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 forty weeks ended October 10, 1998
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)
(612) 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
----- -----
Number of shares of common stock outstanding at November 19, 1998:
11,341,582 shares
PART I - FINANCIAL INFORMATION
This report is for the forty week interim period beginning January 4,
1998, through October 10, 1998.
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 for a fair presentation of 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 Ernst & Young LLP, the Company's
independent auditors.
NASH FINCH COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (unaudited)
(In thousands, except per share amounts)
Sixteen Weeks Ended Forty Weeks Ended
------------------------------ -------------------------
October 10, October 4, October 10, October 4,
1998 1997 1998 1997
------------ ----------- ----------- ----------
Revenues:
Net sales $ 1,280,599 1,329,114 3,175,580 3,225,711
Other revenues 26,808 25,316 51,767 52,001
------------ ----------- ----------- ----------
Total revenues 1,307,407 1,354,430 3,227,347 3,277,712
Cost and expenses:
Cost of sales 1,187,265 1,228,364 2,920,095 2,950,214
Selling, general and administrative expenses 91,539 94,257 233,237 242,690
Special charges - 31,272 (1,262) 31,272
Depreciation and amortization 14,100 14,660 36,478 36,453
Interest expense 8,694 9,769 22,318 24,590
------------ ----------- ----------- ----------
Total costs and expenses 1,301,598 1,378,322 3,210,866 3,285,219
Earnings (loss) before income taxes and
extraordinary charge 5,809 (23,892) 16,481 (7,507)
Income taxes (benefit) 2,411 (7,435) 6,840 (570)
------------ ----------- ----------- ----------
Earnings (loss) before extraordinary charge 3,398 (16,457) 9,641 (6,937)
Extraordinary charge from early extinguishment
of debt, net of income tax benefit of $3,951 - - 5,569 -
------------ ----------- ----------- ----------
Net earnings (loss) $ 3,398 (16,457) 4,072 (6,937)
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary charge $ .30 (1.46) .85 (0.61)
Extraordinary charge from early extinguishment
of debt - - (.49) -
------------ ----------- ----------- ----------
Net earnings (loss) $ .30 (1.46) .36 (0.61)
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
Weighted average number of common and
common equivalent shares outstanding:
Basic 11,314 11,308 11,310 11,297
Diluted 11,340 11,308 11,336 11,297
- ---------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NASH FINCH COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
October 10, January 3,
1998 1998
----------- ----------
(unaudited)
ASSETS
Current assets:
Cash $ 979 933
Accounts and notes receivable, net 185,965 173,962
Inventories 300,655 287,801
Prepaid expenses 17,595 22,582
Deferred tax assets 9,071 9,072
----------- ----------
Total current assets 514,265 494,350
Investments in affiliates 6,871 7,679
Notes receivable, noncurrent 23,613 23,092
Property, plant and equipment:
Land 27,570 31,229
Buildings and improvements 133,429 137,070
Furniture, fixtures and equipment 309,628 306,762
Leasehold improvements 65,601 60,578
Construction in progress 44,047 28,485
Assets under capitalized leases 24,877 25,048
----------- ----------
605,152 589,172
Less accumulated depreciation and amortization (332,004) (312,939)
----------- ----------
Net property, plant and equipment 273,148 276,233
Intangible assets, net 70,818 70,732
Investment in direct financing leases 16,303 19,094
Deferred tax asset - net 2,621 2,622
Other assets 10,234 11,081
----------- ----------
Total assets $ 917,873 904,883
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks $ 22,404 36,271
Short-term debt payable to banks 11,350 11,300
Current maturities of long-term debt and
capitalized lease obligations 2,639 7,964
Accounts payable 215,960 177,548
Accrued expenses 76,986 60,599
Income taxes 6,723 737
----------- ----------
Total current liabilities 336,062 294,419
Long-term debt 308,531 325,489
Capitalized lease obligations 35,026 38,517
Deferred compensation 6,365 6,768
Other 7,875 14,072
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 11,575 shares issued in 1998
and 1997 19,292 19,292
Additional paid-in capital 17,944 17,648
Restricted stock (322) (391)
Retained earnings 188,935 190,984
----------- ----------
225,849 227,533
Less cost of 234 shares and 252 shares of
common stock in treasury, respectively. (1,835) (1,915)
----------- ----------
Total stockholders' equity 224,014 225,618
----------- ----------
Total liabilities and stockholders' equity $ 917,873 904,883
----------- ----------
----------- ----------
- ----------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NASH FINCH COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Forty Weeks Ended
--------------------------------
October 10, October 4,
1998 1997
----------- ----------
Operating activities:
Net earnings $ 4,072 (6,937)
Adjustments to reconcile net income to net cash
provided by operating activities:
Special Charges (3,595) 28,749
Depreciation and amortization 36,620 36,453
Provision for bad debts 1,878 2,771
Provision for losses on closed lease locations 1,178 (601)
Extraordinary Charges - writeoff deferred financing costs 142 -
Deferred income taxes - (9,420)
Deferred compensation (404) (538)
Earnings of equity investments (201) (2,565)
Other (2,120) 1,891
Changes in operating assets and liabilities:
Accounts and notes receivable (4,090) (18)
Inventories (10,216) (15,454)
Prepaid expenses 5,027 1,480
Accounts payable and outstanding checks 24,532 3,915
Accrued expenses 12,387 13,789
Income taxes 5,986 (1,045)
----------- ----------
Net cash provided by operating activities 71,196 52,470
----------- ----------
Investing activities:
Dividends received 799 1,599
Disposal of property, plant and equipment 11,994 11,534
Additions to property, plant and equipment
excluding capital leases (39,980) (44,231)
Business acquired, net of cash acquired (2,895) (17,748)
Sale (repurchase) of receivables (7,400) -
Loans to customers (12,118) (15,589)
Payments from customers on loans 12,205 10,959
Other (4,624) (749)
----------- ----------
Net cash used for investing activities (42,019) (54,225)
----------- ----------
Financing activities:
Dividends paid (6,121) (6,077)
Payments of short-term debt 50 (4,094)
Proceeds from long-term debt 165,000 -
Payments of long-term debt (108,219) (5,466)
Proceeds from revolving debt (79,000) 20,000
Payments of capitalized lease obligations (1,205) (3,089)
Other 364 451
----------- ----------
Net cash provided by financing activities (29,131) 1,725
----------- ----------
Net increase (decrease) in cash $ 46 (30)
----------- ----------
----------- ----------
- ----------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NASH FINCH COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
Fiscal period ended October 10, 1998,
January 3, 1998 and December 28, 1996
(In thousands, except per share amounts)
Foreign
Common Stock Additional currency
---------------------- paid-in Retained translation
Shares Amount capital earnings adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 11,224 $ 18,706 12,013 188,578 (950)
Net earnings - - - 20,032 -
Dividend declared of $.75 per share - - - (8,288) -
Shares issued in connection with acquisition of a
business 350 584 5,064 - -
Treasury stock issued upon exercise of options - - 47 - -
Issuance of restricted stock - - (308) - -
Amortized compensation under restricted stock plan - - - - -
Treasury stock purchased - - - - -
--------- ---------- -------- --------- ---------
Balance at December 28, 1996 11,574 19,290 16,816 200,322 (950)
Net earnings (loss) - - - (1,228) -
Dividend declared of $.72 per share - - - (8,110) -
Treasury stock issued upon exercise of options - - 354 - -
Amortized compensation under restricted stock plan - - - - -
Repayment of notes receivable from holder of
restricted stock - - - - -
Distribution of stock pursuant to performance awards - - 460 - -
Treasury stock purchased - - - - -
Foreign currency translation adjustment - - - - 950
Other 1 2 18 - -
--------- ---------- -------- --------- ---------
Balance at January 3, 1998 11,575 19,292 17,648 190,984 -
Net earnings - - - 4,072 -
Dividend declared of $.54 per share - - - (6,121) -
Treasury stock issued upon exercise of options - - 47 - -
Amortized compensation under restricted stock plan - - - - -
Repayment of notes receivable from holder of
restricted stock - - - - -
Distribution of stock pursuant to performance awards - - 246 - -
Other - - 3 - -
--------- ---------- -------- --------- ---------
Balance at October 10, 1998 (unaudited) 11,575 $ 19,292 17,944 188,935 -
--------- ---------- -------- --------- ---------
--------- ---------- -------- --------- ---------
Treasury Stock Total
Restricted ----------------------- stockholders'
Stock Shares Amount equity
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 - (346) $ (3,034) 215,313
Net earnings - - - 20,032
Dividend declared of $.75 per share - - - (8,288)
Shares issued in connection with acquisition of a -
business - - 5,648
Treasury stock issued upon exercise of options 6 42 89
Issuance of restricted stock (524) 40 995 163
Amortized compensation under restricted stock plan 24 - - 24
Treasury stock purchased - (7) (120) (120)
--------- ---------- -------- ---------
Balance at December 28, 1996 (500) (307) (2,117) 232,861
Net earnings (loss) - - - (1,228)
Dividend declared of $.72 per share - - - (8,110)
Treasury stock issued upon exercise of options - 29 143 497
Amortized compensation under restricted stock plan 29 - - 29
Repayment of notes receivable from holder of
restricted stock 80 - - 80
Distribution of stock pursuant to performance awards - 30 148 608
Treasury stock purchased - (4) (89) (89)
Foreign currency translation adjustment - - - 950
Other - - - 20
--------- ---------- -------- ---------
Balance at January 3, 1998 (391) (252) (1,915) 225,618
Net earnings - - - 4,072
Dividend declared of $.54 per share - - - (6,121)
Treasury stock issued upon exercise of options - 4 21 68
Amortized compensation under restricted stock plan 23 - - 23
Repayment of notes receivable from holder of
restricted stock 46 - - 46
Distribution of stock pursuant to performance awards - 15 75 321
Other - (1) (16) (13)
--------- ---------- -------- ---------
Balance at October 10, 1998 (unaudited) (322) (234) $(1,835) 224,014
--------- ---------- -------- ---------
--------- ---------- -------- ---------
- --------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NASH FINCH COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 10, 1998
NOTE 1
The accompanying financial statements include all adjustments which
are, in the opinion of management, necessary to present fairly the financial
position of the Company and its subsidiaries at October 10, 1998 and January
3, 1998, the results of operations for the 40-weeks ending October 10, 1998
and October 4, 1997, and the changes in cash flows for the 40-week period
ending October 10, 1998 and October 4, 1997, respectively. All material
inter company accounts and transactions have been eliminated in the condensed
consolidated financial statements. Results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the full year.
Warehousing and transportation expenses, historically classified as selling,
general and administrative expenses and other operating expenses, are
reclassified as cost of sales. Amounts in prior periods were reclassified to
conform with current presentation. For the current and prior year quarter,
$41.3 million and $42.5 million were reclassified respectively, and $101.1
million and $99.8 million for the current and prior year to date,
respectively. The reclassifications have impact on neither operating income
nor net income and conform the Company's financial reporting with the
reporting practices of other large food wholesale distribution companies.
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.
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 $44.1 million and $43.1 million higher at October 10, 1998 and
at January 3, 1998, respectively.
NOTE 3
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. Although the
SOP is effective beginning on January 1, 1999, the Company has chosen early
adoption as of January 4, 1998. The SOP requires the capitalization of
certain costs incurred after the date of adoption in connection with
developing or obtaining software for internal use. Certain costs that are
required to be capitalized by the SOP were previously being
expensed as incurred by the Company. As a result of this change in
accounting in 1998, the Company capitalized $2.2 million and $5.1 million,
for the quarter and year to date, respectively, in payroll and
payroll-related costs for employees who are directly involved with and devote
time to internal-use software development projects.
NOTE 4
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, the weighted average shares used in computing
basic and diluted earnings per share (EPS) are as follows:
(in thousands of shares) 16 weeks ended 40 weeks ended
-------------------------- -------------------------
October 10, October 4, October 10, October 4,
1998 1997 1998 1997
----------- ---------- ----------- ----------
Shares for computation of
basic EPS 11,314 11,308 11,310 11,297
Effect of contingent shares 26 26
----------- ---------- ----------- ----------
Shares for computation of
diluted EPS 11,340 11,308 11,336 11,297
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
The impact of contingent shares in 1997 would have been antidilutive.
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. On this date the
Company sold $44.6 million of accounts receivable on a non-recourse basis to
NFFC. NFFC sold $37.0 million of its undivided interest in such receivables
to the Purchaser, subject to specified collateral requirements. 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. 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. At
October 10, 1998, the balance of receivables sold under the revolving
agreement was $29.6 million.
On September 8, 1995, the Company entered into an agreement with a
financial institution which allowed the Company to sell, on a revolving
basis, customer notes receivable. Although the agreement lapsed on December
28, 1996, the notes, which have maturities through the year 2002, were sold
at face value with recourse. As a result, the Company is contingently liable
should these notes become uncollectible. The remaining balances of such sold
notes receivable totaled $6.2 million and $9.1 million at October 10, 1998
and January 3, 1998, respectively.
NOTE 6
During the third quarter of 1997, the Company recorded special charges,
totaling $31.3 million relative to asset impairment and consolidation of
certain warehouses and retail stores. During 1998, the Company closed
distribution facilities in Lexington, Kentucky and Lincoln, Nebraska and
closed or sold a total of five retail stores. Costs totaling $2.3 million
incurred as a result of the shut down of these units were charged to accrued
expenses. In addition, $1.3 million associated with the planned closing of a
retail store was reflected as special charges income following the sale of
the store. At October 10, 1998, accrued liabilities established for purposes
of the special charges total $12.4 million.
On November 17, 1998 the Company announced that it will close its
distribution center in Grand Island, Nebraska in January 1999. The facility
is owned by the Company and will be marketed for sale after the closing is
completed. Most of the distribution business will be consolidated into the
Company's distribution center in Omaha, Nebraska. Costs associated with the
warehouse consolidation were provided through last year's special charges.
NOTE 7
On April 24, 1998, the Company completed the sale of $165 million 8.5%
senior subordinated notes due May 1, 2008, using the net proceeds from the
offering after fees and expenses, to reduce certain amounts borrowed under
its revolving credit facility.
In the first quarter of 1998, in conjunction with the planned senior
subordinated debt offering, the Company prepaid $106.3 million of senior
notes, and paid prepayment premiums and wrote off related deferred financing
costs totaling $9.5 million. This transaction resulted in an extraordinary
charge of $5.6 million, or $.49 per share, net of income tax benefits of $4.0
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenues for the third quarter were $1.307 billion compared to $1.354
billion last year, a decrease of 3.5%. On a year to date basis, revenues
were $3.227 billion compared to $3.278 billion last year, a reduction of
1.5%. During the quarter, both the wholesale and retail segments of the
Company experienced revenue declines.
Wholesale segment revenues for the quarter decreased 1.6% from $1.073 billion
in 1997 to $1.055 billion in 1998. The decline, largely attributed to Super
Food, in particular from competitive pressures realized by its Michigan
operation, more than offset revenue gains reported by certain Midwest and
Southeast non-military distribution centers. During the quarter, the Company
began servicing two stores operated by a new independent retailer following a
transaction in which the Company sold the retailer three of its corporately
owned retail locations in North Dakota. On a year to date basis, wholesale
revenues were $2.610 billion compared to $2.601 billion last year, an
increase of .3% principally attributable to the United-A.G. acquisition which
occurred in June 1997.
Retail segment revenues for the quarter and year to date were $221.0 million
and $568.5 million, respectively, compared to $250.8 million and $626.1
million for the same periods last year. The declines are largely due to the
closing or sale of 15 stores since the end of the third quarter of 1997,
partially offset by the opening or purchase of nine stores during the same
period. Included in the stores purchased were three locations in the Rapid
City, South Dakota area, acquired from Sooper Dooper Markets, Inc. late in
the quarter. Same store revenues for both the quarter and year to date were
flat compared to last year.
GROSS MARGINS
Gross margins for the quarter were 9.2% compared to 9.3% last year. On a
year to date basis, margins were 9.5% in 1998 compared to 10.0% for the three
quarters of 1997. The decline this year is partially attributed to the
growing proportion of lower margin wholesale business. For the quarter and
year to date, wholesale segment business represented 81.1% of the Company's
consolidated revenues compared to 79.5% for the same period last year. A
decline in retail margins as a result of continuing competitive pressures in
certain markets, also contributed to the overall lower gross margin.
The Company's internally measured food price index indicated almost no
inflation; however, continued price increases for tobacco and tobacco-related
products resulted in a LIFO charge of
$.8 million for the quarter compared to $1.0 million last year and $1.0
million year to date, the same as last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses as a percent of total revenues
were 7.0% and 7.2% for the quarter and year to date, respectively, compared
to 7.0% and 7.4% for the comparable periods last year. Expense levels
compare favorably on a year to date basis to last year due in part to the
increasing proportion of wholesale business which typically operates at lower
expense levels than retail. In addition, the Company changed accounting
policies when it adopted Statement of Position (SOP) 98-1. This change
resulted in the capitalization of $2.1 million for the quarter, and $5.1
million year to date, of internal development costs related to HORIZONS, a
project involving new business information technology. Since these costs had
been historically expensed, this change in accounting increased diluted
earnings per share by $.11 and $.26 for the quarter and year to date,
respectively. Information system expenses primarily related to HORIZONS
increased $1.3 million and $2.4 million for the quarter and year to date,
respectively, compared to last year, partially offsetting the positive impact
of the accounting change.
SPECIAL CHARGES
During the second quarter, the Company completed an assignment of a lease and
sale of certain assets related to a retail store included in the special
charges recorded in 1997. As a result, $1.3 million in accrued costs were
reflected as special charges income for 1998.
Subsequent to the end of the third quarter, the Company announced it will
close its distribution center in Grand Island, Nebraska. Certain costs
associated with the closing were provided in the special charges last year.
DEPRECIATION EXPENSE
Depreciation and amortization expense decreased 3.8% for the quarter compared
to last year and remained substantially the same as last year on a year to
date basis. The decrease reflects the reduction in depreciable assets
resulting from the sale or closing of retail stores and lower depreciation
resulting from the write down of impaired assets recorded as part of the
special charges last year.
At the end of the quarter, approximately $28.9 million in HORIZONS
development costs have been classified as construction in progress on the
balance sheet. Depreciation on these assets will not commence until the
related systems are fully developed and ready for use. Depreciation expense
related to information technology already in use increased $.9 million and
$1.6 million for the quarter and year to date, respectively, compared to the
same periods last year. Amortization of goodwill and other intangibles for
the current and prior year quarter were $1.9 and $2.1 million, respectively,
and $4.9 and $5.1 million for the current and prior year to date,
respectively.
INTEREST EXPENSE
Interest expense decreased from $9.8 million in the prior year quarter, to
$8.7 million this year, a decline of 11.0%. The reduction is attributed to
lower borrowings under a revolving credit facility, brought about by the
sale of receivables at the end of 1997 and improved asset management during
1998. Also, the Company reduced its long-term borrowing rates through the
sale of $165.0 million of senior subordinated notes which was completed
during the second quarter.
INCOME TAXES
The effective tax rate for 1998 is estimated at 41.5%, compared to last
year's annual rate of 425.4%, which was significantly affected by the special
charges.
EXTRAORDINARY CHARGE
During the first quarter of 1998, in conjunction with a planned senior
subordinated debt offering, the Company prepaid $106.3 million of senior
notes, and paid prepayment premiums and wrote off related deferred financing
costs totaling $9.5 million, all with borrowings under the Company's revolving
credit facility. This transaction resulted in an extraordinary charge of $5.6
million or $.49 per share after income tax benefits of $4.0 million.
EARNINGS BEFORE TAXES AND EXTRAORDINARY CHARGE
Earnings before taxes and extraordinary charge for the quarter were $5.8
million compared to $7.4 million last year before special charges, a
reduction of 21.3%. This decline is attributed to the performance of Super
Food, in particular its Michigan wholesale operation, and heightened
competition in several retail markets which resulted in weak performance in
those areas. On the other hand, Nash DeCamp's performance for the quarter
improved largely due to timing. Because of weather-related harvest delays,
profit which would have been realized in the second quarter was not
recognized until the third quarter. Also, the Company's Southeast division
contributed improved wholesale results compared to the prior year quarter.
Year to date earnings before taxes and extraordinary charge were $16.5
million compared to $23.8 million last year before the effect of the special
charge, a decrease of 30.7%. The decrease primarily results from the decline
in earnings from Super Food, competitive pressures in certain retail markets
and an increase in overhead expenses from consulting costs, severance costs
related to management changes and additional provisions for closed store
future lease costs.
YEAR 2000
The Company's Year 2000 resolution was initially incorporated in the system
design of the HORIZONS project. However, due to programming and testing
delays in the development of HORIZONS, it has been determined that the system
will not provide the level of Year 2000 readiness the Company had previously
expected in the
time frame required. As a result, the Company has embarked on a process to
develop a remediation plan which accelerates existing efforts toward
resolving Year 2000 issues. The plan will result in an aggressive timetable
to address the modification and/or replacement of existing business critical
software and the identification of the non-information technology systems
that may be affected by Year 2000. In addition, the plan will assess the
readiness of third parties with which the Company does business and the
related risks to the Company in the event of their non-compliance. To
expedite this Year 2000 solution, the Company has reallocated internal
resources and has contracted outside resources to assist in the remediation
effort. The timetable for finalizing the plan and taking initial action to
implement the plan is December 1998.
The total future cost for Year 2000 remediation is estimated at approximately
$18.5 million, which includes $ 4.0 million for the purchase of new equipment
that will be capitalized and $ 14.5 million, which will be expensed as
incurred, primarily for internal and external costs associated with the
modification of existing software. This $18.5 million remediation effort will
be funded from approximately $20.0 million, of which $15.3 million related to
capital expenditures, that was previously allocated to a more aggressive
HORIZONS implementation. The Company is maintaining a small HORIZONS team to
assess a continuing HORIZONS development and implementation strategy based on
an enhanced software release, which may allow the Company greater
functionality.
The costs or consequences of incomplete or untimely resolution of the Year
2000 issue may have a material effect on the Company's business, results of
operations and financial condition. However, this time, the Company is
unable to measure the monetary impact of its failure to comply or failure of
other parties on which it is dependent.
The Company is currently devoting resources toward designing and executing a
plan to insure full compliance with Year 2000 issues by December 1999. In
addition, the Company has begun to develop a contingency plan, in the event
of system or function failure, which will allow it to continue normal
business activities beyond 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed 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,
lease and equity financing.
Operating activities generated positive net cash flows of $71.2 million
during the quarter compared to $52.5 million a year ago. The improvement is
primarily due to an increase in accounts payable and accrued expenses,
somewhat offset by increases in inventory and accounts receivable. Working
capital was $178.2 million at the end of the third quarter, a reduction of
$21.7 million,
or 10.9%, for the three quarters of 1998. The current ratio decreased from
1.68 at the end of fiscal 1997 to 1.53 at the end of the third quarter.
On October 10, 1998 and January 3, 1998, the Company had $11.3 million in
short-term debt from available lines of credit totaling $25 million.
On April 24, 1998, the Company completed the sale of $165 million 8.5% senior
subordinated notes due May 1, 2008, using the net proceeds from the offering,
after fees and expenses, to reduce certain amounts borrowed under its
revolving credit facility.
Other transactions affecting liquidity during the quarter include capital
expenditures of $14.8 million, of which approximately $5.6 million related to
HORIZONS, and payment of a cash dividend of $2.0 million or $.18 per share.
On June 22, 1998 the Company sold three stores to Miracle Mart, Inc., a new
wholesale customer in Mandan, North Dakota, for approximately $4.7 million in
cash. Also, on September 21, 1998, the Company purchased three stores in
South Dakota from Sooper Dooper Markets, Inc. for cash and other
consideration totaling $2.3 million.
The Company believes that borrowing under the revolving credit facility, sale
of subordinated notes, other credit agreements, cash flows from operating
activities and lease financings will be adequate to meet the Company's
working capital needs, planned capital expenditures and debt service
obligations for the foreseeable future.
FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-Q includes forward-looking
statements made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can be
identified by the use of words like "believes," "expects," "may," "will,"
"should," "anticipates" or similar expressions, as well 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 Company's 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; attract and retain qualified
personnel and other resources to address Year 2000 issues; otherwise address
Year 2000 issues as they affect the Company, its customers and vendors; and
fully integrate acquisitions and realize expected synergies.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Retirement Agreement dated as of May 12, 1998 between Alfred N.
Flaten and the Company.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
Not applicable.
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: November 24, 1998 By /s/ John R. Scherer
-----------------------------
John R. Scherer
Chief Financial Officer
By /s/ Lawrence A. Wojtasiak
-----------------------------
Lawrence A. Wojtasiak
Controller
NASH-FINCH COMPANY
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Forty Weeks Ended October 10, 1998
Item No. Item Method of Filing
-------- ---- ----------------
10.1 Retirement Agreement dated as of May 12, 1998 Filed herewith.
between Alfred N. Flaten and the Company.
27.1 Financial Data Schedule Filed herewith.