10-Q 1 a10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) /X/ OF THE SECURITIES EXCHANGE ACT OF 1934 For the twenty four weeks ended June 17, 2000 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) / / OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-785 NASH-FINCH COMPANY (Exact Name of Registrant as Specified in its Charter) DELAWARE 41-0431960 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7600 France Ave. South, Edina, Minnesota 55435 (Address of principal executive offices) (Zip Code) (952) 832-0534 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of July 17, 2000, 11,483,918 shares of Common Stock of the Registrant were outstanding. PART I - FINANCIAL INFORMATION This report is for the twenty-four week interim period beginning January 2, 2000, through June 17, 2000. The accompanying financial information has been prepared in conformity with generally accepted accounting principles and practices, and methods of applying accounting principles and practices, (including consolidation practices) as reflected in the financial information included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the preceding fiscal year. The financial statements included in this quarterly report include all adjustments which are, in the opinion of management, necessary to fairly present the Company's financial position and results of operations for the interim period. The information contained herein has not been audited by independent auditors and is subject to any adjustments which may develop in connection with the annual audit of its accounts by the Company's independent auditors. 2 NASH FINCH COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Operations (unaudited) (In thousands, except per share amounts)
Twelve Weeks Ended Twenty-four Weeks Ended -------------------------- --------------------------- June 17, June 19, June 17, June 19, 2000 1999 2000 1999 ----------- ------------ ------------ ------------- Total sales and revenues $ 917,662 935,950 1,810,335 1,870,747 Cost and expenses: Cost of sales 810,554 841,695 1,600,526 1,686,771 Selling, general and administrative 81,593 74,001 162,652 144,943 Depreciation and amortization 10,296 9,429 20,455 19,155 Interest expense 7,651 6,882 15,224 13,865 ----------- ------------ ------------ ------------- Total costs and expenses 910,094 932,007 1,798,857 1,864,734 Earnings before income taxes 7,568 3,943 11,478 6,013 Income taxes 3,209 1,671 4,867 2,549 ----------- ------------ ------------ ------------- Net earnings $ 4,359 2,272 6,611 3,464 =========== ============ ============ ============= Basic earnings per share: $ 0.38 0.20 0.58 0.31 Diluted earnings per share: $ 0.38 0.20 0.58 0.31 Weighted average number of common shares outstanding and common equivalent shares outstanding: Basic 11,408 11,333 11,407 11,332 Diluted 11,413 11,342 11,412 11,342
------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 3 NASH FINCH COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except per share amounts)
June 17, January 1, ASSETS 2000 2000 -------------- ------------ (unaudited) Current assets: Cash $ 1,419 16,389 Accounts and notes receivable, net 127,419 154,066 Inventories 252,485 264,232 Prepaid expenses 13,478 11,137 Deferred tax assets 18,675 19,739 -------------- ------------ Total current assets 413,476 465,563 Investments in affiliates 738 508 Notes receivable, net 31,262 20,712 Property, plant and equipment: Land 25,278 23,898 Buildings and improvements 136,032 136,119 Furniture, fixtures and equipment 300,923 288,156 Leasehold improvements 73,724 70,071 Construction in progress 18,211 11,073 Assets under capitalized leases 26,186 25,233 -------------- ------------ 580,354 554,550 Less accumulated depreciation and amortization (332,886) (318,924) -------------- ------------ Net property, plant and equipment 247,468 235,626 Goodwill, net 114,364 101,751 Other intangible assets, net 19,313 13,652 Investment in direct financing leases 15,058 15,444 Deferred tax asset, net 9,262 9,187 -------------- ------------ Total assets $ 850,941 862,443 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Outstanding checks $ 38,744 54,974 Current maturities of long-term debt and capitalized lease obligations 3,641 3,117 Accounts payable 185,286 191,749 Accrued expenses 68,321 72,681 Income taxes 7,981 4,806 -------------- ------------ Total current liabilities 303,973 327,327 Long-term debt 319,628 314,091 Capitalized lease obligations 33,803 33,718 Deferred compensation 4,453 4,545 Other 9,391 10,088 Minority interest in subsidiary 2,424 - Stockholders' equity: Preferred stock - no par value Authorized 500 shares; none issued - - Common stock of $1.66 2/3 par value Authorized 25,000 shares, issued 11,641 shares in 2000 and 1999 19,402 19,402 Additional paid-in capital 18,248 18,247 Restricted stock (46) (57) Retained earnings 141,461 136,905 -------------- ------------ 179,065 174,497 Less cost of 228 and 231 shares of common stock in treasury, respectively (1,796) (1,823) -------------- ------------ Total stockholders' equity 177,269 172,674 -------------- ------------ Total liabilities and stockholders' equity $ 850,941 862,443 ============== ============
--------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 4 NASH FINCH COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Twenty-four Weeks Ended ---------------------------- June 17, June 19, 2000 1999 ------------ ------------ Operating activities: Net earnings $ 6,611 3,464 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,455 19,155 Provision for bad debts 4,167 1,487 Provision for losses (recovery from) closed lease locations 216 (506) Deferred income tax expense 988 4,166 Deferred compensation (92) (696) Earnings of equity investments (135) (485) Other 205 (839) Changes in operating assets and liabilities: Accounts and notes receivable 33,836 5,427 Inventories 16,980 44,273 Prepaid expenses (2,162) (4,305) Accounts payable (9,375) 4,475 Accrued expenses (7,760) (1,926) Accrued expenses - special charges (2,342) (3,338) Income taxes 3,175 (1,209) -------- -------- Net cash provided by operating activities 64,767 69,143 -------- -------- Investing activities: Disposal of property, plant and equipment 2,126 4,349 Additions to property, plant and equipment (23,999) (20,558) Business acquired, net of cash (20,431) (57,261) Loans to customers (20,121) (20,541) Payments from customers on loans 6,534 13,007 (Repurchase) sale of receivables (10,920) 327 Other (792) (579) -------- -------- Net cash used for investing activities (67,603) (81,256) -------- -------- Financing activities: Proceeds from long-term debt - 449 Proceeds from revolving debt 6,000 30,000 Dividends paid (2,055) (2,042) Proceeds of short-term debt 400 175 Payments of long-term debt (456) (2,947) Payments of capitalized lease obligations (756) (765) Decrease in outstanding checks (16,230) (9,948) Other 963 697 -------- -------- Net cash (used by) provided for financing activities (12,134) 15,619 -------- -------- Net (decrease) increase in cash $(14,970) 3,506 ======== ========
--------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 5 NASH FINCH COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity ------------------------------------------------------------------------------ Fiscal period ended June 17, 2000 January 1, 2000 and January 2, 1999 (In thousands, except per share amounts)
Common stock Additional --------------------- paid-in Retained Shares Amount capital earnings ---------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1998 11,575 $ 19,292 17,648 190,984 Net earnings (loss) - - - (61,637) Dividend declared of $.72 per share - - - (8,162) Treasury stock issued upon exercise of options - - 47 - Amortized compensation under restricted stock plan - - - - Repayment of notes receivable from holders of restricted stock - - - - Distribution of stock pursuant to performance awards - - 246 - Treasury stock purchased - - - - Other 3 -------- -------- -------- -------- Balance at January 2, 1999 11,575 19,292 17,944 121,185 Net earnings (loss) - - - 19,803 Dividend declared of $.36 per share - - - (4,083) Common stock issued for employee stock purchase plan 66 110 294 - Amortized compensation under restricted stock plan - - - - Repayment of notes receivable from holders of restricted stock - - - - Distribution of stock pursuant to performance awards - - 9 - -------- -------- -------- -------- Balance at January 1, 2000 11,641 19,402 18,247 136,905 Net earnings (loss) - - - 6,611 Dividend declared of $.18 per share - - - (2,055) Common stock issued for employee stock purchase plan - - - - Amortized compensation under restricted stock plan - - - - Repayment of notes receivable from holders of restricted stock - - - - Distribution of stock pursuant to performance awards - - 1 - -------- -------- -------- -------- Balance at June 17, 2000 11,641 $ 19,402 18,248 141,461 ======== ======== ======== ======== Treasury stock Total Restricted -------------------- stockholders' stock Shares Amount equity --------------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1998 (391) (252) $ (1,915) 225,618 Net earnings (loss) - - - (61,637) Dividend declared of $.72 per share - - - (8,162) Treasury stock issued upon exercise of options - 4 21 68 Amortized compensation under restricted stock plan 72 - - 72 Repayment of notes receivable from holders of restricted stock 206 - - 206 Distribution of stock pursuant to performance awards - 15 75 321 Treasury stock purchased - (1) (16) (16) Other - - 3 -------- -------- -------- -------- Balance at January 2, 1999 (113) (234) (1,835) 156,473 Net earnings (loss) - - - 19,803 Dividend declared of $.36 per share - - - (4,083) Common stock issued for employee stock purchase plan - - - 404 Amortized compensation under restricted stock plan 13 - - 13 Repayment of notes receivable from holders of restricted stock 43 - - 43 Distribution of stock pursuant to performance awards - 3 12 21 -------- -------- -------- -------- Balance at January 1, 2000 (57) (231) (1,823) 172,674 Net earnings (loss) - - - 6,611 Dividend declared of $.18 per share - - - (2,055) Common stock issued for employee stock purchase plan - - - - Amortized compensation under restricted stock plan 2 - - 2 Repayment of notes receivable from holders of restricted stock 9 - - 9 Distribution of stock pursuant to performance awards - 3 27 28 -------- -------- -------- -------- Balance at June 17, 2000 (unaudited) (46) (228) $ (1,796) 177,269 ======== ======== ======== ========
--------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 6 NASH FINCH COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 17, 2000 NOTE 1 The accompanying financial statements include all adjustments which are, in the opinion of management, necessary to fairly present the financial position of the Company and its subsidiaries at June 17, 2000, and January 1, 2000, and the results of operations for the 12 and 24-weeks ended June 17, 2000 and June 19, 1999, and the changes in cash flows for the 24-weeks ended June 17, 2000 and June 19, 1999, respectively. All material intercompany accounts and transactions have been eliminated in the consolidated financial statements. Revenues for the food distribution and military segments are recognized when product is shipped and retail revenues are recognized at the point of sale. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, which is required to be adopted for fiscal years beginning after June 15, 2000. Because of its limited use of derivatives, the Company does not expect adoption of the new Statement to have a significant effect on earnings or financial position. NOTE 2 The Company uses the LIFO method for valuation of a substantial portion of inventories. If the FIFO method had been used, inventories would have been approximately $45.4 million and $46.2 million higher at June 17, 2000 and January 1, 2000, respectively. NOTE 3 The following table sets forth the computation of basic and diluted earnings per share.
Twelve Weeks Ended Twenty-four Weeks Ended ----------------------------- ------------------------------- June 17, June 19, June 17, June 19, 2000 1999 2000 1999 ------------ ------------- ------------- ------------ Numerator: Net income $ 4,359 2,272 6,611 3,464 ------------ ------------- ------------- ------------ Denominator: Denominator of basic earnings per share (weighted-average shares) 11,408 11,333 11,407 11,332 Effect of dilutive contingent shares 5 9 5 10 ------------ ------------- ------------- ------------ Denominator for diluted earnings per share (adjusted weighted average shares) 11,413 11,342 11,412 11,342 ============ ============= ============= ============ Basic earnings per share $ .38 .20 .58 .31 ============ ============= ============= ============ Diluted earnings per share $ .38 .20 .58 .31 ============ ============= ============= ============
7 NOTE 4 On January 30, 2000 the Company acquired Hinky Dinky Supermarkets, Inc. ("HDSI") through a cash purchase of all of HDSI's outstanding capital stock. HDSI is the majority owner of twelve supermarkets located in Nebraska with annual sales of approximately $90 million. The acquisition was accounted for as a purchase, for a cash amount subject to purchase price adjustments, and pending final determination of certain acquired asset and liability valuations. NOTE 5 On December 29, 1997, a Receivables Purchase Agreement (the "Agreement") was executed by the Company, Nash Finch Funding Corporation (NFFC), a wholly owned subsidiary of the Company, and a certain third party purchaser (the "Purchaser") pursuant to a securitization transaction. The Agreement is a five-year, $50 million revolving receivable purchase facility allowing the Company to sell additional receivables to NFFC, and NFFC to sell, from time to time, variable undivided interests in these receivables to the Purchaser. NFFC maintains a variable undivided interest in these receivables and is subject to losses on its share of the receivables and, accordingly, maintains an allowance for doubtful accounts. As of June 17, 2000 and January 1, 2000 the Company had sold $37.5 million and $50.5 million, respectively, of accounts receivable on a non-recourse basis to NFFC. NFFC sold $30.9 million and $41.8 million, respectively, of its undivided interest in such receivables to the Purchaser, subject to specified collateral requirements. NOTE 6 1998 SPECIAL CHARGES During the fourth quarter of 1998, the Company recorded special charges totaling $71.4 million (offset by $2.9 million of 1997 special charge adjustments) as a result of the Company's revitalization plan designed to redirect its technology efforts, optimize warehouse capacity through consolidation, and to close, sell or reassess underperforming businesses and investments. In connection with the implementation of the Company's 1998 revitalization plan, the 1998 special charges included $17.0 million to streamline the Company's food distribution operations. The charges provided for post-employment and pension benefit costs, write-down to fair value of tangible assets to be disposed of, and other costs to exit three warehouse facilities. The Company believed the strategy of closing underutilized warehouses and concentrating sales volume into existing warehouses would improve operational efficiency and lower distribution costs. In accordance with the 1998 revitalization plan, the Company completed the closure of its Appleton, Wisconsin distribution center during 1999. During the fourth quarter of 1999, after considering both internal and external factors, the Company decided to indefinitely defer the closure of the remaining two distribution centers scheduled for closing in the 1998 plan. The Company continues to incur costs for the Appleton facility which has not been sold or subleased. Certain of these costs are charged to accrued expenses. 8 The following table details the activity during the first half of 2000, associated with the 1998 special charges relative to the food distribution component of the charge (in thousands):
1998 Food Distribution Rollforward ---------------------------------- Post Employment Benefits Exit Costs Total ---------------- -------------- ---------------- Balance 1/1/00 $ 1,743 670 2,413 Used in 2000 (2) (233) (235) ---------------- -------------- ---------------- Balance 6/17/00 $ 1,741 437 2,178 ================ ============== ================
Under the 1998 special charge, twelve under-performing corporately operated retail stores and one store jointly developed with a food distribution customer were designated for closure and a $9.5 million charge was recorded. During the first half of 2000, three of four remaining stores were closed, while the Company continues to market one other location. In the fourth quarter of 1999, the Company recorded charges of $4.7 million, including $1.0 million to write down assets to fair value, related to four additional corporately operated stores which have been identified for closure. During the first half of 2000, the Company closed two stores, with the remaining two locations closing before the end of the third quarter. Accordingly, the Company recorded charges of $.7 million, in costs related to the closures, to accrued expenses. The following table details 1998 special charge activity during the first half of 2000, relative to the retail component of the charge (in thousands):
1998 Retail Rollforward ----------------------- Lease Commitment Exit Costs Total ---------------- -------------- ---------------- Balance 1/1/00 $ 5,807 1,323 7,130 Used in 2000 (492) (159) (651) ---------------- -------------- ---------------- Balance 6/17/00 $ 5,315 1,164 6,479 ================ ============== ================
The aggregate 1998 special charges included $44.7 million for the abandonment of assets primarily related to an information systems project which was terminated, asset impairments related to ten owned retail stores and the write-off of an equity investment in a joint venture with an independent retailer it continues to service. No additional charges are anticipated in the future periods related to these matters. The impact of suspending depreciation on assets to be disposed of is not material. At June 17, 2000, special charge costs have been included in accrued expenses on the balance sheet. 1997 SPECIAL CHARGES In 1997 the Company accelerated its plan to strengthen its competitive position. Coincident with the implementation of the plan, the Company recorded special charges totaling $31.3 million impacting the Company's food distribution and retail segments, as well as the produce growing and marketing segment discontinued during 1998. 9 The aggregate special charges included $14.5 million for the consolidation or downsizing of seven underutilized warehouses. The following table details 1997 special charge activity during the first half of 2000 relative to the food distribution component of the charge (in thousands):
1997 Food Distribution Rollforward ---------------------------------- Post Lease Employment Commitments Benefits Exit Costs Total ------------------ ------------------ --------------- --------------- Balance 1/1/00 $ 1,590 274 1,106 2,970 Used in 2000 (593) (270) (501) (1,364) ------------------ ------------------ --------------- --------------- Balance 6/17/00 $ 997 4 605 1,606 ================== ================== =============== ===============
The Company has completely executed its 1997 food distribution consolidation plan. During the first half of 2000, continuing costs totaling $1.4 million related to the closures, were charged to accrued expenses. The Company continues to incur costs for those distribution centers that have not been sold or subleased. Certain of these costs are charged to accrued expenses. In retail operations, the special charge of $5.2 million related to the closing of fourteen, principally leased, stores. The following table details special charge activity during the first quarter, relative to the retail component of the charge (in thousands):
1997 Retail Rollforward ----------------------- Lease Commitments Exit Costs Total ------------------ -------------- --------------- Balance 1/1/00 $ 800 267 1,067 Used in 2000 (77) (14) (91) ------------------ -------------- --------------- Balance 6/17/00 $ 723 253 976 ================== ============== ===============
Ten of the fourteen identified retail stores were closed during 1998 and 1999, one store was closed during the first half of 2000, and one of the remaining stores is scheduled to close in the third quarter. One of the remaining two stores identified for closure was subleased in 1999, to another party, while management decided in 1999 to keep another location open. The aggregate 1997 special charges included $9.2 million for impairment of seven retail stores, impairment of agriculture assets of Nash-De Camp Company (the Company's former produce growing and marketing subsidiary which was divested during 1999), and other charges related to abandonment of system software, loss on the sale of an equity investment in a foreign operation, and the write-down of idle real estate to fair value. The 1997 special charges also included $2.5 million of integration costs associated with a business acquisition. No additional charges are anticipated in future periods relative to these matters. The impact of suspending depreciation on assets to be disposed of is not material. At June 17, 2000, special charge costs have been included in accrued expenses on the balance sheet. 10 NOTE 7 A summary of the major segments of the business is as follows (in thousands):
Twelve Weeks Ended June 17, 2000 -------------------------------- Food All Distribution Retail Military Other Totals --------------------------------------------------------------------------------------------------------------------------------- Revenue from external customers $ 451,915 245,279 216,904 1,212 915,310 Intra segment revenue 135,724 -- -- 799 136,523 Segment profit and (loss) 13,919 6,368 5,035 (4) 25,318 Twelve Weeks Ended June 19, 1999 -------------------------------- Food All Distribution Retail Military Other Totals --------------------------------------------------------------------------------------------------------------------------------- Revenue from external customers $ 537,363 175,333 219,050 891 932,637 Intra segment revenue 105,668 -- -- 1,025 106,693 Segment profit and (loss) 12,523 3,580 4,835 (140) 20,798 Twenty-four Weeks Ended June 17, 2000 ------------------------------------- Food All Distribution Retail Military Other Totals --------------------------------------------------------------------------------------------------------------------------------- Revenue from external customers $ 896,525 470,292 432,824 2,686 1,802,327 Intra segment revenue 264,438 -- -- 1,810 266,248 Segment profit and (loss) 25,043 9,419 9,560 (8) 44,014 Twenty-four Weeks Ended June 19, 1999 ------------------------------------- Food All Distribution Retail Military Other Totals --------------------------------------------------------------------------------------------------------------------------------- Revenue from external customers $ 1,080,618 337,854 443,225 1,459 1,863,156 Intra segment revenue 205,441 -- -- 2,202 207,643 Segment profit and (loss) 22,693 4,720 9,889 (321) 36,981
11 Reconciliation to statements of operations: (In thousands)
Twelve Weeks Ended June 17, 2000 and June 19, 1999 -------------------------------------------------- 2000 1999 -------------- ---------------- PROFIT AND LOSS Total profit for segments $ 25,318 20,798 Unallocated amounts: Adjustment of inventory to LIFO 313 -- Unallocated corporate overhead (18,063) (16,855) -------------- ---------------- Income from continuing operations before income taxes $ 7,568 3,943 ============== ================ Twenty-four Weeks Ended June 17, 2000 and June 19, 1999 ------------------------------------------------------- 2000 1999 -------------- ---------------- PROFIT AND LOSS Total profit for segments $ 44,014 36,981 Unallocated amounts: Adjustment of inventory to LIFO 813 (300) Unallocated corporate overhead (33,349) (30,668) -------------- ---------------- Income from continuing operations before income taxes $ 11,478 6,013 ============== ================
Prior year segment information has been restated to reflect a change in method of allocation of marketing revenues. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES Total revenues for the twelve week second quarter were $917.7 million compared to $936.0 million, a decrease of 2.0%. The change reflects the declining year over year impact of closing five distribution centers in 1999 as part of the Company's strategic plan. For the twenty-four weeks, total revenues were $1.810 billion compared to $1.871 billion last year. Beside the effect of warehouse closings, revenues were affected by an industry wide downturn in retail grocery sales following Year 2000 stockpiling of food products by consumers. Food distribution revenues during the second quarter were $451.9 million compared to $537.4 million, a decrease of 15.9%. The change is largely attributed to the acquisitions of two former customers, the Erickson's stores in June, 1999 and Hinky Dinky Supermarkets, Inc., in January, 2000, which resulted in revenues being reported in the retail segment rather than the food distribution segment. During the quarter, however, the Company did experience lower revenues due to competitive pressures in both its Ohio and Southeast market areas. Recent management changes in both areas are expected to result in a more aggressive approach toward growing the Company's market share. Year over year comparisons are also affected by the closing of distribution centers since last year. For the twenty-four weeks, food distribution revenues were $896.5 compared to $1.081 billion last year, again, largely reflecting the shift in business from food distribution to the retail segment. Retail segment revenues for the second quarter were $245.3 million compared to $175.3 million last year. The increase of 39.9% reflects the Company's strategy to grow the retail segment in key regions. The improvement in revenues is attributed to the acquisitions of 18 Erickson's stores in Minnesota and Wisconsin, 12 Hinky Dinky stores in Nebraska and six stores in other market areas since last year. During the quarter, revenues were also increased by the construction and opening of a larger replacement store in Marshalltown, Iowa, and a newly constructed second store in Rochester, Minnesota, which opened in the first quarter of the year. The Company is also testing two alternative store formats which have already contributed to revenue increases but may offer greater growth opportunities going forward. Same store sales for the quarter increased .70% compared to last year. On a year to date basis same store sales declined .61% reflecting the industry wide decline in retail sales following Year 2000. Retail segment sales for the twenty-four weeks were $470.3 compared to $337.9, an increase of 39.2%. With the Company's continued emphasis on retail segment growth, segment revenues for the twenty-four weeks now represent 26.1 % of total Company revenues compared to 18.1 % last year. Military segment revenues decreased 1.0% for the quarter and 2.3% year to date compared to last year. The decreases reflect a general decline in revenues and is not specifically attributed to any loss of commissaries serviced or product lines carried. The Company expects improvement during the remainder of the year. 13 GROSS MARGIN Gross margin for the quarter and year to date was 11.7% and 11.6%, respectively, compared to 10.1% and 9.8%, respectively, last year. The increases largely reflect the growing proportion of higher margin retail revenues to total revenues. In addition, efficiencies in warehousing and transportation resulting from facility consolidations and operational improvements have lowered cost of sales. The Company monitors costs by closely analyzing key indicators of operating performance such as trailer capacity utilization, on-time delivery rate and non-procurement costs per case of product handled and shipped. This process has been successful in lowering logistical costs compared to last year. Margins were also favorably affected by a LIFO credit of $.3 million for the quarter and $.8 million for the year to date compared to no LIFO impact for the quarter and a charge of $.3 million year to date last year. Retail segment margins continue to increase as a greater proportion of revenues are derived from higher margin specialty departments within the stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling , general and administrative expenses for the first quarter, as a percent of total revenues, were 8.9% compared to 7.9% a year ago. On a year to date basis, expenses were 9.0% compared to 7.7% last year. The increase primarily results from the growing proportion of retail business which typically operates at higher operating expense levels than the food distribution segment. During the quarter the Company recorded an additional provision for bad debts of $1.4 million, increasing the total for the year to $4.2 million, compared to $1.5 million last year. This increase is based on the Company's ongoing assessment of customer credit relationships, and relates primarily to accounts in the highly competitive Michigan and Ohio market areas. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased 9.2% for the quarter and 6.8 % year to date over last year. The increases primarily result from the acquisitions of Erickson's, Hinky Dinky and six other retail stores. In addition, expansion of the Lumberton distribution center, completed construction of the store in Rochester, Minnesota and several other store improvement projects, since last year, have contributed to the increased depreciation expense. Amortization of goodwill and other intangibles was $2.0 and $4.0 million, for the current quarter and year to date, respectively, compared to $1.5 million and $3.0 million, last year. The additional expense results primarily from amortization of goodwill related to the Erickson's and Hinky Dinky acquisitions. INTEREST EXPENSE Interest expense increased $.8 million or 11.2% for the quarter and $1.4 million or 9.8% year to date compared to last year. The increased interest costs are directly attributed to higher average debt levels due to acquisitions which occurred since last year, partially offset by successful management of inventories and accounts receivable. In addition, average variable borrowing rates for the twenty-four weeks were 6.8% this year compared to 6.3% last year, further contributing to the higher interest costs. 14 EARNINGS BEFORE INCOME TAXES Earnings before income taxes for the quarter were $7.6 million compared to $3.9 million last year. The improvement over last year is largely attributed to the contribution of the retail segment which increased its profitability by 77.9%. The successful integration of the Hinky Dinky stores and the continued improvement in the Erickson's stores since acquisition, were significant factors contributing to the increase. Productivity gains from consolidations and operational improvements, primarily in the Midwest, contributed to an increase of 11.1% in food distribution segment earnings for the quarter. The military segment also recognized profit increases in the quarter compared to last year. This trend is expected to continue for the remainder of the year. INCOME TAXES The effective income tax rate for 2000 is estimated at 42.4%, unchanged from 1999. Income tax expense increased due to higher pretax earnings for the quarter and year to date compared to last year. SPECIAL CHARGES 1998 SPECIAL CHARGES During the fourth quarter of 1998, the Company announced a five-year revitalization plan to streamline wholesale operations and build retail operations resulting in the Company recording special charges totaling $71.4 million (offset by $2.9 million of 1997 charge adjustments). The new strategic plan's objectives are to: leverage Nash Finch's scale by centralizing operations; improve operational efficiency; and develop a strong retail competency. The Company also redirected technology efforts and set out to close, sell or reassess underperforming businesses and investments. In connection with the implementation of the Company's 1998 revitalization plan, the 1998 special charges included $17.0 million to streamline the Company's wholesale operations by closing three warehouses. The charges provided for post-employment and pension benefit costs, write-down to fair value of tangible assets to be disposed of, and other costs to exit the facilities. The Company believed the strategy of closing underutilized warehouses and concentrating sales volume into existing warehouses would improve operational efficiency and lower distribution costs. In accordance with the 1998 revitalization plan, the Company completed the closure of its Appleton, Wisconsin distribution center during 1999. During the fourth quarter of 1999, after considering both internal and external factors, the Company decided to indefinitely defer the closure of the remaining two distribution centers scheduled for closing in the 1998 plan. Under the 1998 revitalization plan 12 under-performing corporately operated retail stores and one store jointly developed with a food distribution customer were designated for closure and a $9.5 million charge was recorded. The stores were primarily located in geographic areas where the Company could not attain a strong market presence. The Company's focus is to develop corporate stores that can dominate their primary trade areas. At June 17, 2000, twelve stores have been closed and the Company continues to market one other location with the expectation of completing a sale during the third quarter. 15 In the fourth quarter of 1999, the Company also recorded an additional accrual of $4.7 million related to four corporately operated stores which have been announced for closure. Three stores are located in the highly competitive Iowa market and the fourth is in North Carolina. The accrual consists of $3.3 million of non-cancelable lease obligations and related costs required under lease agreements, $1.0 million to write-down to fair value assets held for disposal, and $.4 million of post-closing facility exit costs. During the first half of 2000, two stores were closed with two remaining locations to be closed by the end of the third quarter. The aggregate 1998 special charges included $34.4 million for the abandonment of assets primarily related to the Company's HORIZONS information system project. The abandoned assets related to purchased software and internal and external in-process software development. The remainder of the 1998 special charges consisted of a $10.3 million provision for asset impairment primarily related to ten owned retail stores. Increased competition resulting in declining market share, deterioration of operating performance and inadequate projected cash flows were the factors indicating impairment. The impaired assets, which include leasehold improvements and store equipment, were measured based on a comparison of the assets' net book value to the present value of the stores' estimated cash flows. The tables included in Note (6) of Notes to Condensed Consolidated Financial Statements contain a rollforward of 1998 special charges activity for the first half of 2000 relative to food distribution and retail operations through June 17, 2000. 1997 SPECIAL CHARGES In 1997, the Company accelerated its plan to strengthen its competitive position. Coincident with the implementation of the plan, the Company recorded special charges totaling $31.3 million impacting the Company's food distribution and retail segments, as well as the produce growing and marketing segment discontinued during 1998. The aggregate special charges included $14.5 million for the consolidation or downsizing of seven underutilized warehouses. The charges provided for non-cancelable lease obligations, write-down to fair value of tangible assets to be disposed of, and other costs to exit the facilities. Also included are post-employment benefit costs consistent with existing practice and the unamortized portion of goodwill for one of the locations. As a result of management changes during 1998, all actions to be taken under the 1997 plan were reevaluated by the Company's new management team. Substantially all actions contemplated by the 1997 plan were reaffirmed in 1998 and implemented. However, some actions included in the 1997 plan were modified. In 1999, the Company completed closure of the remaining distribution centers included in the original 1997 special charges, as modified in 1998. These included Grand Island, Nebraska; Liberal, Kansas; Denver, Colorado and Rocky Mount, North Carolina. The Company continues to incur costs for those distribution centers that have not been sold or subleased. Certain of these costs are charged to accrued expenses. In 1999 the Company completed closure of the remaining distribution centers included in the original 1997 special charges, as modified in 1998. 16 In retail operations, the special charge of $5.2 million related to the closing of fourteen, principally leased, stores. The charge covers provisions for continuing non-cancelable lease obligations, anticipated losses on disposals of tangible assets, including abandonment of leasehold improvements, and the write-off of intangible assets. The aggregate 1997 special charges contained a provision of $5.4 million for impaired assets of seven retail stores. Declining market share due to increasing competition, deterioration of operating performance and forecasted future results that were less than previously planned were the factors leading the impairment determination. The remaining 1997 special charge included $2.5 million of integration costs, associated with the acquisition of the business and certain assets from Untied A.G. Cooperative, Inc., an asset impairment charge of $1.0 million relating to agriculture assets of Nash-De Camp, the Company's produce growing and marketing subsidiary, and $2.8 million in other asset write-downs. The tables included in Note (6) of Notes to Condensed Consolidated Financial Statements contain a rollforward of 1997 special charges activity for the first half of 2000 relative to food distribution and retail operations through June 17, 2000. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its capital needs through a combination of internal and external sources. These sources include cash flow from operations, short-term bank borrowings, various types of long-term debt and lease financing. Cash flow provided from operations during the first half of 2000 totaled $64.8 million compared to $69.1 million last year. The decrease in operating cash flow is attributed to changes in the components of working capital, in particular, decreases in accounts payable and accrued expenses. Working capital declined $28.7 million to $109.5 million largely due to reductions in inventories and accounts receivable, the proceeds of which were used to pay down the revolving credit facility. The current ratio at the end of the first half of 2000 was 1.36 compared to 1.42 reported at the end of 1999. During the first half of 2000 the Company acquired Hinky Dinky Supermarkets, Inc. and two other retail stores in separate transactions for cash totaling $20.4 million. The acquisitions were financed from the revolving credit facility. Excluding acquisitions, capital expenditures for the first half were $24.0 million, primarily directed toward upgrading and remodeling the retail stores. Capital expenditures for the year are expected to be approximately $60.0 million, funded principally through the revolving credit facility. Other transactions affecting liquidity during the first half were cash dividends paid to shareholders of $2.1 million. The Company believes that borrowing under the revolving credit facility, proceeds from its sale of senior subordinated notes in 1998, other credit agreements, cash flows from operating activities and lease financing will be adequate to meet the Company's working capital needs, planned capital expenditures and debt service obligations for the foreseeable future. 17 FORWARD-LOOKING STATEMENTS The information contained in this Form 10-Q Report includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation by the use of words like "believes," "expects," "may," "will," "should," "anticipates," or similar expressions, as discussions of strategy. Although such statements represent management's current expectations based on available data, they are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated. Such risks, uncertainties and other factors may include, but are not limited to, the ability to: meet debt service obligations and maintain future financial flexibility; respond to continuing competitive pricing pressures; retain existing independent wholesale customers and attract new accounts; and fully integrate acquisitions and realize expected synergies. 18 PART II - OTHER INFORMATION Items 1, 2, 3 and 5 are not applicable. Item 4. Submission of Matters to a Vote of Security Holders. -------- ---------------------------------------------------- (a) The annual meeting of stockholders was held on May 9, 2000. (b) Not required. (Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to management's nominees as listed in the proxy statement, and all of such nominees were elected.) (c) At the annual meeting, the following proposals were presented to the stockholders and voted upon: (1) election of directors, (2) adoption of the 2000 Stock Incentive Plan, and (3) adoption of an amendment to the 1995 Director Stock Option Plan. (1) ELECTION OF DIRECTORS. Three director nominees were elected to serve for three-year terms expiring in 2003, all of whom were incumbent directors. The terms of the other eight directors do not expire until 2001 and 2002. The director nominees and voting results are as follows:
Votes Broker Nominee Votes For Withheld Non-Votes ------------------------ -------------- ------------------- --------------- Jerry L. Ford 8,880,015 179,238 -0- Robert F. Nash 8,828,325 230,928 -0- John E. Stokley 8,887,223 172,030 -0-
(2) ADOPTION OF THE 2000 STOCK INCENTIVE PLAN. Stockholders approved the adoption of the 2000 Stock Incentive Plan . The voting results are as follows:
Votes Broker Votes For Against Abstentions Non-Votes --------------------- --------------- ---------------- -------------- 4,966,939 1,240,508 94,634 2,757,172
(3) AMENDMENT TO THE 1995 DIRECTOR STOCK OPTION PLAN. The stockholders approved the adoption of the amendment to the 1995 Director Stock Option Plan. The voting results are as follows:
Votes Broker Votes For Against Abstentions Non-Votes --------------------- --------------- ------------------ -------------- 5,443,448 736,327 122,306 2,757,172
19 Item 6. Exhibits and Reports on Form 8-K. --------------------------------------------------- (a) Exhibits: --------- 10.1 Nash Finch 2000 Stock Incentive Plan 10.2 Nash Finch 1995 Director Stock Option Plan, as amended 27.1 Financial Data Schedule (b) Reports on Form 8-K. -------------------- Not applicable. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NASH-FINCH COMPANY ------------------ Registrant Date: July 21, 2000 By /s/ Ron Marshall --------------------- Ron Marshall President and Chief Executive Officer By /s/Leanne M. Stewart ------------------------- LeAnne M. Stewart Vice President and Corporate Controller 21 NASH FINCH COMPANY EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q For the Twenty-four Weeks Ended June 17, 2000
Item No. Item Method of Filing -------- ---- ---------------- 10.1 Nash Finch 2000 Stock Incentive Plan Filed herewith 10.2 Nash Finch 1995 Director of Stock Option Plan, Filed herewith as amended 27.1 Financial Data Schedule Filed herewith
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