | $          | 1,915.2    |      | $          | 33.3                  |       |                                         | $          | 1,881.9                                             |       |   |   | 3.1 | % |   |
| Military                |       | 1,090.0    |       | 17.3      |       |                  | 1,072.7    |                                         |       |                                                | 5.1        | % |   |
| Retail                  |       | 966.3      |       | 17.8      |       |                  | 948.5      |                                         |       |                                                | (7.8       | )% |   |
| **Total  Sales**        |       | $          | 3,971.5    |      | $          | 68.4                  |       |                                         | $          | 3,903.1                                             |       |   |   | 0.7 | % |   |

 

The increase in food distribution sales in fiscal 2003is largely attributable to new business with former Fleming customers and othernew accounts, as well as growth from our existing customer base. Partiallyoffsetting this increase were reduced sales and store closings by certainindependent retailers because of increased competition in their respectivemarkets. The decrease in food distribution sales in fiscal 2002 from fiscal2001 was primarily due to difficult economic conditions, reduced demand on thepart of independent retailers, and the elimination of marginal accounts wechose to no longer service.

The increase in military segment sales in fiscal 2003was largely attributable to increases in year-over-year sales to commissariesin the United States and overseas. The increased sales in fiscal 2002 relativeto 2001 were attributable to an increase in export sales, primarily due to thepositive impact of the military deployment to the Middle East during fiscal2002.

Thedecrease in retail segment sales from fiscal 2002 to fiscal 2003 primarilyreflects a 10.6% decrease in same store sales. While same store sales declined5.3% from fiscal 2001 to fiscal 2002, the impact on retail segment sales waslargely offset by the acquisition of U Save Foods Inc. (U Save) in the secondhalf 

16

----

of fiscal 2001. These declines in same store salesprimarily reflected the growth of supercenter competition in our retailterritories and retail consumers purchasing less in conventional supermarketchannels. We are implementing various initiatives to improve our same storesales performance. These initiatives may not have an immediate impact on samestore sales; however the results of our initiatives are intended to becomeevident in our same store sales comparisons as the year progresses. Duringfiscal 2003 and 2002, our corporate store count changed as follows:
| ** **                             | ** ** | **Fiscal Year  2003** | ** ** | **Fiscal Year  2002** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Number of stores  at beginning of year |       |                       | 109        |                       |       |   | 110 |   |   |
| New stores                             |       |                       | 4          |                       |       |   | 5 |   |   |
| Acquired stores                        |       |                       | 6          |                       |       |   | 1 |   |   |
| Closed or sold  stores                 |       |                       | (9         | )                          |       |   | (7 | ) |   |
| Number of stores at end  of year       |       |                       | 110        |                       |       |   | 109 |   |   |

 

*Gross Profit*

Gross profit (calculated as sales less cost of sales)for fiscal 2003 was 11.5% of sales compared to 12.0% for fiscal 2002 and 11.4%for fiscal 2001. Gross profit was negatively impacted in fiscal 2003 versusfiscal 2002 because retail segment sales, which earn a higher gross profit thanfood distribution and military distribution segment sales, represented asmaller percentage of our total sales. In addition, the costs associated withthe 2003 consolidation of two large warehouse facilities in the militarydistribution segment reduced gross profit by $2.7 million. Gross profit waspositively impacted in fiscal 2002 versus fiscal 2001 by an increase in retailsegment sales as a percentage of our total sales, by distribution efficienciesgained in our food distribution segment, and by more efficient use ofpromotional spending in our retail segment. In addition, gross profitcomparisons benefited from LIFO credits of $1.1 million and $2.2 million infiscal 2003 and 2002, respectively, compared to a LIFO charge of $2.7 millionin fiscal 2001. The LIFO credits in fiscal 2003 and 2002 were due to food pricedeflation and decreased inventory levels as a result of lower sales.

In the fourth quarter offiscal 2002 we early adopted the provisions of EITF  No. 02-16 “*Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor,*” (See “New Accounting Standards” below for discussion)retroactive to the beginning of fiscal 2002. The impact of the adoption ongross profit in fiscal 2002, excluding the cumulative effect adjustment, was anincrease of $1.4 million. In addition, the adoption resulted in areclassification of $9.1 million of net cooperative advertising income fromselling, general and administrative expenses to cost of sales.

*Selling, Generaland Administrative*

Selling, general and administrative expenses(SG&A) for fiscal 2003 were 8.2% of sales as compared to 9.0% of sales infiscal 2002 and 8.4% of sales in fiscal 2001. The decrease in SG&A expensesin dollars and as a percentage of sales in fiscal 2003 from fiscal 2002 wasprimarily due to several factors. SG&A expenses were reduced in fiscal 2003compared to fiscal 2002 because retail segment sales, which have higherSG&A expenses than food distribution and military distribution segmentsales, represented a smaller percentage of our total sales. In addition, healthinsurance expense for fiscal 2003 decreased by $6.2 million, primarily reflectinga decision to eliminate post-retirement medical benefits for active non-unionemployees in the fourth quarter. Charges for asset impairments decreased $3.9million from fiscal 2002 to 2003, from $6.6 million to $2.7 million. Theimpairment charges for fiscal 2003 and 2002 related to six and fifteen stores,respectively, whose carrying values were impaired due to increased competitionwithin the stores’ respective market areas. Partially offsetting thesedecreases was a decrease of $3.0 million in gains on the sale of real estate,from $3.8 million in 2002 to $0.8 million in 2003.

17

----

The increase in SG&Aexpenses in dollars and as a percentage of sales from 2001 to 2002 primarilyreflected an increase in retail segment sales, which have higher SG&A expensesthan food distribution and military distribution segment sales, as a percentageof our total sales. In addition, an increase of $4.7 million in assetimpairments, from $1.9 million to $6.6 million, a $4.2 million increase in baddebt expense from $4.8 million to $9.0 million, and the reclassification of netcooperative advertising income of $9.1 million in 2002 to cost of sales inaccordance with EITF No. 02-16, all contributed to an increase in SG&Aexpenses in fiscal 2002 from 2001. The impairment charges in fiscal 2001resulted from our decision to close two stores, as well as the write down ofthe carrying value of three additional stores. The increase in bad debt expenseis primarily attributed to the increased competitive pressure experienced by ourindependent retailers. Partially offsetting these increases was an increase of$1.2 million in gains from the sale of real estate, from $2.6 million in fiscal2001 to $3.8 million in fiscal 2002.

*Special Charges*

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 3, 2004, theremaining accrued liability was $2.2 million and consisted primarily of leasecommitments.

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

*Depreciation andAmortization Expense*

Depreciation and amortization expense for fiscal 2003increased by 6.1% compared to fiscal 2002. The increase primarily representsthe addition of information technology software in 2003. Depreciation andamortization expense for fiscal 2002 decreased by 14.2% from fiscal 2001,primarily reflecting the elimination of goodwill amortization of $5.9 millionresulting from the adoption of SFAS No. 142, at the beginning of fiscal2002, which requires that goodwill no longer be amortized, but instead betested at least annually for impairment.

*Interest Expense*

Interest expense forfiscal 2003 increased by 14.8% compared to fiscal 2002, primarily due to $2.5million paid to our bondholders and $1.3 million paid to our bank lenders inthe first quarter of 2003 as consideration for waivers to extend the deadlinesfor filing our third quarter Form 10-Q for fiscal 2002, our Form 10-Kfor fiscal 2002 and our first quarter Form 10-Q for fiscal 2003. Apartfrom the waiver fees, the impact of an increase in our average borrowing rateunder the bank credit facility from 4.5% in fiscal 2002 to 5.1% in fiscal 2003was offset by a decrease in our average borrowing level under that facility,from $156.6 million in 2002 to $137.5 million in fiscal 2003. Interest expensefor fiscal 2002 decreased by 14.0% from fiscal 2001, primarily reflecting a$4.3 million reduction in interest expense, including the effects of theinterest rate swaps, paid under the bank credit facility as a result of a loweraverage borrowing rate (4.5% in fiscal 2002 and 8.5% in fiscal 2001), partiallyoffset by an increase in the average borrowing level ($156.6 million in fiscal2002 and $133.7 million in fiscal 2001).

*Income Tax Expense*

The effective tax rate forfiscal 2003 was 33.3% compared to 39.0% in fiscal 2002 and 41.4% in fiscal 2001.The reduction in the effective rate from fiscal 2002 to fiscal 2003 was theresult of the resolution of various outstanding state and federal tax issueswhich reduced income tax expense by $3.0 million in fiscal 2003. The reductionin the effective rate from fiscal 2001 to fiscal 2002 was primarily attributedto changes 

18

----

inaccounting rules relating to the elimination of goodwill amortization forfinancial reporting as well as a higher proportion of taxable income beinggenerated in lower tax jurisdictions. Refer to the tax rate table in Part II,Item 8 of this report under Note (10)—“Income Taxes” of Notes to theConsolidated Financial Statements for the comparative components of theserates.

*DiscontinuedOperations*

The gain on discontinuedoperations of $0.4 million in fiscal 2003 was a result of the resolution of acontingency associated with the sale of our Nash De-Camp produce growing andmarketing 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 Cash Considerations 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).

*Net Earnings*

Net earnings for fiscal2003 were $35.1 million, or $2.88 per diluted share, compared to $23.6 million,or $1.95 per diluted share, in fiscal 2002 and $21.3 million, or $1.78 perdiluted share, in fiscal 2001.

**LIQUIDITY ANDCAPITAL RESOURCES**

Historically, we have financed our capital needsthrough a combination of internal and external sources. These sources includecash flow from operations, short-term bank borrowings, various types oflong-term debt and lease and equity financing. During 2004, we expect that cash flow from operations willbe sufficient to meet our working capital needs and enable us to further reduceour debt, with temporary draws on our revolving credit line needed during theyear to build inventories for certain holidays. Longer term, we believethat cash flows from operations, short-term bank borrowings, various types oflong-term debt and lease and equity financing will be adequate to meet ourworking capital needs, planned capital expenditures and debt service obligations.

Operating cash flows increased by $57.4 million infiscal 2003 compared to fiscal 2002. Primary contributors to the increase wereincreased earnings of $11.5 million and more efficient receivables management,which resulted in a decrease in accounts receivable of $18.5 million. Thedecrease in operating cash flows in fiscal 2002 compared to fiscal 2001 of$33.1 million was primarily due to changes in operating assets and liabilities.Accounts payable decreased by approximately $48.7 million which was partiallyoffset by a decrease in inventory balances of approximately $24.4 million. Bothof the changes were the result of management’s efforts to reduce inventorylevels in conjunction with a lower sales volume.

Cash used for investing activities increased slightlyin fiscal 2003 as compared to fiscal 2002, but decreased $57.6 million fromfiscal 2001 to 2002. The reduction in cash used for investing activities infiscal 2002 compared to fiscal 2001 primarily relates to the level ofacquisitions in fiscal 2001 relative to fiscal 2002 and the reduction in loansextended to customers during fiscal 2002.  We expect our capital expenditures for fiscal2004 to approximate $34.0 million excluding acquisitions. These expendituresare expected to be spent evenly between our food distribution segment, foodretailing segment and corporate projects.

19

----

Cash used for financingactivities increased by $95.0 million in fiscal 2003 compared to fiscal 2002,primarily due to $79.4 million used to pay down our revolving bank creditfacility. At January 3, 2004, credit availability under this facility was$127.4 million.

*ContractualObligations and Commercial Commitments*

Thefollowing table summarizes our significant contractual cash obligations as of January 3,2004, 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)                   |       | $                                         | 284,674    |   | $ | 2,730 |   | $ | 105,654 |   | $ | 167,975 |   | $ | 8,315 |   |
| Capital Lease  Obligations(2)(3)    |       | 88,918                                    |       | 7,641 |   | 15,220 |   | 15,179 |   | 50,878 |   |
| Operating Leases(2)                 |       | 164,896                                   |       | 25,442 |   | 43,103 |   | 31,093 |   | 65,258 |   |
| Purchase  Obligations(4)            |       | 46,773                                    |       | 33,485 |   | 12,732 |   | 556 |   | — |   |
| Total Contractual Cash  Obligations |       | $                                         | 585,261    |   | $ | 69,298 |   | $ | 176,709 |   | $ | 214,803 |   | $ | 124,451 |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          The $105,654 shown asscheduled for payment in years 1-3 includes repayment of the bank creditfacility, which has a five year term ending December 19, 2005, based onthe current outstanding balance of $100,000. Typically, we are able torefinance our bank credit facility with a new agreement either before or uponmaturity, and anticipate refinancing the current agreement in fiscal 2004. 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 product needs and are fulfilled by ourvendors within very short time horizons. Any amounts for which we are liableunder purchase orders are reflected in our consolidated balance sheet asaccounts payable upon shipment of the underlying product. The purchaseobligations shown in this table also exclude agreements that are cancelable byus without significant penalty, which include contracts for routine outsourcedservices. The amount of purchase obligations shown in the table represents theamount of product we are contractually obligated to purchase to earn$2.6 million in upfront contract monies received. Should we not be able tofulfill these purchase obligations, we would be only obligated to pay back theunearned upfront contract monies.

20

----

Wealso have made certain commercial commitments that extend beyond 2003. Thesecommitments include standby letters of credit and guarantees of certain fooddistribution customer debt and lease obligations. The following summarizesthese commitments as of January 3, 2004:
| ** **                             | ** ** | **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)          |       |       | $          | 22,622                                              |       |   | $ | 17,416 |   |   | $ | 5,206 |   |   |   | — |   |   |   | — |   |   |
| Guarantees(2)                          |       |       | 23,270     |                                                |       | 2,983 |   |   | 3,041 |   |   |   | $ | 910 |   |   |   | $ | 16,336 |   |   |
| Total Other Commercial  Commitments    |       |       | $          | 45,892                                              |       |   | $ | 20,399 |   |   | $ | 8,247 |   |   |   | $ | 910 |   |   |   | $ | 16,336 |   |   |

----

(1)          Letters of credit relateprimarily to supporting workers’ compensation obligations and are renewableannually.

(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 CreditAgreement*

Our bank credit agreement has a five year term ending December 19,2005 and provides a $100 million term loan and $150 million in revolving creditavailable for both revolving loans and up to $40 million in letters of credit. Itrepresents one of our primary sources of liquidity, both short-term andlong-term, and the continued availability of credit under that agreement is ofmaterial importance to our ability to fund our capital and working capitalneeds. Borrowings under the bank credit agreement bear interest at theEurodollar rate plus a margin increase and a commitment commission on theunused portion of the revolver. The margin increase and the commitmentcommission are reset quarterly based on movement of a leverage ratio defined bythe agreement. At January 3, 2004 the margin and commitment commissionwere 1.75% and 0.375%, respectively, compared to 2.0% and 0.5% at the end offiscal 2002. 

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

21

----

As of January 3,2004, we were in compliance with all Consolidated EBITDA-based debt covenantsas defined in our credit agreement which are summarized as follows:
| **Financial Covenant**     | ** ** | ** **          | ** ** | **Required Ratio** | ** ** | **Actual Ratio** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------------------|------------|-----------------------|------------|
| Interest Coverage  Ratio(1)     |       | 3.25:1.00 (minimum) |       |                    | 3.66:1.00  |                  |       |
| Fixed Charge  Coverage Ratio(2) |       | 1.05:1.00 (minimum) |       |                    | 1.48:1.00  |                  |       |
| Leverage Ratio(3)               |       | 3.50:1.00 (maximum) |       |                    | 2.68:1.00  |                  |       |

----

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

(2)          Ratio of ConsolidatedEBITDA plus rent expense for the trailing four quarters to the sum of interestexpense, rent expense and capital expenditures for such period. The requiredminimum ratio per the credit agreement will be adjusted upward to 1.10:1.00 asof the end of the first quarter of fiscal 2004.

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

Any failure to comply with any of these financialcovenants would, after the expiration of any applicable cure period, constitutean event of default under the bank credit agreement, entitling a majority ofthe bank lenders to, among other things, terminate future credit availabilityunder the agreement and accelerate the maturity of outstanding obligationsunder that agreement. 

Thefollowing is a summary of the calculation of Consolidated EBITDA (in thousands)for fiscal 2003, 2002 and 2001:
| ** **                                               | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Qtr1** | ** ** | **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** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Qtr1** | ** ** | **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 |   |   |

 

22

----

 
| ** **                                               | ** ** | **2001** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Qtr1** | ** ** | **Qtr 2** | ** ** | **Qtr 3** | ** ** | **Qtr 4** | ** ** | **Rolling 4 Qtr.** | ** ** |
| Earnings from  continuing operations before income taxes |       | $        | 5,554      |   | 9,016 |   | 10,320 |   | 11,402 |   |   | 36,292 |   |   |
| Interest expense                                         |       | 8,202    |       | 8,085 |   | 10,472 |   | 7,544 |   |   | 34,303 |   |   |
| Depreciation and  amortization                           |       | 10,647   |       | 10,631 |   | 14,139 |   | 11,184 |   |   | 46,601 |   |   |
| LIFO                                                     |       | 200      |       | 662 |   | 1,799 |   | — |   |   | 2,661 |   |   |
| Closed store  lease costs                                |       | 282      |       | — |   | — |   | 823 |   |   | 1,105 |   |   |
| Asset impairments                                        |       | —   |       | — |   | — |   | 1,931 |   |   | 1,931 |   |   |
| Losses/(gains) on  sale of real estate                   |       | —   |       | 154 |   | 44 |   | (2,845 | ) |   | (2,647 | ) |   |
| Subsequent cash  payments on non-cash charges            |       | (375     | )          | (407 | ) | (696 | ) | (365 | ) |   | (1,843 | ) |   |
| Total Consolidated  EBITDA                               |       | $        | 24,510     |   | 28,141 |   | 36,078 |   | 29,674 |   |   | 118,403 |   |   |

 

Borrowings under the bankcredit facility are collateralized by a security interest in substantially allassets of the Company and its wholly-owned subsidiaries that are not pledgedunder other debt agreements. The bank credit agreement also contains covenantsthat limit the Company’s ability to incur debt (including guaranteeing the debtof others) and liens, acquire or dispose of assets, pay dividends on andrepurchase its stock, make capital expenditures and make loans or advances toothers, including customers.

*Defaults During2003*

On February 13, 2003 wewere notified by the Trustee for our $165.0 million 8.5% Senior SubordinatedNotes, due in 2008 that a default had occurred under the Indenture as a resultof our failure to file our Form 10-Q for the third quarter ended October 5,2002 with the SEC and that, unless remedied within the 30 day grace period,such failure would constitute an event of default under the Indenture. Inaddition, if the default was not remedied within the 30 days, an event ofdefault would also occur under our bank credit facility.

On February 28, 2003 we announcedthat holders of more than 51% of our Senior Subordinated Notes agreed towaive the default under the Indenture. The waiver required us to file our Form 10-Qfor the third fiscal quarter of 2002 by May 15, 2003. Such holders alsoagreed to extend the time for us to file our Form 10-K for our fiscal yearended December 28, 2002 until May 30, 2003 and our Form 10-Q forthe first fiscal quarter ended March 22, 2003 until June 15, 2003. Inconsideration for the waiver, we paid a fee to the bondholders equal to 1.5% ofthe outstanding principal amount of the notes. We subsequently made thespecified filings prior to the extended deadlines.

On March 26, 2003, weannounced that the requisite number of bank lenders under our bank creditfacility had agreed to extend until June 15, 2003 the deadline forsubmission to the lenders of our audited fiscal 2002 financial statements. Thebank credit agreement had originally called for us to provide to our lendersour audited financial statements for fiscal 2002 by March 28, 2003. Inconsideration for the amendment to the bank credit facility, we paid a fee tothe bank lenders equal to 0.5% of the sum of our revolving loan commitments andaggregate outstanding term loans as of the effective date of the amendment. Wesubsequently submitted our audited financial statements prior to the extendeddeadline.

23

----

*Debt ObligationsGenerally*

Fordebt obligations, the following table presents principal cash flows, relatedweighted average interest rates by expected maturity dates and fair value as ofJanuary 3, 2004: 
| ** ** | ** ** | **Fixed Rate**     | ** ** | **Variable Rate** | ** ** |
|------------|------------|-------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Fair Value**     | ** ** | **Amount**             | ** ** | **Rate** | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** ** | ** ** | **(In thousands)** | ** ** |
| 2004       |       |                    |       | $                      | 1,854      |   | 8.5 | % |   |   | $ | 876 |   | 3.0 | % |
| 2005       |       |                    |       | 1,899                  |       | 8.5 | % |   |   | 100,904 |   | 4.4 | % |
| 2006       |       |                    |       | 2,010                  |       | 8.5 | % |   |   | 841 |   | 4.3 | % |
| 2007       |       |                    |       | 648                    |       | 8.5 | % |   |   | 828 |   | 4.1 | % |
| 2008       |       |                    |       | 165,677                |       | 7.2 | % |   |   | 822 |   | 3.8 | % |
| Thereafter |       |                    |       | 5,537                  |       | 6.9 | % |   |   | 2,778 |   | 3.7 | % |
|       |       | $                       | 177,522    |                   | $          | 177,625 |   |   |   | $ | 107,918 |   | $ | 107,049 |   |   |   |
|            |            |                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

*DerivativeInstruments*

We have market risk exposure to changing interestrates primarily as a result of our borrowing activities. Our objective inmanaging our exposure to changes in interest rates is to reduce fluctuations inearnings and cash flows. To achieve these objectives, we use derivativeinstruments, primarily interest rate swap agreements, to manage risk exposureswhen appropriate, based on market conditions.  We do not enter into derivative agreements fortrading or other speculative purposes, nor are we a party to any leveragedderivative instrument. 

The interest rate swap agreements are designated ascash flow hedges and are reflected at fair value in our consolidated balancesheet and the related gains or losses on these contracts are deferred instockholders’ equity as a component of other comprehensive income.  Deferred gains and losses are amortized as anadjustment to expense over the same period in which the related items beinghedged are recognized in income. However, to the extent that any of thesecontracts are not considered to be perfectly effective in offsetting the changein the value of the items being hedged, any changes in fair value relating tothe ineffective portion of these contracts are immediately recognized in income.

Interest rate swap agreements are entered into forperiods consistent with related underlying exposures and do not constitutepositions independent of those exposures. At January 3, 2004, we had threeoutstanding interest rate swap agreements which commenced on July 26,2002, December 6, 2002 and June 6, 2003, respectively. The agreementsexpire on September 25, 2004, October 6, 2004 and October 6,2004 with notional amounts of $50 million, $35 million and $35 million,respectively. 

Thethree interest rate swap agreements described above total $120 million innotional amounts, which are used to calculate the contractual cash flows to beexchanged under the contract. Interest rate swap agreements outstanding at yearend and their fair value at that date are summarized as follows (in thousands):
| ** **                    | ** ** | **1/3/04** | ** ** | **12/28/02** | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|
| Pay fixed /  receive variable |       | $          | 120,000    |         | $          | 120,000 |   |
| Fair value                    |       | (1,955     | )          | (2,315       | )          |
| Average receive  rate         |       | 1.2        | %          | 1.4          | %          |
| Average pay rate              |       | 3.3        | %          | 3.0          | %          |
|                               |            |            |            |              |            |  |  |

 

*Off-Balance SheetArrangements*

As of the date of thisreport, we do not participate in transactions that generate relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or 

24

----

specialpurpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.

**CRITICAL ACCOUNTINGPOLICIES**

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 assets andliabilities. 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 occurperiodically, could materially impact our financial statements. We consider thefollowing accounting policies to be critical and could result in materiallydifferent amounts being reported under different conditions or using differentassumptions:

**Vendor Allowancesand 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 andperformance-based allowances. These promotional arrangements are often subjectto negotiation with our vendors.

In the case of off-invoice allowances, discounts aretypically offered by vendors with respect to certain merchandise purchased byus during a specified period of time. We use off-invoice allowances to supporta variety of marketing programs such as reduced price offerings for specifictime periods, food shows, pallet promotions and private label promotions. Thediscounts are either reflected directly on the vendor invoice, as a reductionfrom the normal wholesale prices for merchandise to which the allowanceapplies, or we are allowed to deduct the allowance as an offset against thevendor’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 quantities of product sold (as is the case with count-recountpromotions discussed in Part 1, Item 1 in this report under the caption “Count-RecountCharges”), 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 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 collectively plan promotions with our vendors andarrive at the amount the respective vendor plans to spend on promotions with us.We and the vendors then monitor, review and discuss the results of suchpromotions, and resolve issues relating to promotions and billings. Each vendorhas its own method for determining the amount of promotional funds budgeted tobe spent with us during the period. In most situations, the vendor allowancesare based on units we purchased from the vendor. In other situations, theallowances are based on our past or anticipated purchases and/or the anticipatedperformance of the planned promotions.

 

25

----

We jointly negotiate with our vendors the promotionalcalendar that governs all promotions. Forecasting promotional expenditures is acritical part of our twice yearly planning sessions with our vendors. Mostvendors work with us to project not just overall spending, but also spending ona category and regional basis. As individual promotions are completed and theassociated billing is processed, the vendors track our promotional programexecution and spend rate. The vendors discuss the tracking, performance andspend rate with us on a regular basis throughout the year. Depending upon thevendor arrangements, such discussions can occur on a weekly, monthly, quarterlyor annual basis. These communications include future promotions, product cost,targeted retails and price points, anticipated volume, promotion expenditures,vendor maintenance, billing issues and procedures, new items/discontinueditems, and trade spend levels relative to budget per event and per year, aswell as the resolution of any issues that arise between the vendor and us. Inthe future, the nature and menu of promotional programs and the allocation ofdollars among them may change as a result of ongoing negotiations andcommercial relationships between vendors and the Company.

EITF Issue No. 02-16, “Accounting by aCustomer (Including a Reseller) for Cash Consideration Received from a Vendor,”addresses how a reseller of a vendor’s products should account for cashconsideration received from a vendor and how to measure that consideration inits 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 Exposureand Credit Risk**

*Allowance forDoubtful Accounts—Methodology*

We evaluate thecollectability of our accounts and notes receivable based on a combination offactors. In most circumstances when we become aware of factors that mayindicate a deterioration in a specific customer’s ability to meet its financialobligations to us (e.g., reductions of product purchases, deteriorating storeconditions, changes in payment patterns), we record a specific reserve for baddebts against amounts due to reduce the net recognized receivable to the amountwe reasonably believe will be collected. In determining the adequacy of thereserves, we analyze factors such as the value of any collateral, customerfinancial statements, historical collection experience, aging of receivablesand other economic and industry factors. It is possible that the accuracy ofthe estimation process could be materially affected by different judgments asto the collectibility based on information considered and further deteriorationof 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.

26

----

*Lease Commitments*

We have historicallyleased store sites for sublease to qualified independent retailers, at ratesthat are at least as high as the rent paid by us. Under terms of the originallease agreements, we remain primarily liable for any commitments an independentretailer may no longer be financially able to satisfy. We also lease storesites for our retail segment. Should a retailer be unable to perform under asublease or should we close underperforming corporate stores, we record acharge to earnings for costs of the remaining term of the lease, less anyanticipated sublease income. Calculating the estimated losses requires thatsignificant estimates and judgments be made by management. Our reserves forsuch 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 Debtand Lease Obligations of Others*

We have guaranteed thedebt and lease obligations of certain of our food distribution customers. Inthe event these retailers are unable to meet their debt service payments orotherwise experience an event of default, we would be unconditionally liablefor the outstanding balance of their debt and lease obligations ($13.0 millionas of January 3, 2004), which would be due in accordance with theunderlying agreements. We have also assigned various leases to certain fooddistribution customers. If the assignees were to become unable to continuemaking payments under the assigned leases, we estimate our maximum potentialobligation with respect to the assigned leases to be approximately$10.2 million as of January 3, 2004. In circumstances when we becomeaware of factors that indicate deterioration in a customer’s ability to meetits financial obligations guaranteed or assigned by us, we record a specificreserve in the amount we reasonably believe we will be obligated to pay on thecustomer’s behalf, net of any anticipated recoveries from the customer. Indetermining the adequacy of these reserves, we analyze factors such as thosedescribed above in “Allowance for Doubtful Accounts—Methodology” and “LeaseCommitments”. It is possible that the accuracy of the estimation process couldbe materially affected by different judgments as to the obligations based oninformation considered and further deterioration of accounts. Triggering theseguarantees or obligations under assigned leases would not, however, result incross default of our debt, but could restrict resources available for generalbusiness initiatives.

**Impairment ofLong-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. Impairment testingrequires significant management judgment including estimating future sales andcosts, alternative uses for the assets and estimated proceeds from disposal ofthe assets. Estimates of future results are often influenced by assessments ofchanges in competition, merchandising strategies, human resources and generalmarket conditions, which may result in not recognizing an impairment loss. Impairmenttesting is conducted at the lowest level where cash flows can be measured andare independent of cash flows of other assets. An asset impairment would beindicated if the sum of the expected future net pretax cash flows from the useof the asset (undiscounted and without interest charges) is less than thecarrying amount of the asset. An impairment loss would be measured based on thedifference between the fair value of the asset and its carrying amount. Wegenerally determine fair value by discounting expected future cash flows at therate the Company utilizes to evaluate potential 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. 

27

----

The useof different assumptions would increase or decrease the impairment charge. Actualoutcomes may differ from the estimates.

**Reserves for SelfInsurance**

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 material impacton future claim costs and currently recorded liabilities.

**NEW ACCOUNTINGSTANDARDS**

EITF Issue No. 02-16, “*Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor”,* addresses how a reseller of a vendor’s products shouldaccount for cash consideration received from a vendor and how to measure thatconsideration in its income statement.

In January 2003, the EITF concluded that newarrangements, including modifications of existing arrangements entered intoafter December 31, 2002 should apply the treatment outlined in EITF No. 02-16. If determinable, pro forma disclosure ofthe impact of the consensus on prior periods presented is encouraged. In March 2003,the EITF concluded that entities may elect to early adopt the provisions ofEITF No. 02-16 as a cumulative effect of change in accountingprinciple. We elected in the fourth quarter of fiscal 2002 to early adopt theprovisions of EITF No. 02-16 at the beginning of fiscal 2002, andrecognized a charge of $7.0 million, net of income taxes of $4.4 million, thatrepresents the cumulative effect of a change in accounting principle as of thebeginning of fiscal 2002.

In January 2003, the FASB issued Interpretation No. 46,“*Consolidation of Variable Interest Entities*—*an Interpretation of ARB No. 51*”*(FIN No. 46)*.In general, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (a) doesnot have equity investors with voting rights or (b) has equity investorsthat do not provide sufficient financial resources for the entity to supportits activities. A variable interest entity often holds financial assets, includingloans or receivables, real estate or other property. A variable interest entitymay be essentially passive or it may engage in activities on behalf of anothercompany. Until now, a company generally has included another entity in itsconsolidated financial statements only if it controlled the entity throughvoting interests. FIN No. 46 changes that by requiring a variable interestentity to be consolidated by a company if that company is subject to a majorityof the risk of loss from the variable interest entity’s activities or isentitled to receive a majority of the entity’s residual returns or both. On December 17,2003, the FASB provided a revised interpretation on what constitutes a variableinterest under Fin No. 46. The FASB stated in the revised interpretationthat an enterprise need not determine if an entity is a variable interestentity if the entity is a “business” (as defined within EITF Issue No. 98-3,“*Determining Whether a Nonmonetary TransactionInvolves Receipt of Productive Assets or of a Business*”*)*.  As a result of therevised interpretation, the adoption of FIN No. 46 did not have an impacton our consolidated financial statements.

In December 2003, theFASB issued revisions to SFAS No. 132, “*Employers’Disclosures about Pensions and Other Postretirement Benefits*”. Therevisions required changes to existing disclosures as well 

28

----

as newdisclosures related to pension and other postretirement benefit plans. We haveadopted the revisions of SFAS No. 132 and incorporated them in our consolidatedfinancial statements.

**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 anticipates willoccur 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 available reference.These factors are in addition to any other cautionary statements, written ororal, which may be made or referred to in connection with any forward-lookingstatement, or contained elsewhere in this report.

**CompetitiveConditions**

The wholesale food distributionand food retailing businesses are intensely competitive, characterized by highinventory turnover, narrow profit margins and increasing consolidation. Ourfood retailing business, focused in the Upper Midwest, has historicallycompeted with traditional grocery stores and is increasingly competing withalternative store formats such as supercenters, warehouse clubs, dollar storesand extreme value food stores. Our distribution business competes not only withlocal, 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 these competitivepressures, our operating results could be adversely affected by pricereductions, decreased sales or margins, or loss of market share.

**Need to ImproveRetail Operations**

Primarily due to thecompetitive conditions discussed above, same store sales in the Company’sretail business decreased 10.6% in 2003 from 2002, after having decreased 5.3%in 2002 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 numerous risks and uncertainties, includingour ability to successfully identify those initiatives that will be the mosteffective in improving the competitive position of our retail business, ourability to efficiently and timely implement these initiatives, and the responseof competitors to these initiatives. If we are unable to improve the overallcompetitive position of our retail stores, the revenue and operatingperformance of that segment may continue to decline, and we may be compelled toclose additional stores.

29

----

**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.

**Expansion andAcquisition**

Efforts to grow our retailand distribution businesses can include new store openings, new affiliationsand acquisitions. Expansion is subject to a number of risks, including theadequacy of our capital resources, the availability of suitable real estate intarget markets for store or distribution center sites and the negotiation ofacceptable lease or purchase terms, our understanding of the particular demandsand preferences of market segments, and the ability to hire and train employees.Acquisitions entail certain additional risks such as identifying suitablecandidates, effecting acquisitions at acceptable rates of return, timely andeffectively integrating the operations, systems and personnel of the acquiredbusiness, and diversion of management’s time and attention from other businessconcerns.

**Achieving Growth inthe 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 customers. If we are unable to execute these tasks effectively, wemay not be able to attract significant numbers of new customers and attritionamong our existing customer base could increase, either or both of which couldhave an adverse impact on our revenue and profitability.

**Customer CreditRisk**

In the ordinary course ofbusiness, we extend credit, including loans, to our food distributioncustomers, and provide financial assistance to some customers by guaranteeingtheir loan or lease obligations. We also lease store sites for sublease toindependent retailers. Generally, our loans and other financial accommodationsare extended to small businesses that are unrated and may have limited accessto conventional financing. While we seek to obtain security interests and othercredit support in connection with the financial accommodations we extend, suchcollateral may not be sufficient to cover our exposure. Greater than expectedlosses from existing or future credit extensions, loans, guarantee commitmentsor sublease arrangements, particularly in times of economic difficulty oruncertainty, could negatively impact our financial condition and operatingresults.

**Indebtedness andLiquidity**

Our current level of debtand covenants in the documents governing our outstanding debt could limit ouroperating 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 

30

----

availabilityor cost of capital, and by contractual limitations on the degree to which wemay, without the consent of our lenders, take actions such as engaging inmergers or acquisitions, incurring additional debt, making capital expendituresand making investments, loans or advances. If needs or opportunities wereidentified that would require financial resources beyond existing resources,obtaining those resources could increase the Company’s borrowing costs, furtherreduce financial flexibility, require alterations in strategies and affectfuture operating 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 or consolidations in the geographic areas containing commissariesserved by us, or a reduction in the number of persons having access to thecommissaries.

**Other Factors**

Other factors that could cause actual results todiffer materially from those predicted include changes in federal, state andlocal laws and regulations; issues affecting the food distribution and retailindustry generally, such as food safety concerns, an increase in consumerseating away from home and the manner in which vendors target their promotionaldollars; the ability to attract and retain qualified employees; unanticipatedproblems with product procurement; changes in vendor promotions or allowances;adverse determinations or developments with respect to litigation, other legalproceedings or the SEC investigation of Nash Finch; the success or failure ofnew business ventures or initiatives; natural disasters 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.

**ITEM7A**.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

Our exposure in the financialmarkets consists of changes in interest rates relative to our investment in notesreceivable, the balance of debt obligations outstanding, and derivativesemployed from time to time to time to hedge long term variable interest ratedebt.

We carrynotes receivable because, in the normal course of business, we make long-termloans to certain retail customers.  Substantially all notes receivable are basedon floating interest rates which adjust to changes in market rates. As aresult, the carrying value of notes receivable approximates market value.(Refer to Part II, Item 8 of this report under Note 7—“Accounts and NotesReceivable” in Notes to Consolidated Financial Statements for more information). See disclosures set forthunder Item 7 under the caption “Liquidity and Capital Resources.”

31

----

 

**ITEM8**. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**NashFinch CompanyReport of Management**

The consolidated financialstatements are the responsibility of management and have been prepared inconformity with generally accepted accounting principles and include, whererequired, amounts based on management’s best estimates and judgments. Financialinformation appearing throughout this Annual Report is consistent with that inthe consolidated financial statements. In order to meet its responsibility,management maintains a system of internal controls designed to providereasonable assurance that assets are safeguarded and that all transactions areproperly authorized and reflected in the financial records. The concept ofreasonable assurance recognizes that the relative cost of a control procedureshould not exceed the expected benefits. Management believes the selection anddevelopment of qualified personnel, the establishment and communication ofaccounting and administrative policies and procedures (including a code ofbusiness conduct), and a program of internal audit are important elements ofthese control systems. The report of Ernst & Young LLP, the Company’sindependent accountants, covering their audit of the financial statements, isincluded in this Annual Report. Their independent audit of the Company’sfinancial statements includes a review of the system of internal accountingcontrols to the extent they consider necessary to evaluate the system asrequired by auditing standards generally accepted in the United States. TheAudit Committee of the Board of Directors, composed entirely of directors whoare not employees of the Company and who are, in the opinion of the Board ofDirectors, free of any relationships that would interfere with the exercise ofjudgment independent of management, meets regularly with financial management,the independent auditors, and the director of internal audit to reviewaccounting control, auditing and financial reporting matters. The internal andindependent auditors have unrestricted access to the Audit Committee.
|   | /s/ Ron  Marshall                                    |   |
|--------|------------------------------------------------------|--------|
|   | Ron Marshall                                         |
|   | *Chief Executive Officer*                            |
|   | /s/ Robert B. Dimond                                 |   |
|   | Robert B. Dimond,                                    |
|   | *Executive Vice President, Chief  Financial Officer* |

 

32

----

 

**REPORT OF INDEPENDENT AUDITORS**

**The Board of Directors andStockholdersNash Finch Company:**

We have audited the accompanying consolidated balancesheets of Nash Finch Company and subsidiaries as of January 3, 2004 and December 28,2002, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the three years in the period ended January 3,2004. 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 auditingstandards generally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits 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 3, 2004 and December 28,2002, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended January 3, 2004, in conformitywith accounting principles generally accepted in the United States. Also, inour opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

Asdiscussed in Note 1 to the consolidated financial statements, effective December 30,2001, the Company adopted Statement of Financial Accounting Standards No. 142,*“Goodwill and Other Intangible Assets.”*

|   | /s/ Ernst & Young LLP |
|--------|--------------------------------|

 

February 23, 2004Minneapolis, Minnesota

33

----

**NASH FINCH COMPANYAND SUBSIDIARIESConsolidated Statements of Income(In thousands, except per share amounts)**
| **Fiscal years ended January 3, 2004,  December 28, 2002 and December 29, 2001** | ** ** | ** ** | ** ** | **2003  (53 weeks)** |   | **2002  (52 weeks)** |   | **2001  (52 weeks)** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------|--------|---------------------------|--------|---------------------------|-----------|
| Sales                                                                                                                                   |       | $          | 3,971,502  |                      | $      | 3,874,672                 |   | $                         | 3,982,206 |   |
| Cost and  expenses:                                                                                                                     |       |       |       |                      |   |                      |   |
| Cost of sales                                                                                                                           |       | 3,516,460  |       | 3,408,409                 |   | 3,529,124                 |   |
| Selling, general and administrative                                                                                                     |       | 326,828    |       | 347,418                   |   | 335,886                   |   |
| Operating earnings                                                                                                                      |       | 128,214    |       | 118,845                   |   | 117,196                   |   |
| Special charges                                                                                                                         |       | —     |       | (765                      | )      | —                    |   |
| Depreciation and amortization                                                                                                           |       | 42,412     |       | 39,988                    |   | 46,601                    |   |
| Interest expense                                                                                                                        |       | 33,869     |       | 29,490                    |   | 34,303                    |   |
| Total cost and expenses                                                                                                                 |       | 3,919,569  |       | 3,824,540                 |   | 3,945,914                 |   |
| Earnings from continuing operations before income  taxes                                                                                |       | 51,933     |       | 50,132                    |   | 36,292                    |   |
| Income tax expense                                                                                                                      |       | 17,254     |       | 19,552                    |   | 15,025                    |   |
| Earnings from continuing operations                                                                                                     |       | 34,679     |       | 30,580                    |   | 21,267                    |   |
| Discontinued  operations:                                                                                                               |       |       |       |                      |   |                      |   |
| Resolution of contingency                                                                                                               |       | 678        |       | —                    |   | —                    |   |
| Tax expense                                                                                                                             |       | 265        |       | —                    |   | —                    |   |
| Net earnings from discontinued operations                                                                                               |       | 413        |       | —                    |   | —                    |   |
| Earnings before cumulative effect of change in  accounting principle                                                               |       | 35,092     |       | 30,580                    |   | 21,267                    |   |
| Cumulative effect of change in accounting principle,  net of income tax benefit of $4,450                                               |       | —     |       | (6,960                    | )      | —                    |   |
| Net earnings                                                                                                                            |       | $          | 35,092     |                      | $      | 23,620                    |   | $                         | 21,267    |   |
| Basic earnings  per share:                                                                                                              |       |       |       |                      |   |                      |   |
| Continuing operations                                                                                                                   |       | $          | 2.87       |                      | $      | 2.59                      |   | $                         | 1.83      |   |
| Discontinued operations                                                                                                                 |       | 0.03       |       | —                    |   | —                    |   |
| Cumulative effect of change in accounting principle,  net of income tax benefit                                                         |       | —     |       | (0.59                     | )      | —                    |   |
| Net earnings per share                                                                                                                  |       | $          | 2.90       |                      | $      | 2.00                      |   | $                         | 1.83      |   |
| Diluted earnings  per share:                                                                                                            |       |       |       |                      |   |                      |   |
| Continuing operations                                                                                                                   |       | $          | 2.85       |                      | $      | 2.52                      |   | $                         | 1.78      |   |
| Discontinued operations                                                                                                                 |       | 0.03       |       | —                    |   | —                    |   |
| Cumulative effect of change in accounting principle,  net of income tax benefit                                                         |       | —     |       | (0.57                     | )      | —                    |   |
| Net earnings per  share                                                                                                                 |       | $          | 2.88       |                      | $      | 1.95                      |   | $                         | 1.78      |   |

 

See accompanying notes to consolidated financial statements.

34

----

**NASH FINCH COMPANY ANDSUBSIDIARIESConsolidated Balance Sheets(In thousands, except per share amounts)**
| ** **                                                                                                         | ** ** | **January 3,** | ** ** | **December 28,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **2004**            | ** ** | **2002**              | ** ** |
| ***Assets***                                                                                                       |       |                |       |                  |       |   |   |
| Current assets:                                                                                                    |       |                |       |                  |       |   |   |
| Cash                                                                                                               |       | $                   | 12,757     |                  |       | $ | 31,419 |   |   |
| Accounts and notes  receivable, net                                                                                |       | 145,902             |       |                  | 165,527    |   |   |
| Inventories                                                                                                        |       | 236,289             |       |                  | 245,477    |   |   |
| Prepaid expenses                                                                                                   |       | 15,136              |       |                  | 12,335     |   |   |
| Deferred tax  assets                                                                                               |       | 5,726               |       |                  | 13,523     |   |   |
| Total current  assets                                                                                              |       | 415,810             |       |                  | 468,281    |   |   |
| Investments in  affiliates                                                                                         |       | 20                  |       |                  | 556        |   |   |
| Notes receivable,  net                                                                                             |       | 31,178              |       |                  | 32,596     |   |   |
| Property, plant and equipment:                                                                                     |       |                |       |                  |       |   |   |
| Land                                                                                                               |       | 24,121              |       |                  | 25,500     |   |   |
| Buildings and  improvements                                                                                        |       | 163,693             |       |                  | 155,865    |   |   |
| Furniture,  fixtures and equipment                                                                                 |       | 328,318             |       |                  | 323,201    |   |   |
| Leasehold  improvements                                                                                            |       | 86,746              |       |                  | 75,360     |   |   |
| Construction in  progress                                                                                          |       | 1,673               |       |                  | 7,169      |   |   |
| Assets under  capitalized leases                                                                                   |       | 41,661              |       |                  | 42,040     |   |   |
|                                                                                                               |       | 646,212             |       |                  | 629,135    |   |   |
| Less accumulated  depreciation and amortization                                                                    |       | (383,861            | )          |                  | (360,615   | ) |   |
| Net property,  plant and equipment                                                                                 |       | 262,351             |       |                  | 268,520    |   |   |
| Goodwill                                                                                                           |       | 149,792             |       |                  | 148,028    |   |   |
| Investment in  direct financing leases                                                                             |       | 13,426              |       |                  | 14,463     |   |   |
| Deferred tax  asset, net                                                                                           |       | —              |       |                  | 467        |   |   |
| Other assets                                                                                                       |       | 13,775              |       |                  | 15,011     |   |   |
| Total assets                                                                                                       |       | $                   | 886,352    |                  |       | $ | 947,922 |   |   |
| ***Liabilities and Stockholders’  Equity***                                                                   |       |                |       |                  |       |   |   |
| Current liabilities:                                                                                               |       |                |       |                  |       |   |   |
| Outstanding checks                                                                                                 |       | $                   | 23,350     |                  |       | $ | 27,076 |   |   |
| Current maturities  of long-term debt and capitalized lease obligations                                            |       | 5,278               |       |                  | 7,497      |   |   |
| Accounts payable                                                                                                   |       | 166,742             |       |                  | 170,542    |   |   |
| Accrued expenses                                                                                                   |       | 78,768              |       |                  | 94,068     |   |   |
| Income taxes                                                                                                       |       | 10,614              |       |                  | 10,073     |   |   |
| Total current  liabilities                                                                                         |       | 284,752             |       |                  | 309,256    |   |   |
| Long-term debt                                                                                                     |       | 281,944             |       |                  | 357,592    |   |   |
| Capitalized lease  obligations                                                                                     |       | 44,639              |       |                  | 47,784     |   |   |
| Deferred tax  liability, net                                                                                       |       | 6,358               |       |                  | —     |   |   |
| Other liabilities                                                                                                  |       | 12,202              |       |                  | 11,811     |   |   |
| 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 12,152 and 12,012 shares, respectively |       | 20,255              |       |                  | 20,021     |   |   |
| Additional paid-in  capital                                                                                        |       | 27,995              |       |                  | 26,275     |   |   |
| Restricted stock                                                                                                   |       | (475                | )          |                  | (894       | ) |   |
| Accumulated other  comprehensive income                                                                            |       | (5,970              | )          |                  | (7,507     | ) |   |
| Retained earnings                                                                                                  |       | 215,417             |       |                  | 184,645    |   |   |
|                                                                                                               |       | 257,222             |       |                  | 222,540    |   |   |
| Less cost of 35  and 70 shares of common stock in treasury, respectively                                           |       | (765                | )          |                  | (1,061     | ) |   |
| Total  stockholders’ equity                                                                                   |       | 256,457             |       |                  | 221,479    |   |   |
| Total liabilities  and stockholders’ equity                                                                   |       | $                   | 886,352    |                  |       | $ | 947,922 |   |   |

 

See accompanying notes to consolidated financial statements.

35

----

**NASH FINCH COMPANYAND SUBSIDIARIESConsolidated Statements of Cash Flows(In thousands)**
| ** **                                                                         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                              |       |     |       |     |       |     |       |
| Net earnings                                                                       |       | $        | 35,092     |     | $          | 23,620   |       | $ | 21,267 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Special charges—non  cash portion                                             |       | —   |       | (765     | )          | —   |       |
| Discontinued operations                                                            |       | (678     | )          | —   |       | —   |       |
| Curtailment of post retirement plan                                                |       | (4,004   | )          | —   |       | —   |       |
| Depreciation and amortization                                                      |       | 42,412   |       | 39,988   |       | 46,601   |       |
| Amortization of deferred financing costs                                           |       | 1,129    |       | 1,135    |       | 1,183    |       |
| Amortization of rebatable loans                                                    |       | 1,521    |       | 1,798    |       | 254      |       |
| Provision for bad debts                                                            |       | 8,707    |       | 8,997    |       | 4,812    |       |
| Deferred income tax expense                                                        |       | 15,480   |       | 8,320    |       | 8,630    |       |
| Gain on sale of property, plant and equipment                                      |       | (1,003   | )          | (3,815   | )          | (2,608   | )          |
| Cumulative effect of change in accounting principle                                |       | —   |       | 6,960    |       | —   |       |
| LIFO (credit) charge                                                               |       | (1,120   | )          | (2,234   | )          | 2,661    |       |
| Impairments                                                                        |       | 2,706    |       | 6,585    |       | 1,931    |       |
| Other                                                                              |       | (883     | )          | 1,256    |       | 1,345    |       |
| Changes in  operating assets and liabilities, net of effects of acquisitions       |       |     |       |     |       |     |       |
| Accounts and notes receivable                                                      |       | 18,484   |       | (859     | )          | (36,255  | )          |
| Inventories                                                                        |       | 13,145   |       | 24,448   |       | 3,033    |       |
| Prepaid expenses                                                                   |       | (2,564   | )          | 2,675    |       | (2,890   | )          |
| Accounts payable                                                                   |       | (3,817   | )          | (48,718  | )          | 26,200   |       |
| Accrued expenses                                                                   |       | (9,411   | )          | (8,265   | )          | 17,140   |       |
| Income taxes                                                                       |       | 541      |       | (1,309   | )          | (875     | )          |
| Other assets and liabilities                                                       |       | (1,286   | )          | (2,777   | )          | (2,253   | )          |
| Net cash provided by operating activities                                          |       | $        | 114,451    |     | $          | 57,040   |       | $ | 90,176 |   |
| Investing  activities:                                                             |       |     |       |     |       |     |       |
| Disposal of property, plant and equipment                                          |       | 9,002    |       | 14,435   |       | 8,889    |       |
| Additions to property, plant and equipment                                         |       | (40,728  | )          | (52,605  | )          | (43,924  | )          |
| Business acquired, net of cash                                                     |       | (2,054   | )          | (3,356   | )          | (47,680  | )          |
| Loans to customers                                                                 |       | (10,626  | )          | (5,551   | )          | (27,813  | )          |
| Payments from customers on loans                                                   |       | 7,058    |       | 10,042   |       | 17,936   |       |
| Other                                                                              |       | 750      |       | 2,473    |       | 435      |       |
| Net cash used in investing activities                                              |       | $        | (36,598    | )        | $          | (34,562  | )          | $ | (92,157 | ) |
| Financing  activities:                                                             |       |     |       |     |       |     |       |
| (Payments) proceeds of revolving debt                                              |       | (79,400  | )          | 39,400   |       | 12,700   |       |
| Dividends paid                                                                     |       | (4,320   | )          | (4,292   | )          | (4,204   | )          |
| Payments of long-term debt                                                         |       | (7,195   | )          | (3,491   | )          | (3,378   | )          |
| Payments of capitalized lease obligations                                          |       | (2,900   | )          | (2,845   | )          | (1,620   | )          |
| (Decrease) increase in outstanding checks                                          |       | (3,726   | )          | (30,674  | )          | 5,708    |       |
| Other                                                                              |       | 1,026    |       | 376      |       | 1,708    |       |
| Net cash (used) provided by financing activities                                   |       | (96,515  | )          | (1,526   | )          | 10,914   |       |
| Net (decrease) increase in cash                                                    |       | (18,662  | )          | 20,952   |       | 8,933    |       |
| Cash at beginning of year                                                          |       | 31,419   |       | 10,467   |       | 1,534    |       |
| Cash at end of year                                                                |       | $        | 12,757     |     | $          | 31,419   |       | $ | 10,467 |   |
| Supplemental disclosure  of cash flow information:                                 |       |     |       |     |       |     |       |
| Non cash investing  and financing activities                                       |       |     |       |     |       |     |       |
| Purchase of real estate under capital leases                                       |       | $        | —     |     | $          | 3,789    |       | $ | 3,866 |   |
| Acquisition of  minority interest                                                  |       | —   |       | 1,849    |       | 4,294    |       |

 

See accompanying notes to consolidated financial statements.

36

----

**NASH FINCH COMPANYAND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity(In thousands, except per share amounts)**
| ** **                                                                | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **             | ** ** | **Accumulated other**           | ** ** | ** **                | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------------|------------|---------------------------------|------------|---------------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **             | ** ** | **comprehensive income (loss)** | ** ** | ** **                | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **             | ** ** | **Minimum**                     | ** ** | **Deferred (loss)/** | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** | **Total** | ** ** |
| **Fiscal period ended January 3, 2004**          | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Retained**   | ** ** | **pension liab.** | ** ** | **gain on hedging**   | ** ** | **Restricted**            | ** ** | **Treasury stock** | ** ** | **stockholders’** | ** ** |
| **December 28, 2002 and December 29, 2001** | ** ** | ** **       | ** ** | **Shares**  | ** ** | **Amount**     | ** ** | **capital**            | ** ** | **earnings**                    | ** ** | **adjustment**            | ** ** | **activities**     | ** ** | **stock**              | ** ** | **Shares** | ** ** | **Amount** | ** ** | **equity** | ** ** |
| Balance at  December 30, 2000                                        |       | 11,711           |       | $           | 19,518     |           |       | $                      | 18,564     |                            |       | $                         | 148,254    |               |       | $                      | —     |       |       |   | $ | — |   |   |   | $ | (10 | ) |   |   | (226 | ) |   | $ | (1,786 | ) |   | $ | 184,540 |   |   |
| Net earnings                                                              |       | —           |       | —      |       |           | —     |                   |       | 21,267                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 21,267 |   |   |
| Other comprehensive income, net of tax                                    |       |             |       |        |       |           |       |                   |       |                            |       |                      |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loss on  hedging activities                                      |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | (128       | )          |       |   | — |   |   |   | — |   |   | — |   |   | (128 | ) |   |
| Additional minimum  pension liability                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | (2,390     | )                  |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | (2,390 | ) |   |
| Comprehensive  income                                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 18,749 |   |   |
| Dividend declared  of $.36 per share                                      |       | —           |       | —      |       |           | —     |                   |       | (4,204                          | )          |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | (4,204 | ) |   |
| Treasury stock  issued upon exercise of options                           |       | —           |       | —      |       |           | 943        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 102 |   |   | 523 |   |   | 1,466 |   |   |
| Common stock  issued upon exercise of options                             |       | 28               |       | 46          |       |           | 264        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 310 |   |   |
| Common stock  issued for employee stock purchase plan                     |       | 92               |       | 154         |       |           | 655        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 809 |   |   |
| Amortized  compensation under restricted stock plan                       |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | 1 |   |   |   | — |   |   | — |   |   | 1 |   |   |
| Stock based  deferred compensation                                        |       | —           |       | —      |       |           | 993        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 993 |   |   |
| Repayment of notes  receivable from holders of restricted stock           |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | 9 |   |   |   | — |   |   | — |   |   | 9 |   |   |
| Distribution of  stock pursuant to performance awards                     |       | —           |       | —      |       |           | 475        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 51 |   |   | 260 |   |   | 735 |   |   |
| Balance at  December 29, 2001                                        |       | 11,831           |       | 19,718      |       |           | 21,894     |                   |       | 165,317                         |       |                      | (2,390     | )                  |       |                   | (128       | )          |       |   | — |   |   |   | (73 | ) |   | (1,003 | ) |   | 203,408 |   |   |
| Net earnings                                                              |       | —           |       | —      |       |           | —     |                   |       | 23,620                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 23,620 |   |   |
| Other comprehensive income, net of tax                                    |       |             |       |        |       |           |       |                   |       |                            |       |                      |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loss on  hedging activities                                      |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | (1,105     | )          |       |   | — |   |   |   | — |   |   | — |   |   | (1,105 | ) |   |
| Additional minimum  pension liability                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | (3,884     | )                  |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | (3,884 | ) |   |
| Comprehensive  income                                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 18,631 |   |   |
| Dividend declared  of $.36 per share                                      |       | —           |       | —      |       |           | —     |                   |       | (4,292                          | )          |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | (4,292 | ) |   |
| Treasury stock  issued upon exercise of options                           |       | —           |       | —      |       |           | 73         |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 7 |   |   | 37 |   |   | 110 |   |   |
| Common stock  issued upon exercise of options                             |       | 21               |       | 35          |       |           | 195        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 230 |   |   |
| Common stock  issued for employee stock purchase plan                     |       | 43               |       | 72          |       |           | 878        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 950 |   |   |
| Issuance of  restricted stock                                             |       | 50               |       | 84          |       |           | 1,373      |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | (1,457 | ) |   |   | — |   |   | — |   |   | — |   |   |
| Amortized  compensation under restricted stock plan                       |       | —           |       | —      |       |           | —     |                   |       |                            |       |                      |       |               |       |                   |       |       |       |   | 563 |   |   |   | — |   |   | — |   |   | 563 |   |   |
| Stock based  deferred compensation                                        |       | —           |       | —      |       |           | 248        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 248 |   |   |
| Forfeiture of  restricted stock issued pursuant to performance awards     |       | —           |       |        |       |           | (61        | )                      |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | (5 | ) |   | (101 | ) |   | (162 | ) |   |
| Distribution of  stock pursuant to performance awards                     |       | 67               |       | 112         |       |           | 1675       |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 1 |   |   | 6 |   |   | 1,793 |   |   |
| Balance at  December 28, 2002                                        |       | 12,012           |       | 20,021      |       |           | 26,275     |                   |       | 184,645                         |       |                      | (6,274     | )                  |       |                   | (1,233     | )          |       |   | (894 | ) |   |   | (70 | ) |   | (1,061 | ) |   | 221,479 |   |   |
| Net earnings                                                              |       | —           |       | —      |       |           | —     |                   |       | 35,092                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 35,092 |   |   |
| Other comprehensive income, net of tax                                    |       |             |       |        |       |           |       |                   |       |                            |       |                      |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loss on  hedging activities                                      |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | 41         |       |       |   | — |   |   |   | — |   |   | — |   |   | 41 |   |   |
| Minimum pension  liability adjustment                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | 1,496      |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 1,496 |   |   |
| Comprehensive  income                                                     |       | —           |       | —      |       |           | —     |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 36,629 |   |   |
| Dividend declared  of $.36 per share                                      |       | —           |       | —      |       |           | —     |                   |       | (4,320                          | )          |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | (4,320 | ) |   |
| Treasury stock  issued upon exercise of options                           |       | —           |       | —      |       |           | 9          |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   | 140 |   |   | 149 |   |   |
| Common stock  issued upon exercise of options                             |       | 93               |       | 156         |       |           | 784        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 940 |   |   |
| Common stock  issued for employee stock purchase plan                     |       | 47               |       | 78          |       |           | 559        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | — |   |   | — |   |   | 637 |   |   |
| Amortized  compensation under restricted stock plan                       |       | —           |       | —      |       |           | —     |                   |       |                            |       |                      |       |               |       |                   |       |       |       |   | 419 |   |   |   | — |   |   | — |   |   | 419 |   |   |
| Stock based  deferred compensation                                        |       | —           |       | —      |       |           | 277        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   | 95 |   |   | 372 |   |   |
| Forfeiture of  restricted stock issued pursuant to performance awards     |       | —           |       |        |       |           | (9         | )                      |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | (1 | ) |   | (3 | ) |   | (12 | ) |   |
| Distribution of  stock pursuant to performance awards                     |       |             |       |        |       |           | 100        |                   |       | —                          |       |                      | —     |               |       |                   | —     |       |       |   | — |   |   |   | 12 |   |   | 64 |   |   | 164 |   |   |
| Balance January 3,  2004                                             |       | 12,152           |       | $           | 20,255     |           |       | $                      | 27,995     |                            |       | $                         | 215,417    |               |       | $                      | (4,778     | )          |       |   | $ | (1,192 | ) |   |   | $ | (475 | ) |   |   | (35 | ) |   | $ | (765 | ) |   | $ | 256,457 |   |   |
|                                                                           |            |                  |            |             |            |                |            |                        |            |                                 |            |                           |            |                    |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

See accompanying notes to consolidated financialstatements.

37

 

----

**NASH FINCH COMPANY ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(1) Summary ofSignificant Accounting Policies**

*Fiscal Year*

Nash Finch Company’sfiscal year ends on the Saturday nearest to December 31. Fiscal year 2003consisted of 53 weeks while fiscal years 2002 and 2001 each consisted of 52weeks. The Company’s interim quarters consist of 12 weeks except for the thirdquarter which has 16 weeks. For fiscal 2003, the Company’s fourth quarterconsisted of 13 weeks.

*Principles ofConsolidation*

The accompanying financialstatements include the accounts of Nash Finch Company (the “Company”) and itsmajority-owned subsidiaries. The equity method of accounting is appliedto an investment if the ownership structure prevents Nash Finch from exercisinga controlling influence over operating and financial policies of the businessas a result of the voting interests of the members. All material intercompanyaccounts and transactions have been eliminated in the consolidated financialstatements.

*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 withoriginal maturities of three months or less.

*Revenue Recognition*

Revenues for food distribution and military segmentsare 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 and $125.2 million for fiscal years 2002 and 2001,respectively, but did not have an impact on gross profit, earnings fromcontinuing operations before income taxes, net earnings, cash flows orfinancial 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.

*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 

38

----

purchasesfrom the Company’s vendors or sales to customers are recognized as the productis sold. When payment is received prior to fulfillment of the terms, theamounts are deferred and recognized according to the terms of the arrangement. (Referto Part II, Item 8 of this report under Note 2, “Vendor Allowances andCredits”.)

*Inventories*

Inventories are stated atthe lower of cost or market. At January 3, 2004 and December 28,2002, approximately 82% of the Company’s inventories were valued on the last-in,first-out (LIFO) method. During fiscal 2003, the Company recorded a LIFOcredit of $1.1 million compared to a LIFO credit of $2.2 million in fiscal 2002and a charge of $2.7 million in fiscal 2001. The remaining inventories arevalued on the first-in, first-out (FIFO) method. If the FIFO methodof accounting for inventories had been used, inventories would have been $44.4million and $45.5 million higher at January 3, 2004 and December 28,2002, respectively.

*Capitalization,Depreciation and Amortization*

Property, plant and equipment are stated at cost.Assets under capitalized leases are recorded at the present value of futurelease payments or fair market value, whichever is lower. Expenditures whichimprove or extend the life of the respective assets are capitalized whilemaintenance and repairs are expensed as incurred. Interest costs primarilyassociated with construction projects and software development in the amount of$0.1 million, $0.3 million and $0.1 million have been capitalized during fiscal2003, 2002 and 2001, respectively.

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. Leasehold improvements and capitalized leases 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 fiscal2003, 2002 and 2001, the Company recorded retail impairment charges of $2.7million, $6.6 million and $1.9 million, respectively, within the “selling,general and administrative” caption of the consolidated statements of income.

*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 

39

----

operationfollowing a fourth quarter of fiscal 1998 decision to sell the subsidiary. Thegain of $0.4 million in fiscal 2003 reported under the caption “Discontinuedoperations” was a result of the resolution of a contingency associated with thesale.

*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 are actuariallydetermined on a discounted basis. The Company has purchased stop-loss coverageto limit its exposure to any significant exposure on a per claim basis. Anyprojection of losses concerning workers’ compensation, general and automobileand health insurance liability is subject to a considerable degree ofvariability. Among the causes of this variability are unpredictable externalfactors affecting future inflation rates, litigation trends, legalinterpretations, benefit level changes and claim settlement patterns.

*Goodwill andIntangible Assets*

Intangible assets, consisting primarily of goodwillresulting from business acquisitions, are carried at cost. Effective December 30,2001, Nash Finch adopted SAS No. 142, *“Goodwill and OtherIntangible Assets.”*  TheCompany re-evaluates the carrying value of intangible assets for impairmentannually and/or when factors indicating impairment are present, using anundiscounted operating cash flow assumption.

In June 2001, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142,“*Goodwill and Other Intangible Assets”*.SFAS No. 142 requires that goodwill and intangible assets with indefiniteuseful lives no longer be amortized but instead be tested for impairment atleast annually. Separable intangible assets that are not deemed to have anindefinite life will continue to be amortized over their useful lives. TheCompany was required to apply the provisions of SFAS No. 142 at thebeginning of 2002. The Company performed the required impairment test ofgoodwill upon adoption, as of December 28, 2002 and as of January 3,2004 and determined that no impairment issues existed. The Company had nointangible assets with indefinite useful lives as of January 3, 2004 or December 28,2002. At January 3, 2004, the Company had $149.8 million of goodwill onits consolidated balance sheet of which $100.8 million related to the retailsegment, $23.2 million related to the food distribution segment and $25.8million related to the military segment. At December 28, 2002, the Companyhad $148.0 million of goodwill on its consolidated balance sheet of which $99.0million related to the retail segment, $23.2 million related to the fooddistribution segment and $25.8 million related to the military segment.

40

----

Inconjunction with SFAS No. 142 the following table provides areconciliation of fiscal 2003, 2002 and 2001 reported net earnings excludinggoodwill amortization (in thousands, except per share amounts):
| ** **                                           | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** | **December 29,  2001** | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Reported net income:                                 |       | $                         | 35,092     |                        |       | $                           | 23,620     |   |   |   | $ | 21,267 |   |   |
| Add back:  Goodwill amortization net of income taxes |       | —                    |       |                        | —     |                        |       |   | 4,690 |   |   |
| Adjusted net  income                                 |       | $                         | 35,092     |                        |       | $                           | 23,620     |   |   |   | $ | 25,957 |   |   |
| Basic earnings per  share:                           |       |                      |       |                        |       |                        |       |   |   |   |   |
| Reported earnings per share                          |       | $                         | 2.90       |                        |       | $                           | 2.00       |   |   |   | $ | 1.83 |   |   |
| Goodwill amortization net of income taxes            |       | —                    |       |                        | —     |                        |       |   | 0.40 |   |   |
| Adjusted earnings per share                          |       | $                         | 2.90       |                        |       | $                           | 2.00       |   |   |   | $ | 2.23 |   |   |
| Diluted earnings per  share:                         |       |                      |       |                        |       |                        |       |   |   |   |   |
| Reported earnings per share                          |       | $                         | 2.88       |                        |       | $                           | 1.95       |   |   |   | $ | 1.78 |   |   |
| Goodwill amortization net of income taxes            |       | —                    |       |                        | —     |                        |       |   | 0.39 |   |   |
| Adjusted earnings  per share                         |       | $                         | 2.88       |                        |       | $                           | 1.95       |   |   |   | $ | 2.17 |   |   |

 

Changesin the net carrying amount of goodwill were as follows (in thousands):
| Goodwill as of  December 29, 2001                    |   | $      | 137,337 |   |
|-----------------------------------------------------------|--------|--------|---------|--------|
| Retail  acquisitions                                      |   | 10,691 |    |
| Goodwill as of  December 28, 2002                    |   | $      | 148,028 |   |
| Resolution of disputed retail acquisition purchase  price |   | (1,766 | )       |
| Retail  acquisitions                                      |   | 3,530  |    |
| Goodwill as of  January 3, 2004                      |   | $      | 149,792 |   |

 

Otherintangible assets included in other assets on the consolidated balance sheetswere as follows (in thousands):
| ** **                       | ** ** | **January 3, 2004** | ** ** | **December 28, 2002** | ** ** |
|----------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Gross  Carrying  Value**    | ** ** | **Accum.  Amort.**              | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Value** | ** ** | **Accum.  Amort.** | ** ** | **Net  Carrying  Amount** | ** ** |
| Service contracts                |       | $                             | 11,110     |                            | $          | 6,110 |   | $ | 5,000 |   | $ | 10,358 |   | $ | 5,303 |   | $ | 5,055 |   |
| Tradenames                       |       | 3,300                         |       | 924                             |       | 2,376 |   | 3,300 |   | 792 |   | 2,508 |   |
| Franchise  agreements            |       | 2,703                         |       | 752                             |       | 1,951 |   | 2,703 |   | 644 |   | 2,059 |   |
| Non-compete  agreements          |       | 2,444                         |       | 1,310                           |       | 1,134 |   | 1,784 |   | 894 |   | 890 |   |
| Leasehold  interests             |       | 1,209                         |       | 1,195                           |       | 14 |   | 1,209 |   | 1,182 |   | 27 |   |
| Consulting  agreements and other |       | 418                           |       | 400                             |       | 18 |   | 418 |   | 356 |   | 62 |   |
| Total                            |       | $                             | 21,184     |                            | $          | 10,691 |   | $ | 10,493 |   | $ | 19,772 |   | $ | 9,171 |   | $ | 10,601 |   |

 

Aggregate amortizationexpense recognized for fiscal 2003, 2002 and 2001 was $1.5 million, $1.8million and $2.1 million, respectively. The aggregate amortization expense forthe five succeeding fiscal years is expected to approximate $6.3 million. Intangibleassets with a definite life are amortized on a straight-line basis overestimated useful lives ranging from 4-25 years.

 

41

----

*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.

*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 on marketconditions.  The Company does not enterinto derivative agreements for trading or other speculative purposes, nor is ita party to any leveraged derivative instrument.

*Stock Option Plans*

Aspermitted by the provisions of SFAS No. 123, *“Accountingfor Stock-Based Compensation*”*,*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 compensation costs if the option price equals orexceeds market price at date of grant. The following table illustrates theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123, “*Accountingfor Stock-Based Compensation*”*,* tostock-based employee compensation (in thousands, except per share amounts): 
| ** **                                                                                                                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Reported net  income                                                                                                            |       | $        | 35,092     |     | $          | 23,620   |       | $ | 21,267 |   |
| Add: stock-based  compensation expense from restricted stock plan included in net income                                        |       | 419      |       | 562      |       | —   |       |
| Deduct:  stock-based compensation expense from restricted stock plan included in net  income                                    |       | (419     | )          | (562     | )          | —   |       |
| Deducts: total  stock-based employee compensation expense determined under fair value method  for all option awards, net of tax |       | (1,214   | )          | (1,489   | )          | (1,323   | )          |
| Adjusted net income                                                                                                             |       | $        | 33,878     |     | $          | 22,131   |       | $ | 19,944 |   |
| Reported basic  earnings per share                                                                                              |       | $        | 2.90       |     | $          | 2.00     |       | $ | 1.83 |   |
| Adjusted basic  earnings per share                                                                                              |       | $        | 2.80       |     | $          | 1.88     |       | $ | 1.72 |   |
| Reported diluted  earnings per share                                                                                            |       | $        | 2.88       |     | $          | 1.95     |       | $ | 1.78 |   |
| Adjusted diluted  earnings per share                                                                                            |       | $        | 2.78       |     | $          | 1.83     |       | $ | 1.67 |   |

 

*ComprehensiveIncome*

The Company reportscomprehensive income in accordance with SFAS No. 130, “ReportingComprehensive Income”. Comprehensive income refers to revenues, expenses, gainsand losses that are not included in net earnings, but rather are recordeddirectly in the Consolidated Statements of Stockholders’ Equity.

42

----

*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*

EITF Issue No. 02-16, “*Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*”*,* addresses how a reseller of avendor’s products should account for cash consideration received from a vendorand how to measure that consideration in its income statement.

In January 2003, the EITF concluded that newarrangements, including modifications of existing arrangements entered intoafter December 31, 2002 should apply the treatment outlined in EITF No. 02-16. If determinable, pro forma disclosure ofthe impact of the consensus on prior periods presented is encouraged. In March 2003,the EITF concluded that entities may elect to early adopt the provisions ofEITF No. 02-16 as a cumulative effect of change in accountingprinciple. The Company elected in the fourth quarter of fiscal 2002 to earlyadopt the provisions of EITF No. 02-16 at the beginning of fiscal2002, and recognized a charge of $7.0 million, net of income taxes of $4.4million, that represents the cumulative effect of a change in accountingprinciple as of the beginning of fiscal 2002. The impact of the adoption ofEITF No. 02-16 on the year ended December 28, 2002, excludingthe cumulative effect adjustment, was an increase to net earnings of $0.8million, net of income taxes of $0.6 million.

In January 2003, the FASB issued Interpretation No. 46,“*Consolidation of Variable Interest Entities*—*an Interpretation of ARB No. 51*”*(FIN No. 46)*.In general, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (a) doesnot have equity investors with voting rights or (b) has equity investorsthat do not provide sufficient financial resources for the entity to supportits activities. A variable interest entity often holds financial assets,including loans or receivables, real estate or other property. A variableinterest entity may be essentially passive or it may engage in activities onbehalf of another company. Until now, a company generally has included anotherentity in its consolidated financial statements only if it controlled theentity through voting interests. FIN No. 46 changes that by requiring avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or is entitled to receive a majority of the entity’s residualreturns or both. On December 17, 2003, the FASB provided limited deferralon FIN No. 46 and a revised interpretation on what constitutes a variableinterest. The FASB decided that the revised interpretation will provide that anenterprise need not determine if an entity is a variable interest entity if theentity is a “business” (as defined within EITF Issue No. 98-3, “*Determining Whether a Nonmonetary Transaction Involves Receipt ofProductive Assets or of a Business*”*)*. As a result of the revisedinterpretation, the adoption of FIN No. 46 did not have an impact on theCompany’s consolidated financial statements.

In December 2003, theFASB issued revisions to SFAS No. 132, “*Employers’Disclosures about Pensions and Other Postretirement Benefits*”. Therevisions required changes to existing disclosures as well as new disclosuresrelated to pension and other postretirement benefit plans. The revisions ofSFAS No. 132 have been adopted by the Company and incorporated in theCompany’s consolidated financial statements.

**(2) VendorAllowances 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-invoiceallowances and performance- based allowances. These promotional arrangementsare often subject to negotiation with the Company’s vendors.

43

----

In the case of off-invoice allowances, discounts aretypically offered by vendors with respect to certain merchandise purchased bythe Company during a specified period of time. The Company uses off-invoiceallowances to support a variety of marketing programs such as reduced priceofferings for specific time periods, food shows, pallet promotions and privatelabel promotions. The discounts are either reflected directly on the vendorinvoice, as a reduction from the normal wholesale prices for merchandise towhich the allowance applies, or we are allowed to deduct the allowance as anoffset against the vendor’s invoice when 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 quantities of product sold (as is the case with count-recountpromotions discussed below), slotting (adding a new item to the system) andmerchandising a new item, or achieving certain minimum purchase quantities. Thebilling for these performance-based allowances is normally in the form of a “bill-back”in which case the Company is invoiced at the regular price with the understandingthat the Company may bill back the vendor for the requisite allowance when theperformance is satisfied.

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

The Company jointlynegotiates with its vendors the promotional calendar that governs allpromotions. Forecasting promotional expenditures is a critical part of theCompany’s twice yearly planning sessions with its vendors. Most vendors workwith the Company to project not just overall spending, but also spending on acategory and regional basis. As individual promotions are completed and theassociated billing is processed, the vendors track the Company’s promotionalprogram execution and spend rate. The vendors discuss the tracking, performanceand spend rate with the Company on a regular basis throughout the year. Dependingupon the vendor arrangements, such discussions can occur on a weekly, monthly,quarterly or annual basis. These communications include future promotions,product cost, targeted retails and price points, anticipated volume, 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 the Company. In the future, the nature and menu of promotionalprograms and the allocation of dollars among them may change as a result ofongoing negotiations and commercial relationships between vendors and theCompany.

**(3) Count-RecountCharges**

As discussed above, the Company participates with itsvendors in a broad menu of promotions to increase sales of products. Certainpromotions require the Company to track specific shipments of goods toretailers, or to customers in the case of the Company’s own retail stores,during a specified period. At the end of the promotional period, the Companyinvoices its vendors for the total promotional allowance based on the quantityof goods sold. This type of promotion, which is often referred to as “count-recount,”requires wholesalers and retailers such as the Company to incur significantadministrative and other costs to manage such programs.

As a result of the increased costs associated withcount-recount program administration and implementation, the Companyhistorically, but not uniformly, assessed an administrative fee to recoup its 

44

----

reasonable costs ofperforming the tasks associated with administering these promotions. In someinstances this fee was separately identified on the invoice to the vendor andin other instances the Company raised the invoice amounts by adding additionalcases to the quantity of goods sold reflected on the invoices to vendors. Althoughthe Company attempted to standardize the latter practice at a range of between15% and 20% on wholesale movement billings and approximately 12% on retail scanbillings for its retail stores, the application of the practice was unevenacross time and divisions. The aggregate fees charged to vendors, representedas a percent of total count-recount promotional dollars, were approximately 17%in fiscal 2000 and 23% in fiscal 2001 and 2002. The Company’s costs associatedwith administering this program are estimated at approximately 20% of the totalcount-recount promotional dollars.

The count-recount practicedescribed above was established against a backdrop of what the Company believeswas a common industry practice, of which vendors generally were aware. TheCompany believes that its efforts to recapture count-recount costs by addingadditional cases to the invoices in lieu of a separately delineatedadministrative fee were appropriate. The arrangements between the Company andits vendors did not separately address or provide for the addition of suchcharges in lieu of a separately invoiced administrative fee. The Company’sconclusion that its accounting for such charges has been correct, that thecharges were appropriately recognized as a reduction of cost of sales in theperiod the product was sold and in which the count-recount promotions wereactually performed by the Company, is based on its overall relationship andmethod of doing business with our vendors.

*HistoricalAccounting Treatment and Impact on Financial Statements*

Count-recount allowancesare recorded as a reduction to cost of sales as performance has been completedand as the related inventory is sold. Count-recount charges in lieu ofadministrative fees were approximately $6.7 million in fiscal 2000, $8.6million in fiscal 2001 and $6.7 million through November 17, 2002 when theCompany, as a uniform practice across all divisions, began stating theadministrative fee separately on the invoices to the vendor.

*Communications withVendors*

In November 2002, theCompany met with its vendors, and brokers representing vendors, collectivelycomprising approximately 88% of all purchases from vendors who were subject tocount-recount charges in lieu of an administrative fee. In those meetings, theCompany advised the vendors and brokers that (i) the Company had ahistorical practice of charging an administrative fee either separately or, inmost instances, by adding amounts to actual quantities sold in the range of 15%to 20% in lieu of an administrative fee, (ii) such fee had not always beenseparately disclosed on invoices to vendors, (iii) the Company hadattempted to standardize the practice in late 1999 at a range of 15% to 20%, (iv) theCompany had not been successful in standardizing such practice in that in somesituations the application of the practice had been uneven across time anddivisions resulting in a move away from a fixed percentage and sometimesresulting in an uneven percentage being applied, and (v) in the future theCompany would charge a flat fee set at a fixed percentage of sales, which wouldbe separately  itemized on invoices. Inthose meetings, substantially all the vendors acknowledged the fees previouslycharged and none indicated that they would seek any refund based upon the pastpractice. Subsequently, on November 26, 2002, the Company notified all ofits vendors and brokers (including but not limited to those with whom theCompany had met in person) in writing of its prior and current practicesrelated to count-recount. As of the date of these financial statements, none ofits vendors or their brokers is requesting a return of any of the historicalcount-recount Charges assessed, and none has indicated they will make areduction in future promotional funding.

45

----

*SEC Investigation*

On October 9, 2002, the Company received a letterfrom the staff of the Division of Enforcement of the SEC indicating that theywere conducting an informal inquiry into the Company’s process for assessingcount-recount charges to the Company’s vendors and how it accounts for thosecharges. In response, the Company commenced an internal review of its practicesin conjunction with the Audit Committee, special outside counsel and its priorand then-current auditors. The Company filed a written response to the inquiryon November 22, 2002.

On February 3, 2003, the Company provided theOffice of the Chief Accountant of the SEC a written communication detailing thebasis for the manner in which it assesses and accounts for count-recountcharges, advising that the Company believes these charges were properlyaccounted for in accordance with generally accepted accounting principles,seeking the SEC staff’s concurrence with this conclusion, and requesting ameeting with the staff of the Office of Chief Accountant at which these matterscould be discussed. On February 4, 2003, the Company was notified by thestaff of the SEC’s Division of Enforcement that the SEC had approved a formalorder of investigation of the Company.

Representatives of theCompany met with members of the staff of the SEC’s Office of the ChiefAccountant and Division of Corporation Finance on February 19, 2003. In aletter dated March 7, 2003, the staffs of the SEC’s Office of the ChiefAccountant and Division of Corporation Finance indicated that, based on theCompany’s oral and written representations, they would not object at that timeto the Company’s accounting for the count-recount charges. The investigation bythe SEC’s Division of Enforcement is ongoing and the response by the staffs ofthe Office of the Chief Accountant and the Division of Corporation Finance doesnot preclude any action by the Division of Enforcement.

**(4) BusinessAcquisitions**

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. Resultsof operations are included in the consolidated statements from the date ofacquisition. The pro forma effects of the acquisition are immaterial fordisclosure.

On March 5, 2002, the Company acquired two storesin Chilton and Kiel, Wisconsin through a cash purchase of 100% of the netassets. The acquisition of these stores resulted in goodwill of $1.9 million. Resultsof operations are included in the consolidated statements from the date ofacquisition. The pro forma effects of the acquisition are immaterial fordisclosure.

On August 13, 2001,the Company acquired U Save Foods, Inc. (“U Save”), through a cashpurchase of 100% of U Save’s outstanding capital stock. U Save was a privatelyheld retail grocery store chain operating 14 stores, primarily in Nebraska,with annual sales of approximately $145 million. The acquisition resulted ingoodwill of $35.6 million which is not required to be amortized in accordancewith SFAS No. 142. Results of operations are included in the consolidatedstatements from the date of acquisition. The pro forma effects of theacquisition are immaterial for disclosure.

**(5) Special Charges**

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 3,2004, the remaining accrued liability was $2.2 million and consisted primarilyof lease commitments.

46

----

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.

**(6) ImpairmentCharges**

Impairmentcharges of $2.7 million, $6.6 million, and $1.9 million were recorded forasset impairments in fiscal 2003, 2002, and 2001, respectively. These chargeswere recorded with respect to six stores in fiscal 2003, fifteen stores infiscal 2002 and five stores in fiscal 2001 due to increased competition withinthe stores’ respective market areas. The estimated undiscounted cash flowsrelated to these facilities indicated that the carrying value of the assets maynot be recoverable based on current expectations, therefore these assets werewritten down in accordance with SFAS No. 144.

**(7) Accounts andNotes Receivable**

Accountsand notes receivable at the end of fiscal years 2003 and 2002 are comprised ofthe following components (in thousands):
| ** **                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Customer notes  receivable, current        |       | $        | 12,341     |     | $          | 14,571 |   |
| Customer accounts  receivable              |       | 129,560  |       | 140,960  |       |
| Other receivables                          |       | 20,838   |       | 36,729   |       |
| Allowance for  doubtful accounts           |       | (16,837  | )          | (26,733  | )          |
| Net current  accounts and Notes receivable |       | 145,902  |       | 165,527  |       |
| Long-term  customer notes receivable       |       | 33,585   |       | 29,261   |       |
| Other noncurrent  receivables              |       | 3,626    |       | 3,626    |       |
| Allowance for  doubtful accounts           |       | (6,033   | )          | (291     | )          |
| Net long-term  notes receivable            |       | $        | 31,178     |     | $          | 32,596 |   |

 

Operating results include bad debt expense totaling$8.7 million, $9.0 million and $4.8 million during fiscal years 2003, 2002 and2001, respectively. The increase in bad debt expense in fiscal 2003 and 2002can be attributed to increased competitive pressures faced by our independentretailers.

Substantiallyall notes receivable are based on floating interest rates which adjust tochanges in market rates. As a result, the carrying value of notes receivableapproximates market value.

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

Long-termdebt at the end of the fiscal years 2003 and 2002 is summarized as follows (in thousands):
| ** **                                                                              | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revolving credit                                                                        |       | $        | —     |     | $          | 79,400 |   |
| Term loan                                                                               |       | 100,000  |       | 100,000  |       |
| Senior  subordinated debt, 8.5% due in 2008                                             |       | 164,442  |       | 164,310  |       |
| Industrial  development bonds, 1.8% to 7.8% due in various installments through 2014    |       | 6,545    |       | 7,080    |       |
| Notes payable and  mortgage notes, 3% to 11.5% due in various installments through 2018 |       | 13,687   |       | 11,995   |       |
|                                                                                    |       | 284,674  |       | 362,785  |       |
| Less current  maturities                                                                |       | 2,730    |       | 5,193    |       |
|                                                                                    |       | $        | 281,944    |     | $          | 357,592 |   |

 

47

----

The bank credit agreement has a five year term ending December 19,2005 and provides a $100 million term loan and $150 million in revolving credit.Borrowings bear interest at the Eurodollar rate plus a margin increase and acommitment commission on the unused portion of the revolver. The marginincrease and the commitment commission are reset quarterly based on movement ofa leverage ratio defined by the agreement. At January 3, 2004, the marginand commitment commission were 1.75% and 0.375%, respectively compared to 2.0%and 0.5% at the end of 2002. The agreement contains financial covenants which,among other matters require the Company to maintain predetermined ratio levelsrelated to interest coverage, fixed charges, leverage and working capital.

The Company has outstanding letters of credit in theamounts of $22.6 million and $17.4 million at January 3, 2004 and December 28,2002, respectively, primarily supporting workers’ compensation obligations.

At January 3, 2004, land in the amount of $1.6million and buildings and other assets with a depreciated cost of approximately$5.8 million are pledged to secure outstanding mortgage notes and obligationsunder issues of industrial development bonds. In addition, borrowings under thebank credit facility are collaterized by a security interest in substantiallyall remaining assets not pledged under other debt agreements, including thoseof wholly owned subsidiaries.

Aggregateannual maturities of long-term debt for the five fiscal years after January 3,2004 are as follows (in thousands):
| 2004       |   | $       | 2,730  |   |
|------------|--------|---------|--------|--------|
| 2005       |   | 102,803 |   |
| 2006       |   | 2,851   |   |
| 2007       |   | 1,476   |   |
| 2008       |   | 166,499 |   |
| Thereafter |   | 8,315   |   |

 

Interest paid was $33.1 million, $28.4 million and$32.4 million for fiscal years 2003, 2002 and 2001, respectively.

On February 13, 2003 theCompany was notified by the Trustee for its $165.0 million 8.5% SeniorSubordinated Notes, due in 2008, that a default had occurred under theIndenture as a result of the Company’s failure to file with the SEC its Form 10-Qfor the third quarter ended October 5, 2002 and that, unless remediedwithin the 30 day grace period, such failure would constitute an event ofdefault under the Indenture. In addition, if the default was not remediedwithin the 30 days, an event of default would also occur under the bank creditfacility.

On February 28, 2003 theCompany announced that holders of more than 51% of its SeniorSubordinated Notes agreed to waive the default under the Indenture. The waiverrequired the Company to file its Form 10-Q for the third fiscal quarter of2002 by May 15, 2003. Such holders also agreed to extend the time for theCompany to file its Form 10-K for its fiscal year ended December 28,2002 until May 30, 2003 and its Form 10-Q for the first fiscalquarter ended March 22, 2003 until June 15, 2003. In considerationfor the waiver, the Company paid a fee to the bondholders equal to 1.5% of theoutstanding principal amount of the notes. The Company subsequently made thespecified filings prior to the extended deadlines.

On March 26, 2003,the Company announced that the requisite number of bank lenders under its bankcredit facility had agreed to extend until June 15, 2003 the deadline forsubmission to the lenders of its audited fiscal 2002 financial statements. Thebank credit agreement had originally called for the Company to provide to itslenders its audited financial statements for fiscal 2002 by March 28, 2003.In consideration for the amendment to the bank credit facility, the Companypaid a fee to the bank lenders 

48

----

equal to0.5% of the sum of its revolving loan commitments and aggregate outstandingterm loans as of the effective date of the amendment. The Company subsequentlysubmitted its audited financial statements prior to the extended deadline.

**(9) DerivativeInstruments**

The Company has market risk exposure to changinginterest rates primarily as a result of its borrowing activities. The Company’sobjective in managing its exposure to changes in interest rates is to reducefluctuations in earnings and cash flows. To achieve these objectives, theCompany uses derivative instruments, primarily interest rate swap agreements,to manage risk exposures when appropriate, based on market conditions.  The Company does not enter into derivativeagreements for trading or other speculative purposes, nor is it a party to anyleveraged derivative instrument.

The interest rate swap agreements are designated ascash flow hedges and are reflected at fair value in the Company’s consolidatedbalance sheet and the related gains or losses on these contracts are deferredin stockholders’ equity as a component of other comprehensive income.  Deferred gains and losses are amortized as anadjustment to expense over the same period in which the related items beinghedged are recognized in income. However, to the extent that any of thesecontracts are not considered to be perfectly effective in offsetting the changein the value of the items being hedged, any changes in fair value relating tothe ineffective portion of these contracts are immediately recognized inincome.

Interest rate swap agreements are entered into forperiods consistent with related underlying exposures and do not constitutepositions independent of those exposures. At January 3, 2004, the Companyhad three outstanding interest rate swap agreements which commenced on July 26,2002, December 6, 2002 and June 6, 2003 to manage interest rates on aportion of its long-term debt.   Theagreements expire on September 25, 2004, October 6, 2004 and October 6,2004with notional amounts of $50 million,$35 million and $35 million, respectively. The agreements call for an exchangeof interest payments with the Company making payments based on fixed rates of2.75%, 3.5% and 3.97% for the respective time intervals and receiving paymentsbased on floating rates, without an exchange of the notional amount upon whichthe payments are based.

Interest rate swapagreements are reflected at fair value in the Company’s consolidated balancesheet and related losses of $1.2 million, net of income taxes, are deferred instockholders’ equity as a component of other comprehensive income. The Companyexpects the losses deferred in other comprehensive income to reverse duringfiscal 2004.

**(10) Income Taxes**

Incometax expense is made up of the following components (in thousands):
| ** **  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|
| Current:    |       |     |       |     |       |     |       |
| Federal     |       | $        | 3,054      |     | $          | 6,575    |       | $ | 10,643 |   |
| State       |       | 341      |       | 1,205    |       | 2,114    |       |
| Tax credits |       | (168     | )          | (62      | )          | (11      | )          |
| Deferred:   |       | 14,292   |       | 11,834   |       | 2,279    |       |
| Total       |       | $        | 17,519     |     | $          | 19,552   |       | $ | 15,025 |   |

 

49

----

Totalincome tax expense is allocated as follows (in thousands):
| ** **                                                         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax  expense from continuing operations                     |       | $        | 17,254     |     | $          | 19,552   |       | $ | 15,025 |   |
| Tax effect of  discontinued operations                             |       | 265      |       | —   |       | —   |       |
| Tax effect of  cumulative effect of change in accounting principle |       | —   |       | (4,450   | )          | —   |       |
| Total income tax  expense                                          |       | $        | 17,519     |     | $          | 15,102   |       | $ | 15,025 |   |

 

Incometax expense differed from amounts computed by applying the federal income taxrate to pre-tax income as a result of the following:
| ** **                                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  tax rate                     |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State taxes, net  of federal income tax benefit |       | 3.9      |       | 3.9      |       | 4.2      |       |
| Non-deductible  goodwill                        |       | —   |       | —   |       | 2.9      |       |
| Resolution of  various outstanding tax issues   |       | (5.7     | )          | —   |       | —   |       |
| Other net                                       |       | 0.1      |       | 0.1      |       | (0.7     | )          |
| Effective tax  rate                             |       | 33.3     | %          | 39.0     | %          | 41.4     | %          |

 

Income taxes paid were $2.7 million, $9.2 million and$4.6 million during fiscal years 2003, 2002 and 2001, respectively.

Income tax provided for the 53 weeks ended January 3,2004 was 33.3% compared to 39.0% for 2002. During the third quarter of 2003,the Company recognized a reduction in income tax expense of $3.0 million as theresult of the resolution of various outstanding state and federal tax issues.

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at January 3, 2004and December 28, 2002, are presented below (in thousands):
| ** **                                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                       |       |     |       |     |       |
| Provision for obligations to be settled in future  periods |       | $        | 26,498     |     | $          | 34,917 |   |
| Closed locations                                           |       | 2,512    |       | 2,099    |       |
| Inventories                                                |       | —   |       | 346      |       |
| Other                                                      |       | —   |       | 1,179    |       |
| Total deferred tax assets                                  |       | 29,010   |       | 38,541   |       |
| Deferred tax  liabilities:                                 |       |     |       |     |       |
| Depreciation and amortization                              |       | 16,194   |       | 13,723   |       |
| Acquired asset adjustments for fair values                 |       | 10,286   |       | 10,305   |       |
| Accelerated tax deductions                                 |       | 743      |       | 523      |       |
| Inventories                                                |       | 2,295    |       | —   |       |
| Other                                                      |       | 124      |       | —   |       |
| Total deferred tax liabilities                             |       | 29,642   |       | 24,551   |       |
| Net deferred tax  (asset)/liability                        |       | $        | (632       | )        | $          | 13,990 |   |

 

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.

50

----

**(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 priceof $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 outstanding commonstock. 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.

Upon the rights becoming exercisable, subject tocertain adjustments or alternatives, each right would entitle theholder (other than the acquiring person or group, whoserights become void) to purchase a number of shares of the Company’s commonstock having a market value of twice the exercise price of the right. If theCompany is involved in a merger or other business combination, or certain otherevents occur, each right would entitle the holder to purchase common shares ofthe acquiring company having a market value of twice the exercise price of theright. Within 30 days after the rights become exercisable following a flip-inevent, the Board of Directors may exchange shares of Company common stock orcash or other property for exercisable 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.

The Company has four stock incentive plans under whichincentive 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 has received an annual grant of anon-qualified stock option covering 5,000 shares of the Company’s common stock.Each option has an exercise price equal to the fair market value of a share ofthe Company’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 31,2003, the Company has suspended the 1995 Plan and plans to make no furtherissuances from this Plan. The Company also maintains the 1997 Non-EmployeeDirector Stock Compensation Plan (“1997 Plan”) under which each non-employee directormay also defer receipt of some or all of the cash component of his or herannual director compensation until his or her service as a director has ended,and may elect payout of the amounts deferred in cash or shares of Companycommon stock. As of December 31, 2003, the 1997 Plan was amended to nolonger require that non-employee directors receive one-half of their annualretainer in Company stock, and the Board approved the annual issuance of$30,000 worth of performance units to each non-employee director under the 2000Plan (as defined below).

 

51

----

Under the 1994 Stock Incentive Plan (“1994 Plan”),employees of the Company could be awarded stock options, shares of restrictedstock or performance units payable in cash, stock or both. An award under the1994 Plan was generally an incentive stock option that had an exercise priceequal to the fair market value of a share of the Company’s stock on the date ofgrant, that became exercisable as to 20% of the shares covered by the option onthe grant date and 12, 24, 36 and 48 months thereafter, and that had a term of10 years. No further awards of any kind may be made under the 1994 Plan.

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 3, 2004, onlyemployees have received awards under the 2000 Plan, and those awards havecommonly been non-qualified stock options with terms comparable to those of optionsgranted under the 1994 Plan, except that any option is first exercisable sixmonths after the date of the grant. Awards of unrestricted stock in lieu ofcash have been made under the 2000 Plan to certain employees in connection withthe Company’s annual bonus program for executives. In such cases, additionalawards of restricted stock equal to 15% of the number of shares received inlieu of cash have been made to these employees, with such shares subject to atwo-year vesting period. In addition, an award of 50,000 restricted shares wasmade to the Company’s CEO in February 2002, with 20% of such sharesvesting on each of the first five anniversaries of the grant date. Under termsof the award, he has voting power over all of the shares, and is entitled toreceive ordinary cash dividends paid generally to shareholders. The award alsoprovides for a cash payment on each vesting date in an amount equal to fortypercent of the fair market value of the shares vesting at that time topartially offset the taxes due upon vesting. Compensation expense is recognizedover the periods during which the restrictions lapse. Performance units havealso been granted to two executives in exchange for phantom stock units thoseexecutives had accrued under a now discontinued bonus and deferred compensationplan.

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 71,785, 43,026 and 92,243 shares infiscal 2003, 2002 and 2001 respectively, under this plan. At January 3,2004, 107,734 shares of additional common stock were available for purchaseunder the plan.

52

----

Changesin outstanding options under the 1995 Plan, the 1994 Plan and the 2000 Planduring the three fiscal years ended January 3, 2004 are summarized asfollows:
| ** **                                  | ** ** | ** **              | ** ** | **Weighted**          | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | **Average**           | ** ** |
| ** **                                  | ** ** | **Shares**              | ** ** | **Option Price** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** | **Per Share**    | ** ** |
| Options  outstanding December 30, 2000 |       |                    | 944        |                  |       |   | $ | 11.56 |   |   |
| Exercised                                   |       |                    | (130       | )                     |       |   | 13.63 |   |   |
| Forfeited                                   |       |                    | (137       | )                     |       |   | 13.96 |   |   |
| Granted                                     |       |                    | 469        |                  |       |   | 21.36 |   |   |
| 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 |   |   |

 

Stock options totaling 767,000 and 734,474 wereexercisable at January 3, 2004 and December 28, 2002, respectively.

Thefollowing tables summarize information concerning currently outstanding andexercisable stock options at January 3, 2004:
| **Options Outstanding**                 | ** ** |
|----------------------------------------------|------------|
| **Ranges of Exercise Prices** | ** ** | ** ** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $5.68 – 11.22                           |       | 331,400 |   |   | 1.95 |   |   |   | $ | 8.96 |   |   |
| 11.69 – 16.84                           |       | 267,750 |   |   | 3.09 |   |   |   | 15.75 |   |   |
| 17.25 – 22.19                           |       | 517,050 |   |   | 3.60 |   |   |   | 20.15 |   |   |
| 22.78 –  27.52                          |       | 29,000 |   |   | 3.11 |   |   |   | 26.87 |   |   |
| 28.48 – 31.60                           |       | 207,500 |   |   | 3.48 |   |   |   | 31.52 |   |   |
|                                         |       | 1,352,700 |   |   | 3.07 |   |   |   | $ | 18.43 |   |   |

 
| **Options Exercisable**                      | ** ** |
|----------------------------------------------|------------|
| **Ranges of Exercise Prices** | ** ** | ** ** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $5.68 – 11.22                           |       |   | 238,550 |   |   |   | $ | 8.81 |   |   |
| 11.69 – 16.84                           |       |   | 249,600 |   |   |   | 15.95 |   |   |
| 17.25 – 22.19                           |       |   | 159,450 |   |   |   | 22.15 |   |   |
| 22.78 –  27.52                          |       |   | 12,400 |   |   |   | 26.61 |   |   |
| 28.48 – 31.60                           |       |   | 107,000 |   |   |   | 31.45 |   |   |
|                                         |       |   | 767,000 |   |   |   | $ | 17.35 |   |   |

 

The weighted average fairvalue of options granted during 2003, 2002 and 2001 are $6.97, $8.42 and $6.81,respectively. The fair value of each option grant is estimated as of the dateof grant using the 

53

----

Black-Scholessingle option pricing model assuming a weighted average risk-freeinterest rate of 3.24%, an expected dividend yield of 1.53%, expected lives oftwo and one-half years and volatility of 72%. Pro forma compensation costfor the stock incentive plans would reduce net income as described in the “Summaryof Significant Accounting Policies” as required by SFAS No. 148.

**(13) Earnings perShare**

Thefollowing table sets forth the computation of basic and diluted earnings pershare for continuing operations (in thousands, except per share amounts):
| ** **                                                                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                                                     |       |     |       |     |       |     |       |
| Earnings from continuing operations                                            |       | $        | 34,679     |     | $          | 30,580   |       | $ | 21,267 |   |
| Denominator:                                                                   |       |     |       |     |       |     |       |
| Denominator for basic earnings per share  (weighted-average shares)            |       | 12,082   |       | 11,796   |       | 11,624   |       |
| Effect of dilutive options and awards                                          |       | 113      |       | 318      |       | 335      |       |
| Denominator for diluted earnings per share (adjusted  weighted-average shares) |       | 12,195   |       | 12,114   |       | 11,959   |       |
| Basic earnings per share                                                       |       | $        | 2.87       |     | $          | 2.59     |       | $ | 1.83 |   |
| Diluted earnings  per share                                                    |       | $        | 2.85       |     | $          | 2.52     |       | $ | 1.78 |   |

 

**(14) Leases**

Asubstantial portion of the store and warehouse properties of the Company areleased. The following table summarizes assets under capitalized leases (inthousands):
| ** **                           | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Buildings and  improvements          |       | $        | 41,661     |     | $          | 42,040 |   |
| Less accumulated  amortization       |       | (17,039  | )          | (15,374  | )          |
| Net assets under  capitalized leases |       | $        | 24,622     |     | $          | 26,666 |   |

 

Totalfuture minimum sublease rents receivable related to operating and capital leaseobligations as of January 3, 2004 are $46.1 million and $28.3 million,respectively. Future minimum payments for operating and capital leases have notbeen reduced by minimum sublease rentals receivable under non-cancelablesubleases. At January 3, 2004, future minimumrentalpayments by the Company under non-cancelable leases (including withrespect to properties that have been subleased) are as follows (in thousands):
| ** **                                                | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------|------------|
| ** **                                                | ** ** | **Leases**    | ** ** | **leases**  | ** ** |
| 2004                                                      |       | $             | 25,442     |        | $          | 7,641 |   |
| 2005                                                      |       | 23,077        |       | 7,594       |       |
| 2006                                                      |       | 20,026        |       | 7,626       |       |
| 2007                                                      |       | 17,869        |       | 7,590       |       |
| 2008                                                      |       | 13,224        |       | 7,589       |       |
| Thereafter                                                |       | 65,258        |       | 50,878      |       |
| Total minimum  lease payments                             |       | $             | 164,896    |        | $          | 88,918 |   |
| Less imputed interest  (rates ranging from 8.3% to 24.6%) |       |          |       | 41,731      |       |
| Present value of  net minimum lease payments              |       |          |       | 47,187      |       |
| Less current  maturities                                  |       |          |       | (2,548      | )          |
| Capitalized lease  obligations                            |       |          |       | $           | 44,639     |   |

 

54

----

Totalrental expense under operating leases for fiscal years 2003, 2002 and 2001 isas follows (in thousands):
| ** **                                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total rentals                                                |       | $        | 45,002     |     | $          | 43,858   |       | $ | 45,648 |   |
| Less real estate  taxes, insurance and other occupancy costs |       | (4,399   | )          | (3,805   | )          | (3,378   | )          |
| Minimum rentals                                              |       | 40,603   |       | 40,053   |       | 42,270   |       |
| Contingent  rentals                                          |       | (104     | )          | (175     | )          | (175     | )          |
| Sublease rentals                                             |       | (10,986  | )          | (14,092  | )          | (15,687  | )          |
|                                                         |       | $        | 29,513     |     | $          | 25,786   |       | $ | 26,408 |   |

 

Most of the Company’sleases provide that the Company pay real estate taxes, insurance and otheroccupancy costs applicable to the leased premises. Contingent rentals aredetermined on the basis of a percentage of sales in excess of stipulatedminimums for certain store facilities. Operating leases often contain renewaloptions. Management expects that, in the normal course of business, leases thatexpire will be renewed or replaced by other leases.

**(15) Concentrationof 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. 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 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 3,2004, one retailer comprises 36.8% of the Company’s notes receivable balance. Inaddition, the Company has guaranteed outstanding debt and lease obligations ofa number of retailers in the amount of $13.0 million, including $5.4 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 3,2004, the Company estimates that its maximum potential obligation with respectto the subleases and assigned leases to be approximately $74.4 million and$10.2 million, respectively.

**(16) Fair Value ofFinancial Instruments**

The estimated fair value of notes receivableapproximates the carrying value at January 3, 2004 and December 28,2002. 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 $285.4 million and $312.8 million at January 3,2004 and December 28, 2002, respectively, utilizing discounted cash flows.

The estimated fair value of the Company’s interestrate swap agreements is the estimated amount the Company would have to pay orreceive to terminate the agreements based upon quoted market prices as providedby the financial institutions which are counter parties to the agreements.

55

----

**(17) Commitmentsand Contingencies**

*Shareholder Litigation*

Eightclass action lawsuits were filed against the Company and certain of itsexecutive officers in the United States District Court for the District ofMinnesota on behalf of purchasers of the Company’s common stock during theperiod from February 23, 2000 through February 4, 2003. Thecomplaints generally allege that the defendants violated  the Securities Exchange Act of 1934 byissuing false statements, including false financial results in which theCompany included income from vendor promotions to which the Company was notentitled, so as to maintain favorable credit ratings on its debt. These actionswere consolidated in a complaint file in June 2003. Three derivativeactions have also been filed in state court in Minnesota by shareholdersalleging that certain officers and directors violated duties to the Company tooversee and administer the Company’s accounting. These actions are directlytied to the allegations in the federal securities actions. The Company believesthat the lawsuits are without merit and intends to vigorously defend theactions. No damages have been specified. The Company is unable to evaluate thelikelihood of prevailing in the case at this early stage of the proceedings, butdoes not believe that the eventual outcome will have a material impact on itsfinancial position or results of operations.

*SEC Investigation*

On October 9, 2002, the Company received a letterfrom the staff of the Division of Enforcement of the SEC indicating that theywere conducting an informal inquiry into our process for assessingcount-recount charges to the Company’s vendors and how it accounts for thosecharges. In response, it commenced an internal review of its practices inconjunction with the Audit Committee, special outside counsel and its prior andthen-current auditors. The Company filed a written response to the inquiry on November 22,2002.

On February 3, 2003, the Company provided theOffice of the Chief Accountant of the SEC a written communication detailing thebasis for the manner in which it assesses and accounts for count-recountcharges, advising that the Company believes these charges were properlyaccounted for in accordance with generally accepted accounting principles,seeking the SEC staff’s concurrence with this conclusion, and requesting ameeting with the staff of the Office of Chief Accountant at which these matterscould be discussed. On February 4, 2003, the Company was notified by thestaff of the SEC’s Division of Enforcement that the SEC had approved a formalorder of investigation of the Company.

Representatives of theCompany met with members of the staff of the SEC’s Office of the ChiefAccountant and Division of Corporation Finance on February 19, 2003. In aletter dated March 7, 2003, the staffs of the SEC’s Office of the ChiefAccountant and Division of Corporation Finance indicated that, based on ouroral and written representations, they would not object at that time to theCompany’s accounting for the count-recount charges. The investigation by theSEC’s Division of Enforcement is ongoing and the response by the staffs of theOffice of the Chief Accountant and the Division of Corporation Finance does notpreclude any action by the Division of Enforcement.

**(18) Long-TermCompensation 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 dollar fordollar the profit sharing contributions that would otherwise be made to 

56

----

the profit sharing plan. Profitsharing expense (including the matching contribution) for 2003, 2002 and 2001was $4.7 million, $4.7 million and $4.9 million, respectively.

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, $0.6 million and $0.5 million in fiscal2003, 2002 and 2001, respectively.

The Company also has anincome deferral plan for a select group of management or highly compensated employees.The plan is an unfunded plan which permits eligible executives to defer receiptof a portion of the base salary or annual bonus that would otherwise be paid tothem. The deferred amounts, 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.

**(19) Pension andOther Post-retirement Benefits**

The Company 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 Companycontributes amounts necessary to meet minimum funding requirements. This planhas 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 benefits when they reach early retirement age if they have met minimumage and service requirements. Health care benefits for retirees are providedunder a self-insured program 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.

57

----

Theactuarial present value of benefit obligations and funded plan status of January 3,2004 and December 28, 2002 were (in thousands):
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2003**                  | ** ** | **2002**                | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Change in benefit obligation**                | ** ** | ** **                | ** ** |                    |       |   |   |   |   |
| Benefit  obligation at beginning of year        | ** ** | $                         | (41,114    | )                       | $          | (37,434 | ) | $ | (9,199 | ) | $ | (22,377 | ) |
| Service cost                                    |       | (20                       | )          | (42                     | )          | (245 | ) | (402 | ) |
| Interest cost                                   |       | (2,439                    | )          | (2,759                  | )          | (507 | ) | (737 | ) |
| Participant  contributions                      |       | —                    |       | —                  |       | (1,058 | ) | (808 | ) |
| Amendment                                       |       | —                    |       | —                  |       | — |   | 9,050 |   |
| Actuarial (loss)  gain                          |       | 1,528                     |       | (3,599                  | )          | 656 |   | 3,255 |   |
| Benefits paid                                   |       | 2,651                     |       | 2,720                   |       | 2,267 |   | 2,820 |   |
| Curtailments                                    |       | —                    |       | —                  |       | 2,481 |   | — |   |
| Benefit  obligation at end of year              |       | (39,394                   | )          | (41,114                 | )          | (5,605 | ) | (9,199 | ) |
| **Change  in plan assets**                      |       |                      |       |                    |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | 32,912                    |       | 36,034                  |       | — |   | — |   |
| Actual return on  plan assets                   |       | 3,264                     |       | (402                    | )          | — |   | — |   |
| Employer  contributions                         |       | 318                       |       | —                  |       | 1,209 |   | 2,011 |   |
| Plan  participants’ contributions          |       | —                    |       | —                  |       | 1,058 |   | 809 |   |
| Benefits paid                                   |       | (2,651                    | )          | (2,720                  | )          | (2,267 | ) | (2,820 | ) |
| Fair value of  plan assets at end of year       |       | 33,843                    |       | 32,912                  |       | — |   | — |   |
| Funded status                                   |       | (5,550                    | )          | (8,202                  | )          | (5,605 | ) | (9,199 | ) |
| Unrecognized  actuarial loss (gain)             |       | 7,924                     |       | 10,608                  |       | 1,871 |   | 5,298 |   |
| Unrecognized  prior service cost                |       | (62                       | )          | (76                     | )          | (233 | ) | (4,788 | ) |
| Prepaid (accrued)  benefit cost                 |       | $                         | 2,312      |                    | $          | 2,330 |   | $ | (3,967 | ) | $ | (8,689 | ) |

 

Amountsrecognized in the statement of financial position consist of (in thousands):
| ** **                              | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2003**                  | ** ** | **2002**                | ** ** | **2003** | ** ** | **2002** | ** ** |
| Prepaid benefit  cost                   | ** ** | $                         | 2,312      |                    | $          | 2,330 |   | $ | — |   | $ | — |   |
| Accrued benefit  cost                   |       | (7,833                    | )          | (10,456                 | )          | (3,967 | ) | (8,689 | ) |
| Deferred tax asset                      |       | 3,055                     |       | 4,182                   |       | — |   | — |   |
| Accumulated other  comprehensive income |       | 4,778                     |       | 6,274                   |       | — |   | — |   |
| Net amount recognized                   |       | 2,312                     |       | 2,330                   |       | (3,967 | ) | (8,689 | ) |
|                                         |            |                           |            |                         |            |  |  |  |  |  |  |  |  |

 

Theestimated projected benefit obligation, accumulated benefit obligation and fairvalue of assets for the pension plan as of January 3, 2004 and December 28,2002 were as follows (in thousands):
| ** **                      | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
|---------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Projected benefit  obligation   | ** ** | $                         | 39,394     |                        |       | $ | 41,114 |   |   |
| Accumulated  benefit obligation |       | 39,363                    |       |                        | 41,039     |   |   |
| Fair value of  plan assets      |       | 33,843                    |       |                        | 32,912     |   |   |
|                                 |            |                           |            |                             |            |  |  |  |  |

 

58

----

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

**Components of net periodic benefit cost (income)**
| ** **                                     | ** ** | **PENSION BENEFITS** | ** ** | **OTHER BENEFITS** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **2003**                  | ** ** | **2002**                | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Service cost                                   |       | $                         | 20         |                    | $          | 42 |   | $ | 61 |   | $ | 245 |   | $ | 402 |   | $ | 1,122 |   |
| Interest cost                                  |       | 2,439                     |       | 2,759                   |       | 2,716 |   | 507 |   | 737 |   | 1,420 |   |
| Expected return  on plan assets                |       | (2,236                    | )          | (2,448                  | )          | (2,673 | ) | — |   | — |   | — |   |
| Amortization of  transition (asset) obligation |       | —                    |       | —                  |       | — |   | — |   | — |   | 252 |   |
| Amortization of  prior service cost            |       | (15                       | )          | (15                     | )          | (15 | ) | (550 | ) | (550 | ) | 54 |   |
| Recognized  actuarial (gain) loss              |       | 128                       |       | 43                      |       | — |   | 289 |   | 528 |   | 522 |   |
| Net periodic benefit  cost (income)            |       | 336                       |       | 381                     |       | 89 |   | 491 |   | 1,117 |   | 3,370 |   |
| Curtailment (gain) loss                        |       | —                    |       | —                  |       | — |   | (4,005 | ) | — |   | — |   |
| Net periodic  benefit cost after curtailments  |       | 336                       |       | 381                     |       | 89 |   | (3,514 | ) | 1,117 |   | 3,370 |   |
|                                                |            |                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Weighted-averageassumptions used to determine benefit obligations at January 3, 2004:
| ** **                        | ** ** | **PENSION  BENEFITS** | ** ** | **OTHER  BENEFITS** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2003**              | ** ** | **2002**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Weighted-average  assumptions** |       |                  |       |                |       |   |   |   |   |
| Discount rate                     |       | 6.25                  | %          | 6.75                | %          | 6.25 | % | 6.75 | % |
| Rate of compensation  increase    |       | 4.00                  | %          | 4.00                | %          | — |   | — |   |

 

Weighted-averageassumptions used to determine net periodic benefit cost for years ended January 3,2004 and December 28, 2002:
| ** **                        | ** ** | **PENSION  BENEFITS** | ** ** | **OTHER  BENEFITS** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2003**              | ** ** | **2002**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Weighted-average  assumptions** |       |                  |       |                |       |   |   |   |   |
| Discount rate                     |       | 6.75                  | %          | 7.50                | %          | 6.75 | % | 7.50 | % |
| Expected return  on plan assets   |       | 8.00                  | %          | 8.00                | %          | — |   | — |   |
| Rate of compensation  increase    |       | 4.00                  | %          | 5.00                | %          | — |   | — |   |

 

Assumedhealth care cost trend rates at January 3, 2004 and December 28, 2002are as follows:
| ** **                   | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
|------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Current year  trend rate     |       |                      | 10.00      | %                           |       |   | $ | 9.25 | % |   |
| Ultimate year  trend rate    |       |                      | 5.00       | %                           |       |   | 5.50 | **%** |   |
| Year of ultimate  trend rate |       |                      | 2009       |                        |       |   | 2008 | ** ** |   |

 

Assumedhealth care cost trend rates have a significant effect on the 2003 amountsreported for the health care plans. A one-percentage point change in assumedhealth care cost trend rates would have the following effects (in thousands):
| ** **                                               | ** ** | **1%  Increase** | ** ** | **1%  Decrease** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|------------------|------------|
| Effect on total  of service and interest cost components |       |             | $          | 5                |       |   |   | (4 | ) |   |
| Effect on  post-retirement benefit obligation            |       |             | 37         |             |       |   | (34 | ) |   |

 

59

----

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)became law in the Unites 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 tothe Medicare benefit. In accord with FASB Staff Position FAS 106-1, *“Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003”,* theCompany has elected to defer recognition of the effects of the Act in any measuresof the benefit obligation or cost. Finalization of pending guidance couldresult in a reduction in the accumulated post retirement benefit obligation andfuture net periodic post retirement benefit cost.

**Pension Plan Assets**

Thepension plan’s weighted-average asset allocation at January 3, 2004 and December 28,2002, by asset category are as follows:
| ** **                        | ** ** | **Plan Assets**      | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| **Weighted-average  assumptions** |       |                      |       |   |   |   |   |   |   |
| Equity securities                 |       |                      | 25         | % |   |   | 21 | % |   |
| Debt securities                   |       |                      | 10         | % |   |   | 10 | % |   |
| Guaranteed investment  contract   |       |                      | 65         | % |   |   | 69 | % |   |

 

**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.

**Expected Long-TermRate 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 $925,000 to $1,460,000, to be paid during themeasurement year ending December 31, 2004.

*Multi-EmployerPlans*

Approximately4.5% of the Company’s employees are covered by collectively-bargained pensionplans. Contributions are determined in accordance with the provisions ofnegotiated union contracts and are generally based on the number of hoursworked. The Company does not have the information available to reasonablyestimate its share of the accumulated plan benefits or net assets available forbenefits under the multi-employer plans. Amounts contributed to those planswere $1.9 million,$2.3 millionand $2.3 million in fiscal 2003, 2002 and 2001, respectively.

60

----

**(20) SegmentInformation**

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 institutional customers. The retail segment consists ofcorporate-owned stores that sell directly to the consumer. The militarydistribution segment consists of one large distribution center that sellsproducts exclusively to military commissaries.

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 corporateexpenses, interest, restructuring charges and earnings from equity investments.The accounting policies of the reportable segments are the same as thosedescribed in the summary of accounting policies except the Company accounts forinventory on a FIFO basis at the segment level compared to a LIFO basis at theconsolidated level.

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 tocorporate-owned stores are allocated to the retail segment. Those that arespecifically identifiable to independent customers are recorded in the fooddistribution segment. The remaining revenues and costs that are notspecifically identifiable to either the independent or corporate-owned storesare allocated to the retail segment as a percentage of corporate-owned storedistribution sales to total distribution center sales. For fiscal 2003,35% of such warehouse operational profits were allocated to the retailoperations compared to 37% and 34% in 2002 and 2001, respectively. Prior year’ssegment information has been restated to reflect reclassifications of certaintransactions from revenues to expense or cost of sales, and an allocation of amilitary management fee to the military segment.

***Schedules***
| **Year end January 3, 2004**                        | ** ** | ** **         | ** ** | **Food  Distribution** | ** ** | **Retail** | ** ** | **Military** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------------------|------------|------------|------------|--------------|------------|-----------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Revenue from  external customers                    |       | $                  | 1,915,170  |                   | $          | 966,333    |       | $            | 1,089,999  |      | $          | 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              |       | 13,569                 |       | 1,534      |       | 24,085       |       |
| Segment profit                                      |       | 63,898             |       | 30,178                 |       | 31,283     |       | 125,359      |       |
| Segment assets                                      |       | 360,962            |       | 168,323                |       | 126,434    |       | 655,719      |       |
| Expenditures for  long-lived assets                 |       | 5,918              |       | 25,414                 |       | 1,264      |       | 32,596       |       |
|                                                     |            |                    |            |                        |            |            |            |              |            |           |            |  |  |  |  |

 

61

----

 
| **Year end  December 28, 2002**                     | ** ** | ** **         | ** ** | **Food  Distribution** | ** ** | **Retail** | ** ** | **Military** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------------------|------------|------------|------------|--------------|------------|-----------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Revenue from  external customers                    |       | $                  | 1,825,788  |                   | $          | 1,028,174  |       | $            | 1,020,710  |      | $          | 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             |       | 12,851                 |       | 1,420      |       | 24,778       |       |
| Segment profit                                      |       | 61,493             |       | 33,738                 |       | 30,336     |       | 125,567      |       |
| Segment assets                                      |       | 379,166            |       | 160,673                |       | 132,170    |       | 672,009      |       |
| Expenditures for  long-lived assets                 |       | 8,126              |       | 22,894                 |       | 1,604      |       | 32,624       |       |
|                                                     |            |                    |            |                        |            |            |            |              |            |           |            |  |  |  |  |

 
| **Year end  December 29, 2001**                     | ** ** | ** **         | ** ** | **Food  Distribution** | ** ** | **Retail** | ** ** | **Military** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------------------|------------|------------|------------|--------------|------------|-----------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Revenue from  external customers                    |       | $                  | 1,951,384  |                   | $          | 1,035,154  |       | $            | 995,668    |      | $          | 3,982,206 |   |
| Inter-segment  revenue                              |       | 575,301            |       | —                 |       | —     |       | 575,301      |       |
| Interest revenue                                    |       | (741               | )          | (339                   | )          | —     |       | (1,080       | )          |
| Interest expense  (includes capital lease interest) |       | (724               | )          | 2,847                  |       | —     |       | 2,123        |       |
| Depreciation and  amortization expense              |       | 12,427             |       | 12,771                 |       | 1,373      |       | 26,571       |       |
| Segment profit                                      |       | 60,717             |       | 38,751                 |       | 31,366     |       | 130,834      |       |
| Segment assets                                      |       | 386,088            |       | 169,051                |       | 133,223    |       | 688,362      |       |
| Expenditures for  long-lived assets                 |       | 20,484             |       | 8,909                  |       | 1,721      |       | 31,114       |       |
|                                                     |            |                    |            |                        |            |            |            |              |            |           |            |  |  |  |  |

 

***Reconciliation (Inthousands)***
| ** **                                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001**  | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| ***Revenues***                                  |       |     |       |     |       |      |       |
| Total external  revenue for segments            |       | $        | 3,971,502  |     | $          | 3,874,672 |       | $ | 3,982,206 |   |
| Inter-segment  revenue from reportable segments |       | 506,488  |       | 553,287  |       | 575,301   |       |
| Elimination of  intra-segment revenue           |       | (506,488 | )          | (553,287 | )          | (575,301  | )          |
| Total consolidated revenues                     |       | $        | 3,971,502  |     | $          | 3,874,672 |       | $ | 3,982,206 |   |
| ***Profit  or Loss***                           |       |     |       |     |       |      |       |
| Total profit for  segments                      |       | $        | 125,359    |     | $          | 125,567   |       | $ | 130,834 |   |
| Unallocated amounts:                            |       |     |       |     |       |      |       |
| Adjustment of LIFO to inventory                 |       | 1,120    |       | 2,234    |       | (2,661    | )          |
| Unallocated corporate overhead                  |       | (74,546  | )          | (78,434  | )          | (91,881   | )          |
| Special charges                                 |       | —   |       | 765      |       | —    |       |
| Income before  income taxes                     |       | $        | 51,933     |     | $          | 50,132    |       | $ | 36,292 |   |
| ***Assets***                                    |       |     |       |     |       |      |       |
| Total assets for  segments                      |       | $        | 655,719    |     | $          | 672,009   |       | $ | 688,362 |   |
| Unallocated  corporate assets                   |       | 278,189  |       | 328,643  |       | 338,907   |       |
| Accumulated LIFO  reserves                      |       | (44,399  | )          | (45,519  | )          | (47,753   | )          |
| Elimination of  intercompany receivables        |       | (3,157   | )          | (7,141   | )          | (9,271    | )          |
| **Total  consolidated assets**                  |       | $        | 886,352    |     | $          | 947,992   |       | $ | 970,245 |   |

 

62

----

***Other SignificantItems—2003***
| ** **                             | ** ** | **Segment  Totals** | ** ** | **Adjustments** | ** ** | **Consolidated  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  Totals** | ** ** | **Adjustments** | ** ** | **Consolidated  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 |   |   |
|                                        |            |                     |            |                 |            |                          |            |  |  |  |  |  |  |  |

 

***Other SignificantItems—2001***
| ** **                             | ** ** | **Segment  Totals** | ** ** | **Adjustments** | ** ** | **Consolidated  Totals** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|--------------------------|------------|
| Depreciation and  amortization expense |       | $                   | 26,571     |            |       | $                        | 20,030     |   |   |   | $ | 46,601 |   |   |
| Interest expense                       |       | 2,123               |       |            | 32,180     |                     |       |   | 34,303 |   |   |
| Expenditures for  long-lived assets    |       | 31,114              |       |            | 12,810     |                     |       |   | 43,924 |   |   |
|                                        |            |                     |            |                 |            |                          |            |  |  |  |  |  |  |  |

 

The reconciling items to adjust expenditures fordepreciation, interest revenue, interest expense and expenditures forlong-lived assets are for unallocated general corporate activities. Allrevenues are attributed to and all assets are held in the United States. TheCompany’s market areas are in the Midwest, Mid-Atlantic and Southeast UnitedStates.

 

63

----

**(21) SubsidiaryGuarantees**

The following table presents summarized combinedfinancial information for certain wholly owned subsidiaries which guarantee ona full unconditional and joint and several basis, $165.0 million of seniorsubordinated notes due May 1, 2008, which were offered and sold by theCompany on April 24, 1998:

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

**NASHFINCH COMPANY AND SUBSIDIARIESConsolidating Statements of IncomeFiscal Year Ended January 3, 2004(in thousands)**
| ** **                                               | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | **Nash Finch**         | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Consolidation** | ** ** | **Company**                 | ** ** |
| ** **                                               | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **& Subsidiaries** | ** ** |
| Sales                                                    |       | $          | 3,148,360  |             | $          | 1,017,930         |       |                        | $          | (194,788 | ) |   |   | $ | 3,971,502 |   |   |
| Cost and expenses:                                       |       |       |       |             |       |              |       |                        |       |   |   |   |   |
| Cost of sales                                            |       | 2,819,801  |       | 891,447          |       |              | (194,788   | )                           |       |   | 3,516,460 |   |   |
| Selling, general and administrative                      |       | 213,899    |       | 112,929          |       |              | —     |                        |       |   | 326,828 |   |   |
| Operating earnings                                       |       | 114,660    |       | 13,554           |       |              | —     |                        |       |   | 128,214 |   |   |
| Depreciation and amortization                            |       | 32,398     |       | 10,014           |       |              | —     |                        |       |   | 42,412 |   |   |
| Equity in consolidated subsidiaries                      |       | (174       | )          | —           |       |              | 174        |                        |       |   | — |   |   |
| Interest expense                                         |       | 32,322     |       | 1,547            |       |              | —     |                        |       |   | 33,869 |   |   |
| Total cost and expenses                                  |       | 3,098,246  |       | 1,015,937        |       |              | (194,614   | )                           |       |   | 3,919,569 |   |   |
| Earnings from continuing operations before income  taxes |       | 50,114     |       | 1,993            |       |              | (174       | )                           |       |   | 51,933 |   |   |
| Income tax  expense                                      |       | 15,435     |       | 1,819            |       |              | —     |                        |       |   | 17,254 |   |   |
| Earnings from continuing operations                      |       | 34,679     |       | 174              |       |              | (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     |             | $          | 174               |       |                        | $          | (174 | ) |   |   | $ | 35,092 |   |   |
|                                                     |       |       |       |             |       |              |       |                        |       |   |   |   |   |

 

64

----

**FiscalYear Ended December 28, 2002(in thousands)**
| ** **                                                                                | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | **Nash Finch**         | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Consolidation** | ** ** | **Company**                 | ** ** |
| ** **                                                                                | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **& Subsidiaries** | ** ** |
| Sales                                                                                     |       | $          | 3,027,101  |             | $          | 1,057,740         |       |                        | $          | (210,169 | ) |   |   | $ | 3,874,672 |   |   |
| Cost and expenses:                                                                        |       |       |       |             |       |              |       |                        |       |   |   |   |   |
| Cost of sales                                                                             |       | 2,696,673  |       | 921,905          |       |              | (210,169   | )                           |       |   | 3,408,409 |   |   |
| Selling, general and administrative                                                       |       | 228,359    |       | 119,059          |       |              | —     |                        |       |   | 347,418 |   |   |
| Operating earnings                                                                        |       | 102,069    |       | 16,776           |       |              | —     |                        |       |   | 118,845 |   |   |
| Special charges                                                                           |       | (765       | )          | —           |       |              | —     |                        |       |   | (765 | ) |   |
| Depreciation and amortization                                                             |       | 29,015     |       | 10,973           |       |              | —     |                        |       |   | 39,988 |   |   |
| Equity in consolidated subsidiaries                                                       |       | (1,780     | )          | —           |       |              | 1,780      |                        |       |   | — |   |   |
| Interest expense                                                                          |       | 27,990     |       | 1,500            |       |              | —     |                        |       |   | 29,490 |   |   |
| Total cost and expenses                                                                   |       | 2,979,492  |       | 1,053,437        |       |              | (208,389   | )                           |       |   | 3,824,540 |   |   |
| Earnings from continuing operations before income  taxes                                  |       | 47,609     |       | 4,303            |       |              | (1,780     | )                           |       |   | 50,132 |   |   |
| Income tax  expense                                                                       |       | 17,029     |       | 2,523            |       |              | —     |                        |       |   | 19,552 |   |   |
| Earnings before cumulative effect of change in  accounting principle                      |       | 30,580     |       | 1,780            |       |              | (1,780     | )                           |       |   | 30,580 |   |   |
| Cumulative effect of change in accounting principle,  net of income tax benefit of $4,450 |       | (6,960     | )          | —           |       |              | —     |                        |       |   | (6,960 | ) |   |
| Net earnings                                                                              |       | $          | 23,620     |             | $          | 1,780             |       |                        | $          | (1,780 | ) |   |   | $ | 23,620 |   |   |
|                                                                                      |       |       |       |             |       |              |       |                        |       |   |   |   |   |

 

**FiscalYear Ended December 29, 2001(in thousands)**
| ** **                                               | ** ** | ** ** | ** ** | ** **       | ** ** | ** **        | ** ** | **Nash Finch**         | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------|------------|-------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **Nash**   | ** ** | **Guarantor**    | ** ** | **Consolidation** | ** ** | **Company**                 | ** ** |
| ** **                                               | ** ** | **Finch**  | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **& Subsidiaries** | ** ** |
| Sales                                                    |       | $          | 3,066,756  |             | $          | 1,099,868         |       |                        | $          | (184,418 | ) |   |   | $ | 3,982,206 |   |   |
| Cost and expenses:                                       |       |       |       |             |       |              |       |                        |       |   |   |   |   |
| Cost of sales                                            |       | 2,748,832  |       | 964,710          |       |              | (184,418   | )                           |       |   | 3,529,124 |   |   |
| Selling, general and administrative                      |       | 226,955    |       | 108,931          |       |              | —     |                        |       |   | 335,886 |   |   |
| Operating earnings                                       |       | 90,969     |       | 26,227           |       |              | —     |                        |       |   | 117,196 |   |   |
| Depreciation and amortization                            |       | 33,333     |       | 13,268           |       |              | —     |                        |       |   | 46,601 |   |   |
| Equity in consolidated subsidiaries                      |       | (5,277     | )          | —           |       |              | 5,277      |                        |       |   | — |   |   |
| Interest expense                                         |       | 33,473     |       | 830              |       |              | —     |                        |       |   | 34,303 |   |   |
| Total cost and expenses                                  |       | 3,037,316  |       | 1,087,739        |       |              | (179,141   | )                           |       |   | 3,945,914 |   |   |
| Earnings from continuing operations before income  taxes |       | 29,440     |       | 12,129           |       |              | (5,277     | )                           |       |   | 36,292 |   |   |
| Income tax  expense                                      |       | 8,173      |       | 6,852            |       |              | —     |                        |       |   | 15,025 |   |   |
| Net earnings                                             |       | $          | 21,267     |             | $          | 5,277             |       |                        | $          | (5,277 | ) |   |   | $ | 21,267 |   |   |
|                                                     |       |       |       |             |       |              |       |                        |       |   |   |   |   |

 

65

----

**NASH FINCH COMPANYAND SUBSIDIARIESCondensed Consolidating Balance SheetsJanuary 3, 2004(in thousands)**
| ** **                                                              | ** ** | **Nash  Finch** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Nash Finch  Company  & Subsidiaries** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| *Assets*                                                                |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Current assets:                                                         |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Cash                                                                    |       | $               | 12,182     |                        |       | $                              | 575        |                                                  |       |   | $ | — |   |   |   | $ | 12,757 |   |   |
| Accounts and notes receivable, net                                      |       | 113,497         |       |                        | 34,916     |                           |       |                                                  | (2,511     | ) |   |   | 145,902 |   |   |
| Accounts receivable/payable subs                                        |       | 71,312          |       |                        | (71,312    | )                              |       |                                                  | —     |   |   |   | — |   |   |
| Inventories                                                             |       | 150,718         |       |                        | 85,571     |                           |       |                                                  | —     |   |   |   | 236,289 |   |   |
| Prepaid expenses                                                        |       | 13,564          |       |                        | 1,572      |                           |       |                                                  | —     |   |   |   | 15,136 |   |   |
| Deferred tax assets                                                     |       | 11,523          |       |                        | (5,797     | )                              |       |                                                  | —     |   |   |   | 5,726 |   |   |
| Total current assets                                                    |       | 372,796         |       |                        | 45,525     |                           |       |                                                  | (2,511     | ) |   |   | 415,810 |   |   |
| Investments in affiliates                                               |       | 197,891         |       |                        | —     |                           |       |                                                  | (197,871   | ) |   |   | 20 |   |   |
| Notes receivable,  net                                                  |       | 20,832          |       |                        | 10,346     |                           |       |                                                  | —     |   |   |   | 31,178 |   |   |
| Net property, plant and equipment                                       |       | 170,085         |       |                        | 92,266     |                           |       |                                                  | —     |   |   |   | 262,351 |   |   |
| Goodwill                                                                |       | 32,021          |       |                        | 117,771    |                           |       |                                                  | —     |   |   |   | 149,792 |   |   |
| Other assets                                                            |       | 16,073          |       |                        | 11,128     |                           |       |                                                  | —     |   |   |   | 27,201 |   |   |
| Total assets                                                            |       | $               | 809,698    |                        |       | $                              | 277,036    |                                                  |       |   | $ | (200,382 | ) |   |   | $ | 886,352 |   |   |
| *Liabilities  and Stockholders’ Equity*                            |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Current liabilities:                                                    |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Outstanding checks                                                      |       | $               | 23,350     |                        |       | $                              | —     |                                                  |       |   | — |   |   |   | $ | 23,350 |   |   |
| Current maturities of long-term debt and capitalized  lease obligations |       | 1,739           |       |                        | 3,539      |                           |       |                                                  | —     |   |   |   | 5,278 |   |   |
| Accounts payable                                                        |       | 137,599         |       |                        | 31,654     |                           |       |                                                  | $          | (2,511 | ) |   |   | 166,742 |   |   |
| Accrued expenses                                                        |       | 73,488          |       |                        | 5,280      |                           |       |                                                  | —     |   |   |   | 78,768 |   |   |
| Income taxes                                                            |       | 10,626          |       |                        | (12        | )                              |       |                                                  | —     |   |   |   | 10,614 |   |   |
| Total current liabilities                                               |       | 246,802         |       |                        | 40,461     |                           |       |                                                  | (2,511     | ) |   |   | 284,752 |   |   |
| Long-term debt                                                          |       | 271,653         |       |                        | 10,291     |                           |       |                                                  | —     |   |   |   | 281,944 |   |   |
| Capitalized lease  obligations                                          |       | 28,157          |       |                        | 16,482     |                           |       |                                                  | —     |   |   |   | 44,639 |   |   |
| Deferred tax  liability, net                                            |       | (3,333          | )          |                        | 9,691      |                           |       |                                                  | —     |   |   |   | 6,358 |   |   |
| Other liabilities                                                       |       | 9,962           |       |                        | 2,240      |                           |       |                                                  | —     |   |   |   | 12,202 |   |   |
| Stockholders’  equity                                              |       | 256,457         |       |                        | 197,871    |                           |       |                                                  | (197,871   | ) |   |   | 256,457 |   |   |
| Total liabilities  and stockholders’ equity                        |       | $               | 809,698    |                        |       | $                              | 277,036    |                                                  |       |   | $ | (200,382 | ) |   |   | $ | 886,352 |   |   |

 

66

----

**December 28,2002(in thousands)**
| ** **                                                              | ** ** | **Nash  Finch** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Nash Finch  Company  & Subsidiaries** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| *Assets*                                                                |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Current assets:                                                         |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Cash                                                                    |       | $               | 30,856     |                        |       | $                              | 563        |                                                  |       |   | — |   |   |   | $ | 31,419 |   |   |
| Accounts and notes receivable, net                                      |       | 117,482         |       |                        | 53,828     |                           |       |                                                  | $          | (5,783 | ) |   |   | 165,527 |   |   |
| Account receivable/payable subs                                         |       | 87,227          |       |                        | (87,227    | )                              |       |                                                  | —     |   |   |   | — |   |   |
| Inventories                                                             |       | 153,405         |       |                        | 92,072     |                           |       |                                                  | —     |   |   |   | 245,477 |   |   |
| Prepaid expenses                                                        |       | 11,318          |       |                        | 1,017      |                           |       |                                                  |       |   |   |   | 12,335 |   |   |
| Deferred tax assets                                                     |       | 18,181          |       |                        | (4,658     | )                              |       |                                                  | —     |   |   |   | 13,523 |   |   |
| Total current assets                                                    |       | 418,469         |       |                        | 55,595     |                           |       |                                                  | (5,783     | ) |   |   | 468,281 |   |   |
| Investments in affiliates                                               |       | 198,253         |       |                        | —     |                           |       |                                                  | (197,697   | ) |   |   | 556 |   |   |
| Notes receivable,  net                                                  |       | 24,378          |       |                        | 8,218      |                           |       |                                                  | —     |   |   |   | 32,596 |   |   |
| Net property, plant and equipment                                       |       | 180,842         |       |                        | 87,678     |                           |       |                                                  | —     |   |   |   | 268,520 |   |   |
| Deferred tax asset, net                                                 |       | 9,243           |       |                        | (8,776     | )                              |       |                                                  | —     |   |   |   | 467 |   |   |
| Goodwill                                                                |       | 29,996          |       |                        | 118,032    |                           |       |                                                  | —     |   |   |   | 148,028 |   |   |
| Other assets                                                            |       | 17,554          |       |                        | 11,920     |                           |       |                                                  | —     |   |   |   | 29,474 |   |   |
| Total assets                                                            |       | $               | 878,735    |                        |       | $                              | 272,667    |                                                  |       |   | $ | (203,480 | ) |   |   | $ | 947,922 |   |   |
| *Liabilities  and Stockholders’ Equity*                            |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Current liabilities:                                                    |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Outstanding checks                                                      |       | $               | 27,076     |                        |       | $                              | —     |                                                  |       |   | — |   |   |   | $ | 27,076 |   |   |
| Current maturities of long-term debt and capitalized  lease obligations |       | 4,083           |       |                        | 3,414      |                           |       |                                                  | —     |   |   |   | 7,497 |   |   |
| Accounts payable                                                        |       | 144,121         |       |                        | 32,204     |                           |       |                                                  | $          | (5,783 | ) |   |   | 170,542 |   |   |
| Accrued expenses                                                        |       | 87,579          |       |                        | 6,489      |                           |       |                                                  | —     |   |   |   | 94,068 |   |   |
| Income taxes                                                            |       | 10,358          |       |                        | (285       | )                              |       |                                                  | —     |   |   |   | 10,073 |   |   |
| Total current liabilities                                               |       | 273,217         |       |                        | 41,822     |                           |       |                                                  | (5,783     | ) |   |   | 309,256 |   |   |
| Long-term debt                                                          |       | 345,280         |       |                        | 12,312     |                           |       |                                                  | —     |   |   |   | 357,592 |   |   |
| Capitalized lease  obligations                                          |       | 29,667          |       |                        | 18,117     |                           |       |                                                  | —     |   |   |   | 47,784 |   |   |
| Other liabilities                                                       |       | 9,092           |       |                        | 2,719      |                           |       |                                                  | —     |   |   |   | 11,811 |   |   |
| Stockholders’  equity                                              |       | 221,479         |       |                        | 197,697    |                           |       |                                                  | (197,697   | ) |   |   | 221,479 |   |   |
| Total liabilities  and stockholders’ equity                        |       | $               | 878,735    |                        |       | $                              | 272,667    |                                                  |       |   | $ | (203,480 | ) |   |   | $ | 947,922 |   |   |

 

67

----

**NASH FINCH COMPANYAND SUBSIDIARIESConsolidating Statements of Cash FlowsFiscal Year Ended January 3, 2004(in thousands)**
| ** **                                 | ** ** | **Nash  Finch** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidation  Adjustments** | ** ** | **Nash Finch  Company &  Subsidiaries** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| Operating activities:                      |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Net cash provided by operating activities  |       | $               | 93,749     |                        |       | $                              | 20,702     |                                                  |       |   | $ | — |   |   |   | $ | 114,451 |   |   |
| Investing  activities:                     |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Disposal of property, plant and equipment  |       | 8,110           |       |                        | 892        |                           |       |                                                  | —     |   |   |   | 9,002 |   |   |
| Additions to property, plant and equipment |       | (25,532         | )          |                        | (15,196    | )                              |       |                                                  | —     |   |   |   | (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 |   |   |
| Other                                      |       | 750             |       |                        | —     |                           |       |                                                  | —     |   |   |   | 750 |   |   |
| Net cash used in investing activities      |       | (21,324         | )          |                        | (15,274    | )                              |       |                                                  | —     |   |   |   | (36,598 | ) |   |
| Financing  activities:                     |       |            |       |                        |       |                           |       |                                                  |       |   |   |   |   |   |   |
| Payments of revolving debt                 |       | (79,400         | )          |                        | —     |                           |       |                                                  | —     |   |   |   | (79,400 | ) |   |
| Dividends paid                             |       | (4,320          | )          |                        | —     |                           |       |                                                  | —     |   |   |   | (4,320 | ) |   |
| Payments of long-term debt                 |       | (3,247          | )          |                        | (3,948     | )                              |       |                                                  | —     |   |   |   | (7,195 | ) |   |
| Payments of capitalized lease obligations  |       | (1,432          | )          |                        | (1,468     | )                              |       |                                                  | —     |   |   |   | (2,900 | ) |   |
| Decrease in outstanding checks             |       | (3,726          | )          |                        | —     |                           |       |                                                  | —     |   |   |   | (3,726 | ) |   |
| Other                                      |       | 1,026           |       |                        | —     |                           |       |                                                  | —     |   |   |   | 1,026 |   |   |
| Net cash used by financing activities      |       | (91,099         | )          |                        | (5,416     | )                              |       |                                                  | —     |   |   |   | (96,515 | ) |   |
| Net (decrease) increase in cash            |       | (18,674         | )          |                        | 12         |                           |       |                                                  | —     |   |   |   | (18,662 | ) |   |
| Cash at beginning of year                  |       | 30,856          |       |                        | 563        |                           |       |                                                  | —     |   |   |   | 31,419 |   |   |
| Cash at end of  year                       |       | $               | 12,182     |                        |       | $                              | 575        |                                                  |       |   | $ | — |   |   |   | $ | 12,757 |   |   |

 

68

----

**FiscalYear Ended December 28, 2002**

**(inthousands)**
| ** **                                        | ** ** | **Nash   Finch** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidation   Adjustments** | ** ** | **Nash Finch   Company &  Subsidiaries** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|--------------------------------------|------------|-------------------------------------------------------------|------------|
| Operating activities:                             |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Net cash provided by operating activities         |       | $                     | 44,313     |                        |       | $                                    | 12,727     |                                                        |       |   | $ | — |   |   |   | $ | 57,040 |   |   |
| Investing  activities:                            |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Disposal of property, plant and equipment         |       | 12,616                |       |                        | 1,819      |                                 |       |                                                        | —     |   |   |   | 14,435 |   |   |
| Additions to property, plant and equipment        |       | (39,458               | )          |                        | (13,147    | )                                    |       |                                                        | —     |   |   |   | (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               | )          |                        | (9,047     | )                                    |       |                                                        | —     |   |   |   | (34,562 | ) |   |
| Financing  activities:                            |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Proceeds of revolving debt                        |       | 39,400                |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 39,400 |   |   |
| Dividends paid                                    |       | (4,292                | )          |                        | —     |                                 |       |                                                        | —     |   |   |   | (4,292 | ) |   |
| Payments of long-term debt                        |       | (1,752                | )          |                        | (1,739     | )                                    |       |                                                        | —     |   |   |   | (3,491 | ) |   |
| Payments of capitalized lease obligations         |       | (831                  | )          |                        | (2,014     | )                                    |       |                                                        | —     |   |   |   | (2,845 | ) |   |
| Decrease in outstanding checks                    |       | (30,674               | )          |                        | —     |                                 |       |                                                        | —     |   |   |   | (30,674 | ) |   |
| Other                                             |       | 376                   |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 376 |   |   |
| Net cash provided (used) by financing  activities |       | 2,227                 |       |                        | (3,753     | )                                    |       |                                                        | —     |   |   |   | (1,526 | ) |   |
| Net increase (decrease) in cash                   |       | 21,025                |       |                        | (73        | )                                    |       |                                                        | —     |   |   |   | 20,952 |   |   |
| Cash at beginning of year                         |       | 9,831                 |       |                        | 636        |                                 |       |                                                        | —     |   |   |   | 10,467 |   |   |
| Cash at end of  year                              |       | $                     | 30,856     |                        |       | $                                    | 563        |                                                        |       |   | $ | — |   |   |   | $ | 31,419 |   |   |

 

69

----

**FiscalYear Ended December 29, 2001**

**(inthousands)**
| ** **                                        | ** ** | **Nash   Finch** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidation   Adjustments** | ** ** | **Nash Finch   Company &  Subsidiaries** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|--------------------------------------|------------|-------------------------------------------------------------|------------|
| Operating activities:                             |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Net cash provided by operating activities         |       | $                     | 29,350     |                        |       | $                                    | 60,826     |                                                        |       |   | $ | — |   |   |   | $ | 90,176 |   |   |
| Investing  activities:                            |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Disposal of property, plant and equipment         |       | 8,363                 |       |                        | 526        |                                 |       |                                                        | —     |   |   |   | 8,889 |   |   |
| Additions to property, plant and equipment        |       | (32,076               | )          |                        | (11,848    | )                                    |       |                                                        | —     |   |   |   | (43,924 | ) |   |
| Business acquired, net of cash                    |       | (1,069                | )          |                        | (46,611    | )                                    |       |                                                        | —     |   |   |   | (47,680 | ) |   |
| Loans to customers                                |       | (25,702               | )          |                        | (2,111     | )                                    |       |                                                        | —     |   |   |   | (27,813 | ) |   |
| Payments from customers on loans                  |       | 16,000                |       |                        | 1,936      |                                 |       |                                                        | —     |   |   |   | 17,936 |   |   |
| Other                                             |       | 435                   |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 435 |   |   |
| Net cash used in investing activities             |       | (34,049               | )          |                        | (58,108    | )                                    |       |                                                        | —     |   |   |   | (92,157 | ) |   |
| Financing  activities:                            |       |                  |       |                        |       |                                 |       |                                                        |       |   |   |   |   |   |   |
| Proceeds of revolving debt                        |       | 12,700                |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 12,700 |   |   |
| Dividends paid                                    |       | (4,204                | )          |                        | —     |                                 |       |                                                        | —     |   |   |   | (4,204 | ) |   |
| Payments of long-term debt                        |       | (2,100                | )          |                        | (1,278     | )                                    |       |                                                        | —     |   |   |   | (3,378 | ) |   |
| Payments of capitalized lease obligations         |       | (407                  | )          |                        | (1,213     | )                                    |       |                                                        | —     |   |   |   | (1,620 | ) |   |
| Increase in outstanding checks                    |       | 5,708                 |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 5,708 |   |   |
| Other                                             |       | 1,708                 |       |                        | —     |                                 |       |                                                        | —     |   |   |   | 1,708 |   |   |
| Net cash provided (used) by financing  activities |       | 13,405                |       |                        | (2,491     | )                                    |       |                                                        | —     |   |   |   | 10,914 |   |   |
| Net increase in cash                              |       | 8,706                 |       |                        | 227        |                                 |       |                                                        | —     |   |   |   | 8,933 |   |   |
| Cash at beginning of year                         |       | 1,125                 |       |                        | 409        |                                 |       |                                                        | —     |   |   |   | 1,534 |   |   |
| Cash at end of  year                              |       | $                     | 9,831      |                        |       | $                                    | 636        |                                                        |       |   | $ | — |   |   |   | $ | 10,467 |   |   |

 

70

----

**NASH FINCH COMPANYAND SUBSIDIARIESQuarterly Financial Information (Unaudited)(In thousands, except per share amounts)**
| ** **                                                                         | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **A summary of quarterly financial**                           | ** ** | ** **             | ** ** | **12 Weeks**       | ** ** | **12 Weeks**      | ** ** | **16 Weeks**       | ** ** | **13 Weeks** | ** ** | **12 Weeks** | ** ** |
| **information is presented.**                                            | ** ** | ** **             | ** ** | **2003**                | ** ** | **2002**               | ** ** | **2003**                | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Sales                                                                              |       | $                      | 856,664    |                    | $          | 894,575                |       | $                       | 888,612    |   | $ | 908,266 |   | $ | 1,214,781 |   | $ | 1,191,072 |   | $ | 1,011,445 |   | $ | 880,759 |   |
| Cost of sales                                                                      |       | 756,640                |       | 788,639                 |       | 785,031                |       | 796,797                 |       | 1,077,363 |   | 1,052,278 |   | 897,426 |   | 770,695 |   |
| Earnings from continuing operations before income  taxes                           |       | 5,346                  |       | 11,291                  |       | 11,910                 |       | 15,795                  |       | 14,105 |   | 10,508 |   | 20,572 |   | 12,538 |   |
| Income taxes                                                                       |       | 2,085                  |       | 4,505                   |       | 4,645                  |       | 6,302                   |       | 2,501 |   | 3,854 |   | 8,023 |   | 4,891 |   |
| Net earnings from continuing operations                                            |       | 3,261                  |       | 6,786                   |       | 7,265                  |       | 9,493                   |       | 11,604 |   | 6,654 |   | 12,549 |   | 7,647 |   |
| Discontinued operations, net of income tax expense                                 |       | —                 |       | —                  |       | —                 |       | —                  |       | — |   | — |   | 413 |   | — |   |
| Cumulative effect of change in accounting principle,  net of income tax benefit(1) |       | —                 |       | (6,960                  | )          | —                 |       | —                  |       | — |   | — |   | — |   | — |   |
| Net earnings(1)                                                                    |       | 3,261                  |       | (174                    | )          | 7,265                  |       | 9,493                   |       | 11,604 |   | 6,654 |   | 12,962 |   | 7,647 |   |
| Percent to sales and revenues(1)                                                   |       | 0.38                   |       | (0.02                   | )          | 0.82                   |       | 1.05                    |       | 0.96 |   | 0.56 |   | 1.28 |   | 0.87 |   |
| Basic earnings per share                                                           |       |                   |       |                    |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| Continuing operations                                                              |       | $                      | 0.27       |                    | $          | 0.58                   |       | $                       | 0.61       |   | $ | 0.80 |   | $ | 0.96 |   | $ | 0.56 |   | $ | 1.03 |   | $ | 0.65 |   |
| Discontinued operations                                                            |       | $                      | —     |                    | $          | —                 |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.03 |   | $ | — |   |
| Cumulative effect of change in accounting  principle                               |       | $                      | —     |                    | $          | (0.59                  | )          | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net earnings                                                                       |       | $                      | 0.27       |                    | $          | (0.01                  | )          | $                       | 0.61       |   | $ | 0.80 |   | $ | 0.96 |   | $ | 0.56 |   | $ | 1.06 |   | $ | 0.65 |   |
| Diluted earnings per share                                                         |       |                   |       |                    |       |                   |       |                    |       |   |   |   |   |   |   |   |   |
| Continuing operations                                                              |       | $                      | 0.27       |                    | $          | 0.56                   |       | $                       | 0.61       |   | $ | 0.78 |   | $ | 0.95 |   | $ | 0.55 |   | $ | 1.02 |   | $ | 0.64 |   |
| Discontinued operations                                                            |       | $                      | —     |                    | $          | —                 |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.03 |   | $ | — |   |
| Cumulative effect of change in accounting  principle                               |       | $                      | —     |                    | $          | (0.57                  | )          | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Net earnings                                                                       |       | $                      | 0.27       |                    | $          | (0.01                  | )          | $                       | 0.61       |   | $ | 0.78 |   | $ | 0.95 |   | $ | 0.55 |   | $ | 1.05 |   | $ | 0.64 |   |
|                                                                                    |            |                        |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             In the fourth quarter of fiscal 2002, the Companyelected to early adopt the provisions of EITF 02-16, “Accounting by a Resellerfor Cash Consideration Received from a Vendor,” effective as of the beginningof fiscal 2002, and restated its results of operations for fiscal 2002 (seeNote (1) Summary of Significant Accounting Policies under the caption “NewAccounting Standards”). Net earnings for the Fiscal 2002 first quarter includes($6,960) or ($0.59) per basic share and ($0.57) per diluted share, net ofincome taxes, for the cumulative effect of the adoption of EITF 02-16.Quarterly financial data for Fiscal 2002 as previously reported, prior torestatement for the adoption of EITF 02-16 is as follows:
| ** **                                                                            | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                            | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                                                            | ** ** | **2002**    | ** ** | **2002**    | ** ** | **2002**    | ** ** |
| Sales                                                                                 |       | $           | 894,575    |        | $          | 908,266     |       | $ | 1,191,072 |   |
| Cost of sales                                                                         |       | 792,389     |       | 801,288     |       | 1,053,610   |       |
| Earnings before income taxes and cumulative effect of  change in accounting principle |       | 9,749       |       | 13,415      |       | 11,891      |       |
| Income taxes                                                                          |       | 3,890       |       | 5,352       |       | 4,429       |       |
| Net earnings before cumulative effect of change in  accounting principle              |       | 5,859       |       | 8,063       |       | 7,462       |       |
| Cumulative effect of change in accounting principle,  net of income tax benefit       |       | —      |       | —      |       | —      |       |
| Net earnings                                                                          |       | 5,859       |       | 8,063       |       | 7,462       |       |
| Basic earnings per share                                                              |       | $           | 0.50       |        | $          | 0.68        |       | $ | 0.63 |   |
| Diluted earnings  per share                                                           |       | $           | 0.48       |        | $          | 0.66        |       | $ | 0.61 |   |

 

71

----

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

Information regardingchanges in our principal independent accountants during fiscal 2002 and 2003was previously 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 2004 Annual Meeting of Stockholders (the “2004 Proxy Statement”) underthe caption “Independent Auditors—Changes in Independent Auditors During theTwo Most Recent Fiscal Years.”

**ITEM9A. CONTROLS 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 effectiveas of 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. There was no changein the Company’s internal control over financial reporting that occurred duringthe Company’s most recently completed fiscal quarter that materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

**PART III**

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

The information called forby Item 10 that appears in the 2004 Proxy Statement under the captions “Electionof Directors - Information About Directors and Nominees”, “Election ofDirectors—Information About the Board of Directors and Its Committees”, “CorporateGovernance—Governance Guidelines” and “Section 16(a) BeneficialOwnership Reporting Compliance” is incorporated herein by reference. Certaininformation regarding executive officers of the Registrant is included in Part Iimmediately following Item 4 above.

**ITEM 11. EXECUTIVE COMPENSATION**

The information called forby Item 11 that appears in the 2004 Proxy Statement under the captions “Electionof Directors—Compensation of Directors” and “Executive Compensation and OtherBenefits” is incorporated herein by reference.

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

The information called forby Item 12 that appears in the 2004 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

Notapplicable, as there are no reportable relationships or transactions.

72

----

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information called for byItem 14 that appears in the 2004 Proxy Statement under the captions “IndependentAuditors—Fees Paid to Independent Auditors” and “Independent Auditors—Pre-Approvalof Audit and Non-Audit Services” is incorporated herein by reference.

73

----

**PART IV**

**ITEM 15. EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**
| **1.** | **FINANCIAL STATEMENTS.**                                                                                                                                              |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The  following financial statements are included in this report on the  pages indicated:                                                                          |
|   | Report of Management—page 32                                                                                                                                      |
|   | Independent Auditors’  Report—page  33                                                                                                                       |
|   | Consolidated  Statements of Income for the fiscal years ended January 3, 2004,  December 28, 2002 and December 29, 2001—page 34                    |
|   | Consolidated  Balance Sheets as of January 3, 2004 and December 28, 2002—page 35                                                                        |
|   | Consolidated Statements of  Cash Flows for the fiscal years ended January 3, 2004, December 28,  2002 and December 29, 2001—page  36               |
|   | Consolidated  Statements of Stockholders’ Equity for the fiscal years ended January 3,  2004, December 28, 2002 and December 29, 2001—page 37 |
|   | Notes to Consolidated Financial  Statements—pages  38 to 71                                                                                                       |
| **2.** | **FINANCIAL  STATEMENT SCHEDULES.**                                                                                                                                    |

 

The following financial statement schedule is included herein and shouldbe read in conjunction with the consolidated financial statements referred toabove:
|   | Valuation and  Qualifying Accounts—page  78 |
|--------|--------------------------------------------------|

 

Other Schedules. Other schedules are omitted because therequired information is either inapplicable or presented in the consolidatedfinancial statements or related notes.
| **3.** | **EXHIBITS** |
|--------|--------------|

** **
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                             | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1               |       | Restated  Certificate of Incorporation of the Company (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               |       | 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               |       | Amendment  to Restated Certificate of Incorporation of the Company, effective  May 13, 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, as amended effective 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)).                            |

74

----

 
| 4.1  |   | Stockholder Rights Agreement,  dated February 13, 1996, between the Company and 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)).                                                                                                                                                                                |
| 4.3  |   | Indenture  dated as of April 24, 1998 between the Company, the Guarantors, and U.S.  Bank Trust National Association pertaining to $165,000,000 of 8.5% Senior  Subordinated Notes Due 2008 (incorporated by reference to Exhibit 4.2 to  the Company’s Registration Statement on Form S-4 filed  May 22, 1998 (File No. 333-53363)).                                                                                    |
| 4.4  |   | Form of  Company’s 8.5% Senior Subordinated Notes due 2008 Series A (incorporated  by reference to Exhibit 4.2 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 20, 1998 (File  No. 0-785)).                                                                                                                                                                                         |
| 4.5  |   | Form of  Company’s 8.5% Senior Subordinated Notes due 2008 Series B (incorporated  by reference to Exhibit 4.3 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 20, 1998 (File  No. 0-785)).                                                                                                                                                                                         |
| 4.6  |   | First  Supplemental Indenture of Trust dated as of June 10, 1999 between the  Company, the Subsidiary Guarantors, Erickson’s Diversified Corporation and  U.S. Bank Trust National Association (incorporated by reference to  Exhibit 4.5 to the Company’s Annual Report on Form 10-K for  the fiscal year ended January 1, 2000 (File No. 0-785)).                                                                 |
| 4.7  |   | Second  Supplemental Indenture of Trust Dated as of January 31, 2000 between the  Company, the Subsidiary Guarantors, Hinky Dinky Supermarkets, Inc., and  U.S. Bank Trust National Association (incorporated by reference to  Exhibit 4.6 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 29, 2001 (File No. 0-785)).                                                              |
| 4.8  |   | Third  Supplemental Indenture of Trust dated as August 13, 2001 between the  Company, the Subsidiary Guarantors, U Save Foods, Inc., and U.S. Bank  Trust National Association (incorporated by reference to Exhibit 4.7 to  the Company’s Annual Report on Form 10-K for the fiscal year ended  December 29, 2001(File No. 0-785)).                                                                                |
| 4.9  |   | Fourth  Supplemental Indenture of Trust, dated as of February 25, 2003, between  the Company, the Subsidiary Guarantors and U.S. Bank National Association  (incorporated by reference to Exhibit 4.1 to the Company’s Current  Report on Form 8-K filed March 5, 2003 (File No. 0-785)).                                                                                                                                |
| 10.1 |   | Bank  Credit Agreement dated as of December 19, 2000 among the Company,  Bankers Trust Company, as administrative agent, and various lenders  (incorporated by reference to Exhibit 10.7 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 30,  2000 (File No. 0-785)).                                                                                                                    |
| 10.2 |   | First  Amendment, dated as of March 21, 2003, to the Bank Credit Agreement  dated as of December 19, 2000 (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated March 27, 2003. (File No. 0-785)).                                                                                                                                                                         |
| 10.3 |   | Second  Amendment, dated as of September 16, 2003, to the Bank Credit Agreement  dated as of December 19, 2000 among the Company, Deutsche Bank Trust  Company Americas (formerly known as Bankers Trust Company) as administrative  agent and various lenders (incorporated by reference to Exhibit 10.1 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  October 4, 2003 (File No. 0-785)). |

75

----

 
| *10.4  |   | 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)).                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.5  |   | Nash  Finch Income Deferral Plan (incorporated by reference to Exhibit 10.17  to the Company’s Annual Report on Form 10-K for the fiscal year  ended January 1, 1994 (File No. 0-785)).                                                                              |
| *10.6  |   | Nash  Finch 1994 Stock Incentive Plan, as amended (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 14, 1997 (File No. 0-785)).                                                                 |
| *10.7  |   | Nash  Finch 2000 Stock Incentive Plan, as amended (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)).                                                                 |
| *10.8  |   | Nash  Finch 1995 Director Stock Option Plan, as amended (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 N. 0-785)).                                                                 |
| *10.9  |   | Nash  Finch 1997 Non-Employee Director Stock Compensation Plan (2003 Revision)  (filed herewith).                                                                                                                                                                                             |
| *10.10 |   | Nash  Finch 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)).                                                            |
| *10.11 |   | Non-Statutory  Stock Option Agreement dated as of June 1, 1998 between Nash Finch 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)).    |
| *10.12 |   | 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)). |
| *10.13 |   | Nash  Finch 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)).                                                                            |
| 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).                                                                                                                                                                                |

----

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

76

----

A copy of any of these exhibits will be furnished at areasonable cost to any stockholder of the Company, upon receipt from any suchperson of a written request for any such exhibit. Such request should be sentto Nash Finch Company, 7600 France Avenue South, P.O. Box 355, Minneapolis, Minnesota,55440-0355, and Attention: Secretary.
| **B.** | **REPORTS  ON FORM 8**-**K:** |
|--------|-------------------------------|

 

The following report on Form 8-Kwas furnished to the SEC during the fourth quarter of fiscal 2003:

On October 31, 2003, theCompany furnished a Form 8-K reporting in accordance with “Item 12—Resultsof Operations and Financial Condition” its results for the third quarter of fiscal year 2003.

77

----

**NASH FINCH COMPANYand SUBSIDIARIESValuation and Qualifying AccountsFiscal Years ended January 3, 2004, December 28, 2002 and December 29,2001(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 31, 2001:                      |       |       |       |                                         |       |                                          |       |                                             |       |           |       |                                   |       |   |   |   |   |
| Allowance for doubtful receivables(c)                        |       | $          | 31,012     |                                         |       | $                                             | 4,812      |                                             |       |           | $          | 1,083                                  | (a)        |   |   | $ | 5,418 | (b) |   | $ | 31,489 |   |
| Provision for losses relating to leases on closed  locations |       | 6,075      |       |                                         | 1,105      |                                          |       |                                             |       |           |       |                                   | 2,180      | (d) |   | 5,000 |   |
|                                                         |       | $          | 37,087     |                                         |       | $                                             | 5,917      |                                             |       |           | $          | 1,083                                  |       |   |   | $ | 7,598 |   |   | $ | 36,489 |   |
| 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 |   |

----

(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 10,  2004 |   | 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 10, 2004 by thefollowing persons on behalf of the Registrant and in the capacities indicated.
| /s/ Ron Marshall                         |   | /s/ Leanne M. Stewart             |
|-----------------------------------------------|--------|----------------------------------------|
| Ron Marshall, *Chief Executive Officer*       |   | LeAnne M. Stewart, *Vice President*    |
| *(Principal Executive Officer)  and Director* |   | *and Corporate Controller  (Principal* |
|                                          |   | *Accounting Officer)*                  |
| /s/ Robert B. Dimond                     |   |                                   |
| Robert B. Dimond, *Executive Vice President,* |   |                                   |
| *Chief Financial Officer and*                 |   |                                   |
| *Treasurer (Principal Financial  Officer)*    |   |                                   |

 
| /s/ Carole F. Bitter*     |   | /s/ Laura Stein*            |
|--------------------------------|--------|----------------------------------|
| Carole F. Bitter, *Director*   |   | Laura Stein, *Director*          |
| /s/ Jerry L. Ford*        |   | /s/ John E. Stokely*        |
| Jerry L. Ford, *Director*      |   | John E. Stokely, *Director*      |
| /s/ Allister P. Graham*   |   | /s/ William R. Voss*        |
| Allister P. Graham, *Chairman* |   | William R. Voss, *Director*      |
| /s/ John H. Grunewald*    |   | /s/ William H. Weintraub*   |
| John H. Grunewald, *Director*  |   | William H. Weintraub, *Director* |

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

 

79

----

**NASH FINCH COMPANYEXHIBIT INDEX TO ANNUAL REPORTON FORM 10-KFor Fiscal Year Ended January 3, 2004**
| **Exhibit   No.** | ** ** | ** **                                                                                                                                                                                                | ** ** | **Description**                  | ** ** | **Method of Filing** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------|
| 3.1               |       | Restated  Certificate of Incorporation of the Company                                                                                                                                                     |       | Incorporated  by reference (IBR) |
| 3.2               |       | Amendment  to Restated Certificate of Incorporation of the Company, effective May 15,  1987                                                                                                          |       | IBR                              |
| 3.3               |       | Amendment  to Restated Certificate of Incorporation of the Company, effective March 16,  2002                                                                                                        |       | IBR                              |
| 3.4               |       | Bylaws  of the Company, as amended effective April 15, 2002                                                                                                                                          |       | IBR                              |
| 4.1               |       | Stockholder  Rights Agreement, dated February 13, 1996, between the Company and  Norwest Bank Minnesota, National Association                                                                        |       | IBR                              |
| 4.2               |       | Amendment  to Stockholder Rights Agreement dated as of October 30, 2001                                                                                                                              |       | IBR                              |
| 4.3               |       | Indenture  dated as of April 24, 1998 between the Company, the Guarantors, and U.S.  Bank Trust National Association                                                                                 |       | IBR                              |
| 4.4               |       | Form of  Company’s 8.5% Senior Subordinated Notes due 2008 Series A                                                                                                                        |       | IBR                              |
| 4.5               |       | Form of  Company’s 8.5% Senior Subordinated Notes due 2008 Series B                                                                                                                        |       | IBR                              |
| 4.6               |       | First  Supplemental Indenture of Trust dated as of June 10, 1999 between the  Company, the Subsidiary Guarantors, Erickson’s Diversified Corporation and  U.S. Bank Trust National Association  |       | IBR                              |
| 4.7               |       | Second  Supplemental Indenture of Trust Dated as of January 31, 2000 between the  Company, the Subsidiary Guarantors, Hinky Dinky Supermarkets, Inc., and  U.S. Bank Trust National Association |       | IBR                              |
| 4.8               |       | Third  Supplemental Indenture of Trust Dated as August 13, 2001 between the  Company, the Subsidiary Guarantors, U Save Foods, Inc., and U.S. Bank  Trust National Association                  |       | IBR                              |
| 4.9               |       | Fourth  Supplemental Indenture of Trust Dated as February 25, 2003, between the  Company, the Subsidiary Guarantors and U.S. Bank Trust National Association                                         |       | IBR                              |

80

----

 
| 10.1  |   | Bank  Credit Agreement, dated as of December 19, 2000 among the Company,  Bankers Trust Company, as administrative agent, and various lenders                                                                                                                         |   | IBR                 |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|
| 10.2  |   | First  Amendment, dated as of March 21, 2003, to the Bank Credit Agreement  dated as of December 19, 2000                                                                                                                                                        |   | IBR                 |
| 10.3  |   | Second  Amendment, dated as of September 16, 2003, to the Bank Credit Agreement  dated as of December 19, 2000 among the Company, Deutsche Bank Trust  Company Americas (formerly known as Bankers Trust Company) as administrative  agent, and various lenders. |   | IBR                 |
| 10.4  |   | Form of  Change in Control Agreement                                                                                                                                                                                                                                  |   | IBR                 |
| 10.5  |   | Nash  Finch Income Deferral Plan                                                                                                                                                                                                                                           |   | IBR                 |
| 10.6  |   | Nash  Finch 1994 Stock Incentive Plan, as amended                                                                                                                                                                                                                          |   | IBR                 |
| 10.7  |   | Nash  Finch 2000 Stock Incentive Plan, as amended                                                                                                                                                                                                                          |   | IBR                 |
| 10.8  |   | Nash  Finch 1995 Director Stock Option Plan, as amended                                                                                                                                                                                                                    |   | IBR                 |
| 10.9  |   | Nash  Finch 1997 Non-Employee Director Stock Compensation Plan (2003 Revision)                                                                                                                                                                                             |   | Electronically  (E) |
| 10.10 |   | Nash  Finch Supplemental Executive Retirement Plan                                                                                                                                                                                                                         |   | IBR                 |
| 10.11 |   | Non-Statutory  Stock Option Agreement dated as of June 1, 1998 between Nash Finch and Ron  Marshall                                                                                                                                                                   |   | IBR                 |
| 10.12 |   | Restricted  Stock Award Agreement between the Company and Ron Marshall, effective as of  February 19, 2002                                                                                                                                                            |   | IBR                 |
| 10.13 |   | Nash  Finch Performance Incentive Plan                                                                                                                                                                                                                                     |   | IBR                 |
| 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                   |
| 1.1   |   | 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

----