UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		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 (State or other jurisdiction of incorporation or organization)		41-0431960 (IRS Employer Identification No.)
7600 France Avenue South,
P.O. Box 355
Minneapolis, Minnesota		55440-0355
(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 5, 2009, 12,841,406 shares of Common Stock of the Registrant were outstanding.

 

 

Index

		Page No.
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income			2
Consolidated Balance Sheets			3
Consolidated Statements of Cash Flows			4
Notes to Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			31
Part II — OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			33
SIGNATURES			34
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. — FINANCIAL INFORMATION

NASH-FINCH COMPANY AND SUBSIDIARIES

		16 Weeks Ended								40 Weeks Ended
		October 10,				October 4,				October 10,				October 4,
		2009				2008				2009				2008
Sales		$	1,633,304				1,416,308			$	3,990,218				3,445,052
Cost of sales			1,504,350				1,294,143				3,667,116				3,135,985
Gross profit			128,954				122,165				323,102				309,067
Other costs and expenses:
Selling, general and administrative			84,716				89,937				222,055				216,109
Gain on acquisition of a business			—				—				(6,682	)			—
Gain on litigation settlement			(7,630	)			—				(7,630	)			—
Depreciation and amortization			12,592				11,643				31,299				29,378
Interest expense			7,621				7,556				18,765				20,432
Total other costs and expenses			97,299				109,136				257,807				265,919
Earnings before income taxes			31,655				13,029				65,295				43,148
Income tax expense			9,728				5,344				19,410				15,415
Net earnings		$	21,927				7,685			$	45,885				27,733
Net earnings per share:
Basic		$	1.68				0.60			$	3.53				2.15
Diluted		$	1.64				0.58			$	3.44				2.10
Declared dividends per common share		$	0.18				0.18			$	0.54				0.54
Weighted average number of common shares outstanding and common equivalent shares outstanding:
Basic			13,021				12,839				12,998				12,893
Diluted			13,377				13,174				13,344				13,176

See accompanying notes to consolidated financial statements.

NASH-FINCH COMPANY AND SUBSIDIARIES

		October 10,				January 3,
		2009				2009
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	860				824
Accounts and notes receivable, net			284,746				185,943
Inventories			337,122				261,491
Prepaid expenses and other			12,349				13,909
Deferred tax asset, net			6,785				5,784
Total current assets			641,862				467,951
Notes receivable, net			24,524				28,353
Property, plant and equipment:
Property, plant and equipment			627,275				590,894
Less accumulated depreciation and amortization			(415,566	)			(392,807	)
Net property, plant and equipment			211,709				198,087
Goodwill			217,516				218,414
Customer contracts and relationships, net			22,101				24,762
Investment in direct financing leases			3,232				3,388
Other assets			13,453				11,591
Total assets		$	1,134,397				952,546
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt and capitalized lease obligations		$	4,375				4,032
Accounts payable			279,836				220,610
Accrued expenses			59,131				73,087
Total current liabilities			343,342				297,729
Long-term debt			306,763				222,774
Capitalized lease obligations			22,275				25,252
Deferred tax liability, net			26,268				22,232
Other liabilities			40,071				35,539
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock — no par value. Authorized 500 shares; none issued			—				—
Common stock — $1.66 2/3 par value. Authorized 50,000 shares, issued 13,673 and 13,665 shares, respectively			22,790				22,776
Additional paid-in capital			105,143				98,048
Common stock held in trust			(2,317	)			(2,243	)
Deferred compensation obligations			2,317				2,243
Accumulated other comprehensive income (loss)			(10,575	)			(10,876	)
Retained earnings			307,306				268,562
Common stock in treasury, 832 and 848 shares, respectively			(28,986	)			(29,490	)
Total stockholders’ equity			395,678				349,020
Total liabilities and stockholders’ equity		$	1,134,397				952,546

See accompanying notes to consolidated financial statements.

NASH-FINCH COMPANY AND SUBSIDIARIES

		40 Weeks Ended
		October 10,				October 4,
		2009				2008
Operating activities:
Net earnings		$	45,885				27,733
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on acquisition of a business			(6,682	)			—
Gain on litigation settlement			(7,630	)			—
Depreciation and amortization			31,299				29,378
Amortization of deferred financing costs			1,357				1,867
Non-cash convertible debt interest			3,753				3,458
Amortization of rebateable loans			3,133				2,154
Provision for bad debts			1,070				(525	)
Provision for lease reserves			1,492				(1,515	)
Deferred income tax expense			(1,237	)			9,702
LIFO charge			(732	)			11,892
Asset impairments			1,738				1,490
Share-based compensation			7,421				6,978
Deferred compensation			990				222
Other			(130	)			(995	)
Changes in operating assets and liabilities:
Accounts and notes receivable			(38,921	)			(7,031	)
Inventories			(32,838	)			(73,369	)
Prepaid expenses			824				2,757
Accounts payable			23,294				37,992
Accrued expenses			(14,529	)			(6,161	)
Income taxes payable			946				7,447
Other assets and liabilities			1,795				(2,305	)
Net cash provided by operating activities			22,298				51,169
Investing activities:
Disposal of property, plant and equipment			507				361
Additions to property, plant and equipment			(12,563	)			(17,716	)
Business acquired, net of cash			(78,056	)			(6,566	)
Loans to customers			(2,225	)			(17,579	)
Payments from customers on loans			3,411				1,059
Other			(154	)			(202	)
Net cash used in investing activities			(89,080	)			(40,643	)
Financing activities:
Proceeds of revolving debt			80,500				128,800
Dividends paid			(6,929	)			(6,922	)
Proceeds from exercise of stock options			196				329
Proceeds from employee stock purchase plan			—				238
Repurchase of Common Stock			—				(14,348	)
Payments of long-term debt			(248	)			(118,940	)
Payments of capitalized lease obligations			(2,649	)			(2,903	)
Increase (decrease) in book overdraft			(1,346	)			6,742
Payments of deferred financing costs			(2,706	)			(3,573	)
Net cash provided (used) by financing activities			66,818				(10,577	)
Net increase (decrease) in cash and cash equivalents			36				(51	)
Cash and cash equivalents:
Beginning of year			824				862
End of period		$	860				811

See accompanying notes to consolidated financial statements.

Nash-Finch Company and Subsidiaries

Notes to Consolidated Financial Statements
October 10, 2009

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended January 3, 2009.

The accompanying unaudited consolidated financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position of Nash-Finch Company and our subsidiaries (“Nash Finch” or “the Company”) at October 10, 2009 and January 3, 2009, the results of operations for the 16 and 40 weeks ended October 10, 2009 (“third quarter 2009”) and October 4, 2008 (“third quarter 2008”) and changes in cash flows for the 40 weeks ended October 10, 2009 and October 4, 2008. Adjustments consist only of normal recurring items, except for any items discussed in the notes below. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. Subsequent events have been evaluated through the date and time the financial statements were issued on November 12, 2009. 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 U.S. GAAP 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 fiscal 2009, the Company revised its treatment of consigned inventory sales in our military segment. Prior to the revision, consigned sales were recorded on a gross basis as sales and a related amount recorded as a cost of sales. The Company has revised its presentation for sales of consigned inventory to be on a net basis. The revision reduced both sales and cost of sales by $20.2 million and $55.7 million for the third quarter and year-to-date 2008, respectively, but did not have an impact on gross profit, earnings from continuing operations before income taxes, net earnings, cash flows or financial position for any period or their respective trends. Certain prior year amounts shown below related to the third quarter and year-to-date 2008 have been revised to conform to the current year presentation. Amounts related to fiscal 2008 periods after the third quarter will be revised as shown the next time those periods are presented.

		16 weeks ended
		October 4, 2008												16 weeks ended
		As originally				%								October 4, 2008				%
(in 000’s)		Reported				of Sales				Adjustments				As revised				of Sales
Sales		$	1,436,490				100.0	%			(20,182	)			1,416,308				100.0	%
Cost of Sales			1,314,325				91.5	%			(20,182	)			1,294,143				91.4	%
Gross Profit		$	122,165				8.5	%			—				122,165				8.6	%

		40 weeks ended
		October 4, 2008												40 weeks ended
		As originally				%								October 4, 2008				%
(in 000’s)		Reported				of Sales				Adjustments				As revised				of Sales
Sales		$	3,500,788				100.0	%			(55,736	)			3,445,052				100.0	%
Cost of Sales			3,191,721				91.2	%			(55,736	)			3,135,985				91.0	%
Gross Profit		$	309,067				8.8	%			—				309,067				9.0	%

		13 weeks ended
		January 3, 2009												13 weeks ended
		As originally				%								January 3, 2009				%
(in 000’s)		Reported				of Sales				Adjustments				As revised				of Sales
Sales		$	1,202,872				100.0	%			(14,430	)			1,188,442				100.0	%
Cost of Sales			1,104,990				91.9	%			(14,430	)			1,090,560				91.8	%
Gross Profit		$	97,882				8.1	%			—				97,882				8.2	%

		Fiscal Year ended
		January 3, 2009												Fiscal Year ended
		As originally				%								January 3, 2009				%
(in 000’s)		Reported				of Sales				Adjustments				As revised				of Sales
Sales		$	4,703,660				100.0	%			(70,166	)			4,633,494				100.0	%
Cost of Sales			4,296,711				91.3	%			(70,166	)			4,226,545				91.2	%
Gross Profit		$	406,949				8.7	%			—				406,949				8.8	%

Note 2 — Acquisition

On January 31, 2009, the Company completed the purchase from GSC Enterprises, Inc. (“GSC”), of substantially all of the assets relating to three military food distribution centers located in San Antonio, Texas, Pensacola, Florida and Junction City, Kansas serving military commissaries and exchanges (“Business”). The Company also assumed certain trade payables, accrued expenses and receivables associated with the assets being acquired. The aggregate purchase price paid was $78.1 million in cash.

Effective January 4, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 (“ASC 805”, originally issued as Statement of Financial Accounting Standards “SFAS” No. 141R, “Business Combinations”). ASC 805 defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC 805 also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date.

The following table summarizes the fair values of the assets acquired and liabilities of the Business assumed at the acquisition date:

As of January 31, 2009
(in thousands)
Cash and cash equivalents		$	47
Accounts receivable			61,285
Inventories			42,061
Prepaid expenses and other			210
Property, plant and equipment			30,294
Other assets			890
Total identifiable assets acquired			134,787
Current liabilities			43,114
Accrued expenses			1,162
Deferred tax liability, net			4,272
Other long-term liabilities			1,456
Total liabilities assumed			50,004
Net assets acquired		$	84,783

The fair value of the net identifiable assets acquired and liabilities assumed of $84.8 million exceeded the purchase price of $78.1 million. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $6.7 million (net of tax) in the first quarter 2009 associated with the acquisition of the Business. The gain is included in the line item “Gain on acquisition of a business” in the Consolidated Statement of Income.

A contingency of $0.3 million is included in the other long-term liabilities account in the table above related to a payment the Company would be required to make in the event a purchase option is not exercised associated with the sublease of the Pensacola, FL facility prior to October 10, 2010. The Company has determined the range of the potential loss on the contingency is zero to $1.0 million and the acquisition date fair value of the contingency is $0.3 million based upon a probability-weighted discounted cash flow valuation technique. As of October 10, 2009, there were no changes in the recognized amounts or range of outcomes associated with this contingency.

The Company has recognized acquisition and integration costs of $0.9 million and $2.3 million that were expensed during the third quarter and year-to-date 2009, respectively.

Sales of the Business included in the Consolidated Statement of Income for the third quarter and year-to-date 2009 were $229.2 million and $508.4 million, respectively. Although the Company has made reasonable efforts to do so, synergies achieved through the integration of the Business into the Company’s military segment, unallocated interest expense and the allocation of shared overhead specific to the Business cannot be precisely determined. Accordingly, the Company has deemed it impracticable to calculate the precise impact the Business will have on the Company’s net earnings during fiscal 2009. However, please refer to “Note 15-Segment Reporting” of this Form 10-Q for a comparison of military segment sales and profit for the third quarters and year-to-date periods of fiscal 2009 and 2008.

Supplemental pro forma financial information

The unaudited pro forma financial information in the table below combines the historical results for the Company and the historical results for the Business for the 16 and 40 weeks ended October 10, 2009 and October 4, 2008. This pro forma financial information is provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the combined operations for the periods presented or that will be achieved by the combined operations in the future.

		16 Weeks Ended								40 Weeks Ended
		October 10,				October 4,				October 10,				October 4,
(in thousands, except per share data)		2009				2008				2009				2008
Total revenues		$	1,633,304				1,632,429			$	4,052,508				3,972,100
Net earnings			21,927				8,404				46,051				29,435
Basic earnings per share			1.68				0.65				3.54				2.28
Diluted earnings per share			1.64				0.64				3.45				2.23

Note 3 — Change in Accounting Principle

Effective January 4, 2009, the Company adopted the provisions of ASC Subtopic 470-20 (“ASC 470-20”, originally issued as FASB Staff Position APB 14-1, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”), which impacts the accounting associated with our senior convertible notes. ASC 470-20 requires us to recognize interest expense, including non-cash interest, based on the market rate for similar debt instruments without the conversion feature, which the Company determined to be 8.0%. Furthermore, it requires retrospective accounting treatment. Under ASC 470-20, the liability component of convertible debt is measured upon issuance using an 8.0% interest rate and an assumed eight year life, as determined by the first date the holders may require the Company redeem the note. The difference between the proceeds from the issuance and the fair value of the liability is assigned to equity. Additionally, ASC 470-20 states that transaction costs incurred with third parties shall be allocated to and accounted for as debt issuance costs and equity issuance costs in proportion to the allocation of proceeds between the liability and equity component, respectively.

The following table represents the Company’s initial measurement of the convertible debt as of March 15, 2005 and its retrospective measurement under ASC 470-20:

		Measurement under				Initial
		ASC 470-20				Measurement
(in millions)		3/15/2005				3/15/2005				Change
Other assets		$	3.6				4.9				(1.3	)(a)
Long-term debt			110.8				150.1				(39.3	)(b)
Deferred tax liability, net			14.8				—				14.8	(c)
Additional paid-in capital			23.2				—				23.2	(d)

(in millions)
Long-term debt reclassified to equity		$	39.3
Deferred financing costs reclassified to equity			(1.3	)
Deferred tax liability			(14.8	)
Total additional paid-in capital impact			23.2

The following tables represent the retrospective accounting impact the adoption of ASC 470-20 had on the Company’s Consolidated Statement of Income for the third quarter and year-to-date 2008 and the Consolidated Balance Sheet as of January 3, 2009:

Consolidated Statement of Income:		Third Quarter 2008								Year-to-Date 2008
(in thousands, except EPS data)		As adjusted				As reported				As adjusted				As reported
Interest expense		$	7,556				6,065			$	20,432				16,750
Income tax expense			5,344				5,926				15,415				16,851
Net earnings			7,685				8,594				27,733				29,979
Basic EPS			0.60				0.67				2.15				2.33
Diluted EPS			0.58				0.65				2.10				2.28
Consolidated Balance Sheet:		As of January 3, 2009
(in thousands)		As adjusted				As reported
Other assets		$	11,591				13,997
Long-term debt			222,774				246,441
Deferred tax liability, net			22,233				13,940
Additional paid-in capital			98,048				74,836
Retained earnings			268,562				278,804
Total stockholders’ equity			349,020				336,050

Note 4 — Inventories

We use the LIFO method for valuation of a substantial portion of inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation. If the FIFO method had been used, inventories would have been approximately $75.4 million higher at October 10, 2009 and $76.1 million higher at January 3, 2009. In the third quarter 2009 we recorded a reversal of LIFO charges of $0.4 million compared to charges of $8.4 million recorded during the third quarter 2008. During year-to-date 2009 we have recorded a reversal of LIFO charges of $0.7 million compared to charges of $11.9 million during year-to-date 2008. The LIFO charges incurred during fiscal 2008 were reflective of high levels of inflation during the prior year and the reversal of LIFO charges during fiscal 2009 represents deflation experienced during the current year.

Note 5 — Goodwill

As a result of the closing of one retail store in the second quarter 2009, retail goodwill was impaired by $0.9 million. Changes in the net carrying amount of goodwill for year-to-date 2009 are as follows (in thousands):

		Food distribution				Military				Retail				Total
Goodwill as of January 3, 2009		$	121,863				25,754				70,797				218,414
Retail store closing			—				—				(898	)			(898	)
Goodwill as of October 10, 2009		$	121,863				25,754				69,899				217,516

Note 6 — Share-Based Compensation

We account for share-based compensation awards in accordance with the provisions of ASC Topic 718 (“ASC 718”, originally issued as SFAS No. 123(R), “Share-Based Payment – Revised”) which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. We recognized share-based compensation expense in our Consolidated Statements of Income of $1.7 million for the third quarter 2009 and $7.4 million for year-to-date 2009 versus expense of $3.0 million for the third quarter 2008 and $7.0 million for year-to-date 2008.

We have four equity compensation plans under which incentive stock options, non-qualified stock options and other forms of share-based compensation have been, or may be, granted primarily to key employees and non-employee members of the Board of Directors. These plans include the 2009 Incentive Award Plan, the 2000 Stock Incentive Plan (“2000 Plan”), the Director Deferred Compensation Plan, and the 1997 Non-Employee Director Stock Compensation Plan. These plans are more fully described in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 under the caption “Footnote 9 – Share-based Compensation Plans” and in Exhibit 10.1 to our current report on Form 8-K dated May 26, 2009.

As of October 10, 2009, options to purchase 10,000 shares of common stock at $35.36 per share were outstanding and exercisable under the 2000 Plan.

Since 2005, awards have taken the form of performance units (including share units pursuant to our Long-Term Incentive Plan (“LTIP”)), restricted stock units (“RSUs”) and Stock Appreciation Rights (“SARs”).

Performance units were granted during 2005, 2006, 2007, 2008 and 2009 under the 2000 Plan pursuant to our LTIP. These units vest at the end of a three-year performance period. The 2005 plan provided for payout in shares of our common stock or cash, or a combination of both, at the election of the participant, and therefore was accounted for as a liability award in accordance with ASC 718. All units under the 2005 plan were settled in shares of our common stock during the second quarter 2008 and all units under the 2006 plan were settled in shares of our common stock during the second quarter 2009.

In the first three quarters of 2009, 108,696 units were granted pursuant to our 2009 LTIP. Depending on a comparison of the Company’s cumulative three-year actual EBITDA results to the cumulative three-year strategic plan EBITDA targets and the Company’s ranking on absolute return on net assets and compound annual growth rate for return on net assets among the companies in the peer group, a participant could receive a number of shares ranging from zero to 200% of the number of performance units granted. Because these units can only be settled in stock, compensation expense (for shares expected to vest) is recorded over the three-year period for the grant date fair value.

During fiscal 2006, 2007, 2008 and 2009, RSUs were awarded to certain executives of the Company. Awards vest in increments over the term of the grant or cliff vest on the fifth anniversary of the grant date, as designated in the award documents. In addition to the time vesting criteria, awards granted in 2008 and 2009 to two of the Company’s executives include performance vesting conditions. The Company records expense for such awards over the service vesting period if the Company anticipates the performance vesting conditions will be satisfied.

On December 17, 2008, in connection with the Company’s announcement of its planned acquisition of certain military distribution assets of GSC, eight executives of the Company were granted a total of 267,345 SARs with a per share price of $38.44. The SARs are eligible to become vested during the 36 month period commencing on closing of the acquisition of the GSC assets which was January 31, 2009. The SARs will vest on the first business day during the vesting period that follows the date on which the closing prices on NASDAQ for a share of Nash Finch common stock for the previous 90 market days is at least $55.00 or a change in control occurs following the six month anniversary of the grant date or termination of the executive’s employment due to death or disability. Upon exercise, the Company will award the executive a number of shares of restricted stock equal to (a) the product of (i) the number of shares with respect to which the SAR is exercised and (ii) the excess, if any, of (x) the fair market value per share of common stock on the date of exercise over (y) the base price per share relating to such SAR, divided by (b) the fair market value of a share of common stock on the date such SAR is exercised. The restricted stock shall vest on the first anniversary of the date of exercise so long as the executive remains continuously employed with the Company.

The fair value of SARs is estimated on the date of grant using a modified binomial lattice model which factors in the market and service vesting conditions. The modified binomial lattice model used by the Company incorporates a risk-free interest rate based on the 5-year treasury rate on the date of the grant. The model uses an expected volatility calculated as the daily price variance over 60, 200 and 400 days prior to grant date using the Fair Market Value (average of daily high and low market price of Nash Finch common stock) on each day. Dividend yield utilized in the model is calculated by the Company as the average of the daily yield (as a percent of the Fair Market Value) over 60, 200 and 400 days prior to the grant date. The modified binomial lattice model calculated a fair value of $8.44 per SAR which will be recorded over a derived service period of 3.55 years.

The following assumptions were used to determine the fair value of SARs granted during fiscal 2008:

Assumptions — SARs Valuation		2008 Grants
Weighted-average risk-free interest rate			1.37	%
Expected dividend yield			1.86	%
Expected volatility			35	%
Exercise price		$	38.44
Market vesting price (90 consecutive market days at or above this price)		$	55.00
Contractual term		5.1 years

The following table summarizes activity in our share-based compensation plans during the year-to-date period 2009:

														Weighted
														Average
						Weighted				Restricted				Remaining
						Average				Stock Awards/				Restriction/
		Stock Option				Option Price				Performance				Vesting Period
(In thousands, except per share amounts)		Shares				Per Share				Units				(Years)
Outstanding at January 3, 2009			18.0			$	30.56				926.0				1.3
Granted			—								150.9
Exercised/restrictions lapsed/settled			(8.0	)							(112.2	)
Forfeited/cancelled			—								(15.9	)
Outstanding at October 10, 2009			10.0			$	35.36				948.8				1.2
Exercisable/unrestricted at January 3, 2009			18.0			$	30.56				300.5
Exercisable/unrestricted at October 10, 2009			10.0			$	35.36				250.0

•

The “exercised/restrictions lapsed” amount above includes settlement of performance units granted pursuant to the 2006 LTIP that vested at the end of fiscal 2008. The units were settled for approximately 90,000 shares of common stock, of which approximately 15,000 shares, net of tax withholding of approximately 8,000 shares, were paid out of treasury stock during the second quarter 2009 and the remaining 67,000 shares deferred to future periods as required by the 2006 plan.

						Weighted
		Stock				Average
		Appreciation				Base/Exercise
(in thousands, except per share amounts)		Rights				Price Per SAR
Outstanding at January 3, 2009			267.3			$	38.44
Granted			—
Exercised/restrictions lapsed			—
Forfeited/cancelled			—
Outstanding at October 10, 2009			267.3				38.44
Exercisable/unrestricted at January 3, 2009			—
Exercisable/unrestricted at October 10, 2009			—

The weighted-average grant-date fair value of equity based restricted stock/performance units granted was $33.31 during year-to-date 2009, versus $37.21 during year-to-date 2008.

Note 7 — Fair Value Measurements

In September 2006, the FASB issued ASC Topic 820 (“ASC 820”, originally issued as SFAS No. 157, “Fair Value Measurements”). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about instruments recorded at fair value. It also applies under other accounting pronouncements that require or permit fair value measurements. Effective January 1, 2008, we adopted the provisions of ASC 820 related to financial assets and liabilities recognized or disclosed on a recurring basis. Additionally, beginning in the first quarter 2009, we now apply ASC 820 to financial and non-financial assets and liabilities.

The fair value hierarchy for disclosure of fair value measurements under ASC 820 is as follows:

		Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
		Level 2: Quoted prices, other than quoted prices included in Level 1, which are observable for the assets or liabilities, either directly or indirectly.
		Level 3: Inputs that are unobservable for the assets or liabilities.

Our outstanding interest rate swap agreements are classified within level 2 of the valuation hierarchy as readily observable market parameters are available to use as the basis of the fair value measurement. As of October 10, 2009, we have recorded a fair value liability of $1.4 million in relation to our outstanding interest rate swap agreements.

Other Financial Assets and Liabilities

Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and outstanding checks. The carrying value of these financial assets and liabilities approximates fair value due to their short maturities.

The fair value of notes receivable approximates the carrying value at October 10, 2009 and January 3, 2009. Substantially all notes receivable are based on floating interest rates which adjust to changes in market rates.

Long-term debt, which includes the current maturities of long-term debt, at October 10, 2009, had a carrying value and fair value of $307.4 million and $293.8 million, respectively, and at January 3, 2009, had a carrying value and fair value of $223.4 million and $222.6 million, respectively. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.

We account for the impairment of long-lived assets in accordance with ASC Subtopic 360-10-35 (originally issued as SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”). During the third quarter and year-to-date 2009 we recognized asset impairments of $0.8 million and $1.7 million, respectively. We utilize a discounted cash flow model that incorporates unobservable level 3 inputs to test for long-lived asset impairment.

Note 8 — Derivatives

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities and commodity price risk associated with anticipated purchases of diesel fuel. Our objective in managing our exposure to changes in interest rates and commodity prices is to reduce fluctuations in earnings and cash flows. From time-to-time we use derivative instruments, primarily interest rate and commodity swap agreements, to manage risk exposures when appropriate, based on market conditions. We do not enter into derivative agreements for trading or other speculative purposes, nor are we a party to any leveraged derivative instrument.

The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in our Consolidated Balance Sheet and the related gains or losses on these contracts are deferred in stockholders’ equity as a component of other comprehensive income. Deferred gains and losses are amortized as an adjustment to expense over the same period in which the related items being hedged are recognized in income. However, to the extent that any of these contracts are not considered to be effective in accordance with ASC Topic 815 (“ASC 815”, originally issued as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”) in offsetting the change in the value of the items being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.

As of October 10, 2009, we had two outstanding interest rate swap agreements with notional amounts totaling $52.5 million. The notional amounts of the two outstanding swaps are reduced annually over their three year terms as follows (amounts in thousands):

Notional		Effective Date		Termination Date		Fixed Rate
$30,000		10/15/2008		10/15/2009		3.49%
20,000		10/15/2009		10/15/2010		3.49%
10,000		10/15/2010		10/15/2011		3.49%

Notional		Effective Date		Termination Date		Fixed Rate
$22,500		10/15/2008		10/15/2009		3.38%
15,000		10/15/2009		10/15/2010		3.38%
7,500		10/15/2010		10/15/2011		3.38%

As of October 4, 2008, we had entered into the two interest rate swap agreements referenced above but they had yet to become effective.

From time-to-time, we use commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The agreements call for an exchange of payments with us making payments based on a fixed price per gallon and receiving payments based on floating prices, without an exchange of the underlying commodity amount upon which the payments are made. Resulting gains and losses on the fair market value of the commodity swap agreement are immediately recognized as income or expense.

As of October 10, 2009, there were no commodity swap agreements in existence. Our only commodity swap agreement in place during 2008 expired during the first quarter and was settled for fair market value.

In addition to the previously discussed interest rate and commodity swap agreements, from time-to-time we enter into fixed price fuel supply agreements to support our food distribution segment. Effective January 1, 2009, we entered into an agreement which requires us to purchase a total of 252,000 gallons of diesel fuel per month at prices ranging from $1.90 to $1.98 per gallon. The term of the agreement is for one year. During the first quarter 2008 we had a fixed price fuel supply agreement which required us to purchase a total of 168,000 gallons of diesel fuel per month at prices ranging from $2.28 to $2.49 per gallon. These fixed price fuel agreements qualify for the “normal purchase” exception under ASC 815, therefore the fuel purchases under these contracts are expensed as incurred as an increase to cost of sales.

Note 9 — Other Comprehensive Income

Other comprehensive income consists of market value adjustments to reflect derivative instruments at fair value, pursuant to ASC 815.

Our outstanding interest rate swap agreements which were entered into during the third quarter of fiscal 2008 are designated as cash flow hedges of interest payments on borrowings under our asset-backed credit agreement and are reflected at fair value in our Consolidated Balance Sheet with the related gains or losses on these contracts deferred in stockholders’ equity as a component of other comprehensive income. The gain reported in other comprehensive income during the third quarter and year-to-date 2009 reflects a change in fair value of those agreements during the respective periods. During the third quarter and year-to-date 2009 all interest rate swap agreements were designated as cash flow hedges.

The loss reported in other comprehensive income during the third quarter 2008 reflects a change in the fair value of the interest rate swap agreements which were entered into during the third quarter 2008 as of October 4, 2008. During fiscal 2008 all interest rate swap agreements were designated as cash flow hedges.

During the first quarter 2008 our only outstanding commodity swap agreement did not qualify for hedge accounting in accordance with ASC 815, and the corresponding changes in fair value of the commodity swap agreement were recognized in earnings. The components of comprehensive income are as follows:

		16 Weeks								Year-to-date
		Ended								Ended
		October 10,				October 4,				October 10,				October 4,
(In thousands)		2009				2008				2009				2008
Net Earnings		$	21,927				7,685				45,885				27,733
Change in fair value of derivatives, net of tax			23	(1)			(236	)(2)			302	(3)			(236	)(2)
Comprehensive income		$	21,950				7,449				46,187				27,497

Note 10 — Long-term Debt and Bank Credit Facilities

Total debt outstanding was comprised of the following:

		October 10,				January 3,
(In thousands)		2009				2009
Asset-backed credit agreement:
Revolving credit		$	174,100				93,600
Senior subordinated convertible debt, 3.50% due in 2035			130,173				126,420
Industrial development bonds, 5.60% to 5.75% due in various installments through 2014			2,690				2,875
Notes payable and mortgage notes, 7.95% due in various installments through 2013			410				474
Total debt			307,373				223,369
Less current maturities			(610	)			(595	)
Long-term debt		$	306,763				222,774

Asset-backed Credit Agreement

Our credit agreement is an asset-backed loan consisting of a $340.0 million revolving credit facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit Facility”). Provided no default is then existing or would arise, the Company may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $110.0 million. The Revolving Credit Facility has a 5-year term and will be due and payable in full on April 11, 2013. The Company can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin currently is 2.00% and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions. As of October 10, 2009, $153.1 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $12.8 million of outstanding letters of credit primarily supporting workers’ compensation obligations.

The credit agreement contains no financial covenants unless and until (i) the continuance of an event of default under the credit agreement, or (ii) the failure of the Company to maintain excess availability (a) greater than 10% of the borrowing base for more than two (2) consecutive business days or (b) greater than 7.5% of the borrowing base at any time, in which event, the Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability exceeds 10% of the borrowing base for ninety (90) consecutive days.

The credit agreement contains standard covenants requiring the Company and its subsidiaries, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve the corporate existence, maintain insurance, and pay taxes in a timely manner. Events of default under the credit agreement are usual and customary for transactions of this type including, among other things: (a) any failure to pay principal there under when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.

We are currently in compliance with all covenants contained within the credit agreement.

Senior Subordinated Convertible Debt

To finance a portion of the acquisition of distribution centers in 2005, we sold $150.1 million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035. The notes are our unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our Revolving Credit Facility. See our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 for additional information regarding the notes.

Note 11 — Guarantees

We have guaranteed debt and lease obligations of certain food distribution customers. In the event these retailers are unable to meet their debt service payments or otherwise experience an event of default, we would be unconditionally liable for the outstanding balance of their debt and lease obligations ($14.5 million as of October 10, 2009 as compared to $15.1 million as of January 3, 2009), which would be due in accordance with the underlying agreements.

We have entered into loan and lease guarantees on behalf of certain food distribution customers that are accounted for under ASC Topic 460 (“ASC 460”, originally issued as FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”). ASC 460 provides that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee. The maximum undiscounted payments we would be required to make in the event of default under the guarantees is $11.2 million, which is included in the $14.5 million total referenced above. These guarantees are secured by certain business assets and personal guarantees of the respective customers. We believe these customers will be able to perform under their respective agreements and that no payments will be required and no loss will be incurred under the guarantees. As required by ASC 460, a liability representing the fair value of the obligations assumed under the guarantees of $1.2 million is included in the accompanying consolidated financial statements for the guarantees accounted for under ASC 460. All of the other guarantees were issued prior to December 31, 2002 and therefore not subject to the recognition and measurement provisions of ASC 460.

We have also assigned various leases to other entities. If the assignees were to become unable to continue making payments under the assigned leases, we estimate our maximum potential obligation with respect to the assigned leases to be $8.4 million as of October 10, 2009 as compared to $10.2 million as of January 3, 2009.

Note 12 — Income Taxes

For the third quarter 2009 and 2008, our tax expense was $9.7 million and $5.3 million, respectively. For year-to-date 2009 and 2008, our tax expense was $19.4 million and $15.4 million, respectively.

The provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any discrete events, which are reported in the period that they occur. This estimate is re-evaluated each quarter based on the Company’s estimated tax expense for the full fiscal year. During the third quarter 2009 and 2008 the Company filed claims with and received refunds from various taxing authorities. However, the effect of these discrete events in the third quarter was less than $0.1 million in each year. For the third quarter 2009, the effective tax rate was 30.7% and was reflective of the effects from the settlement of these 2009 uncertain tax positions including the release of certain income tax contingency reserves related to these discrete events. Additionally, the third quarter 2009 reflects the one time tax effect on the gain from the settlement of the litigation with Roundy’s Supermarkets, Inc. The effective tax rates for year-to-date 2009 and 2008 were 29.7% and 35.7%, respectively.

The total amount of unrecognized tax benefits as of end of the third quarter 2009 was $11.5 million. The net increase in unrecognized tax benefits of $0.8 million since June 20, 2009 is due to the increase in unrecognized tax benefits as a result of tax positions taken in prior periods. The total amount of tax benefits that if recognized would impact the effective tax rate was $4.1 million at the end of the third quarter 2009. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. At the end of the third quarter 2009, we had approximately $2.2 million for the payment of interest and penalties accrued.

During the next 12 months, the Company expects various state and local statutes of limitation to expire. Due to the uncertain response of the taxing authorities, an estimate of the range of possible outcomes cannot be reasonably estimated at this time. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state or local examinations by tax authorities for years 2003 and prior.

Note 13 — Pension and Other Postretirement Benefits

The following tables present the components of our pension and postretirement net periodic benefit cost:

16 Weeks Ended October 10, 2009 and October 4, 2008

		Pension Benefits								Other Benefits
(In thousands)		2009				2008				2009				2008
Interest cost		$	716				693				15				14
Expected return on plan assets			(551	)			(742	)			—				—
Amortization of prior service cost			—				(1	)			(25	)			(198	)
Recognized actuarial loss (gain)			422				166				(2	)			(1	)
Net periodic benefit cost		$	587				116				(12	)			(185	)

40 Weeks Ended October 10, 2009 and October 4, 2008:

		Pension Benefits								Other Benefits
(In thousands)		2009				2008				2009				2008
Interest cost		$	1,790				1,732				37				36
Expected return on plan assets			(1,377	)			(1,854	)			—				—
Amortization of prior service cost			—				(2	)			(63	)			(496	)
Recognized actuarial loss (gain)			1,054				415				(4	)			(2	)
Net periodic benefit cost		$	1,467				291				(30	)			(462	)

Weighted-average assumptions used to determine net periodic benefit cost for the first three quarters of 2009 and first three quarters of 2008 were as follows:

		Pension Benefits								Other Benefits
		2009				2008				2009				2008
Weighted-average assumptions:
Discount rate			6.30	%			6.00	%			6.30	%			6.00	%
Expected return on plan assets			7.00	%			7.00	%			N/A				N/A
Rate of compensation increase			N/A				N/A				N/A				N/A

Total contributions to our pension plan in fiscal 2009 are expected to be $0.7 million.

Note 14 — Earnings Per Share

The following table reflects the calculation of basic and diluted earnings per share:

		Third Quarter								Year-to-Date
		Ended								Ended
		October 10,				October 4,				October 10,				October 4,
(In thousands, except per share amounts)		2009				2008				2009				2008
Net earnings		$	21,927				7,685				45,885				27,733
Net earnings per share-basic:
Weighted-average shares outstanding			13,021				12,839				12,998				12,893
Net earnings per share-basic		$	1.68				0.60				3.53				2.15
Net earnings per share-diluted:
Weighted-average shares outstanding			13,021				12,839				12,998				12,893
Dilutive impact of options			—				3				1				4
Shares contingently issuable			356				332				345				279
Weighted-average shares and potential dilutive shares outstanding			13,377				13,174				13,344				13,176
Net earnings per share-diluted		$	1.64				0.58				3.44				2.10
Anti-dilutive options excluded from calculation (weighted-average amount for period)			10				—				5				—

Certain options were excluded from the calculation of diluted net earnings per share because the exercise price was greater than the market price of the stock and would have been anti-dilutive under the treasury stock method.

The senior subordinated convertible notes due 2035 will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.5222 shares (initially 9.3120) of our common stock per $1,000 principal amount at maturity of notes (equal to an adjusted conversion price of approximately $48.95 per share). Upon conversion, we will pay the holder the conversion value in cash up to the accreted principal amount of the note and the excess conversion value, if any, in cash, stock or both, at our option. The notes are only dilutive above their accreted value and for all periods presented the weighted average market price of the Company’s stock did not exceed the accreted value. Therefore, the notes are not dilutive to earnings per share for any of the periods presented.

Performance units granted during 2005 under the 2000 Plan for the LTIP were payable in shares of Nash Finch common stock or cash, or a combination of both, at the election of the participant. No recipients notified the Company by the required notification date for the 2005 awards that they wished to be paid in cash. Therefore, all units under the 2005 plan were settled in shares of common stock during the second quarter 2008. During the second quarter 2009, performance units granted under the 2006 LTIP Plan were settled in shares of common stock. Other performance units and RSUs granted during 2007, 2008 and 2009 pursuant to the 2000 Plan will pay out in shares of Nash Finch common stock. Unvested RSUs are not included in basic earnings per share until vested. All shares of time-restricted stock are included in diluted earnings per share using the treasury stock method, if dilutive. Performance units granted for the LTIP are only issuable if certain performance criteria are met, making these shares contingently issuable under ASC Topic 260 (originally issued as SFAS No. 128, “Earnings per Share”). Therefore, the performance units are included in diluted earnings per share at the payout percentage based on performance criteria results as of the end of the respective reporting period and then accounted for using the treasury stock method, if dilutive. For the third quarter 2009, approximately 201,000 shares related to the LTIP and 155,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to 179,000 shares related to the LTIP and 153,000 shares related to RSUs during the third quarter 2008. For year-to-date 2009, approximately 190,000 shares related to the LTIP and 155,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to 133,000 shares related to the LTIP and 146,000 shares related to RSUs during year-to-date 2008.

Note 15 — Segment Reporting

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments. Our food distribution segment consists of 15 distribution centers that sell to independently operated retail food stores, our corporate owned stores and other customers. The military segment consists primarily of five distribution centers that distribute products exclusively to military commissaries and exchanges. The retail segment consists of corporate-owned stores that sell directly to the consumer.

A summary of the major segments of the business is as follows:

		Third Quarter Ended
		October 10, 2009												October 4, 2008
		Sales from				Inter-								Sales from				Inter-
		external				Segment				Segment				external				segment				Segment
(In thousands)		customers				sales				profit				customers				sales				profit
Food Distribution		$	818,202				90,231				27,302				839,894				94,245				30,028
Military			637,056				—				15,183	(1)			390,212				—				15,072
Retail			178,046				—				5,882				186,202				—				6,326
Eliminations			—				(90,231	)			—				—				(94,245	)			—
Total		$	1,633,304				—				48,367				1,416,308				—				51,426

		Year-to-Date Ended
		October 10, 2009												October 4, 2008
		Sales from				Inter-								Sales from				Inter-
		external				segment				Segment				external				segment				Segment
(In thousands)		customers				sales				profit				customers				sales				profit
Food Distribution		$	2,040,013				224,000				67,505				2,034,129				231,595				75,853
Military			1,508,312				—				38,317	(1)			956,593				—				36,925
Retail			441,893				—				13,507				454,330				—				15,643
Eliminations			—				(224,000	)			—				—				(231,595	)			—
Total		$	3,990,218				—				119,329				3,445,052				—				128,421

Reconciliation to Consolidated Statements of Income:

		Third Quarter Ended								Year-to-Date Ended
		October 10,				October 4,				October 10,				October 4,
(In thousands)		2009				2008				2009				2008
Total segment profit		$	48,367				51,426				119,329				128,421
Unallocated amounts:
Adjustment of inventory to LIFO			445				(8,361	)			732				(11,892	)
Gain on acquisition of a business			—				—				6,682				—
Gain on litigation settlement			7,630				—				7,630				—
Unallocated corporate overhead			(24,787	)			(30,037	)			(69,078	)			(73,381	)
Earnings before income taxes and cumulative effect of a change in accounting principle		$	31,655				13,028				65,295				43,148

Note 16 — Legal Proceedings

Roundy’s Supermarkets, Inc. v. Nash Finch

On February 11, 2008, Roundy’s Supermarkets, Inc. (“Roundy’s”) filed suit against us claiming we breached the Asset Purchase Agreement (“APA”), entered into in connection with our acquisition of certain distribution centers and other assets from Roundy’s, by not paying approximately $7.9 million that Roundy’s claims is due under the APA as a purchase price adjustment. We answered the complaint denying any payment was due to Roundy’s and asserted counterclaims against Roundy’s for, among other things, breach of contract, misrepresentation, and breach of the duty of good faith and fair dealing. In our counterclaim we demand damages from Roundy’s in excess of $18.0 million.

On or about March 25, 2008, Roundy’s filed a motion for judgment on the pleadings with respect to some, but not all, of the claims, asserted in our counterclaim. On May 27, 2008, we filed an amended counterclaim which rendered Roundy’s motion moot. The amended counterclaim asserts claims against Roundy’s for, among other things, breach of contract, fraud, and breach of the duty of good faith and fair dealing. Our counterclaim demands damages from Roundy’s in excess of $18.0 million. Roundy’s filed an answer to the counterclaims denying liability, and subsequently moved to dismiss our counterclaims. The Court denied the motion in part and granted the motion in part.

On September 14, 2009, we entered into a settlement agreement with Roundy’s that fully resolves all claims brought in the lawsuit. Under the terms of the settlement agreement, both parties agreed to dismiss their claims against the other in exchange for a release of claims. Neither party was required to pay any money to the other. Subsequently, we have recorded a $7.6 million gain in the third quarter, 2009, which represent the reversal of the liability we had recorded in conjunction with the disputed APA purchase price adjustment.

Other

We are also engaged from time-to-time in routine legal proceedings incidental to our business. We do not believe that these routine legal proceedings, taken as a whole, will have a material impact on our business or financial condition.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Information and Cautionary Factors

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements relate to trends and events that may affect our future financial position and operating results. Any statement contained in this report that is not statements of historical fact may be deemed forward-looking statements. For example, words such as “may,” “will,” “should,” “likely,” “expect,” “anticipate,” “estimate,” “believe,” “intend, “ “potential” or “plan,” or comparable terminology, are intended to identify forward-looking statements. Such statements are based upon current expectations, estimates and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Important factors known to us that could cause or contribute to material differences include, but are not limited to the following:

	•		the effect of competition on our food distribution, military and retail businesses;
	•		general sensitivity to economic conditions, including the uncertainty related to the current state of the economy in the U.S. and worldwide economic slowdown; recent disruptions to the credit and financial markets in the U.S. and worldwide; changes in market interest rates; continued volatility in energy prices and food commodities;
	•		macroeconomic and geopolitical events affecting commerce generally;
	•		changes in consumer buying and spending patterns;
	•		our ability to identify and execute plans to expand our food distribution, military and retail operations;
	•		possible changes in the military commissary system, including those stemming from the redeployment of forces, congressional action and funding levels;
	•		our ability to identify and execute plans to improve the competitive position of our retail operations;
	•		the success or failure of strategic plans, new business ventures or initiatives;
	•		our ability to successfully integrate and manage current or future businesses we acquire, including the ability to manage credit risks and retain the customers of those operations;
	•		changes in credit risk from financial accommodations extended to new or existing customers;
	•		significant changes in the nature of vendor promotional programs and the allocation of funds among the programs;
	•		limitations on financial and operating flexibility due to debt levels and debt instrument covenants;
	•		legal, governmental, legislative or administrative proceedings, disputes, or actions that result in adverse outcomes;
	•		failure of our internal control over financial reporting;
	•		changes in accounting standards;
	•		technology failures that may have a material adverse effect on our business;
	•		severe weather and natural disasters that may impact our supply chain;
	•		unionization of a significant portion of our workforce;
	•		costs related to a multi-employer pension plan;
	•		changes in health care, pension and wage costs and labor relations issues;
	•		product liability claims, including claims concerning food and prepared food products;
	•		threats or potential threats to security; and
	•		unanticipated problems with product procurement.

A more detailed discussion of many of these factors, as well as other factors, that could affect the Company’s results is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2009. You should carefully consider each of these factors and all of the other information in this report. We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to revise or update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission (“SEC”).

Overview

In terms of revenue, we are the second largest publicly traded wholesale food distributor in the United States serving the retail grocery industry and the military commissary and exchange systems. Our business consists of three primary operating segments: food distribution, military food distribution and retail.

In November 2006, we announced the launch of a new strategic plan, Operation Fresh Start, designed to sharpen our focus and provide a strong platform to support growth initiatives. Built upon extensive knowledge of current industry, consumer and market trends, and formulated to differentiate the Company, the new strategy focuses activities on specific retail formats, businesses and support services designed to delight consumers. The strategic plan encompasses several important elements:

•

Emphasis on a suite of retail formats designed to appeal to the needs of today’s consumers including an initial focus on everyday value, Hispanic and extreme value formats, as well as military commissaries and exchanges;

•

Strong, passionate businesses in key areas including perishables, health and wellness, center store, pharmacy and military supply, driven by the needs of each format;

•

Supply chain services focused on supporting our businesses with warehouse management, inbound and outbound transportation management and customized solutions for each business;

•

Retail support services emphasizing best-in-class offerings in marketing, advertising, merchandising, store design and construction, store brands, market research, retail store support, retail pricing and license agreement opportunities;

•

Store brand management dedicated to leveraging the strength of the Our Family brand as a regional brand through exceptional product development coupled with pricing and marketing support; and

•

Integrated shared services company-wide, including IT support and infrastructure, accounting, finance, human resources and legal.

In addition to the strategic initiatives already in progress, our 2009 initiatives consist of the following:

•

Invest in our retail formats, supply chain capabilities and center store systems;

•

Successful integration of three distribution facilities acquired from GSC Enterprises, Inc. into our military segment; and

•

Identify acquisitions that support our strategic plan.

Our food distribution segment sells and distributes a wide variety of nationally branded and private label products to independent grocery stores and other customers primarily in the Midwest and Southeast regions of the United States.

Our military segment contracts with manufacturers to distribute a wide variety of grocery products to military commissaries and exchanges located in the United States, and in Europe, Puerto Rico, Cuba, the Azores and Egypt. We have over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges. On January 31, 2009, we completed the purchase from GSC Enterprises, Inc., of substantially all of the assets relating to three wholesale food distribution centers located in San Antonio, Texas, Pensacola, Florida and Junction City, Kansas, including all inventory and customer contracts related to the purchased facilities (“GSC acquisition”).

Our retail segment operated 57 corporate-owned stores primarily in the Upper Midwest as of October 10, 2009. On April 1, 2008, we completed the acquisition of two stores located in Rapid City, SD and Scottsbluff, NE and on May 1, 2009 we opened an AVANZA^® store in Aurora, CO. Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed or sold one retail store in 2009 and four retail stores in 2008. We are implementing initiatives of varying scope and duration with a view toward improving our response to and performance under these highly competitive conditions. These initiatives include designing and reformatting some of our retail stores into alternative formats to increase overall retail sales performance. As we continue to assess the impact of performance improvement initiatives and the operating results of individual stores, we may need to recognize additional impairments of long-lived assets and goodwill associated with our retail segment, and may incur restructuring or other charges in connection with closure or sales activities. The retail segment yields a higher gross profit percent of sales and higher selling, general and administrative (“SG&A”) expenses as a percent of sales compared to our food distribution and military segments. Thus, changes in sales of the retail segment can have a disproportionate impact on consolidated gross profit and SG&A as compared to similar changes in sales in our food distribution and military segments.

Results of Operations

Sales

The following tables summarize our sales activity for the 16 weeks ended October 10, 2009 (“third quarter 2009”) compared to the 16 weeks ended October 4, 2008 (“third quarter 2008”) and the 40 weeks ended October 10, 2009 (“year-to-date 2009”) compared to the 40 weeks ended October 4, 2008 (“year-to-date 2008”):

		Third quarter 2009								Third quarter 2008
						Percent of								Percent of				Increase/(Decrease)
(In thousands)		Sales				Sales				Sales				Sales				$				%
Segment Sales:
Food Distribution		$	818,202				50.1	%			839,894				59.3	%			(21,692	)			(2.6	)%
Military			637,056				39.0	%			390,212				27.6	%			246,844				63.3	%
Retail			178,046				10.9	%			186,202				13.1	%			(8,156	)			(4.4	)%
Total Sales		$	1,633,304				100.0	%			1,416,308				100.0	%			216,996				15.3	%

		Year-to-date 2009								Year-to-date 2008
						Percent of								Percent of				Increase/(Decrease)
(In thousands)		Sales				Sales				Sales				Sales				$				%
Segment Sales:
Food Distribution		$	2,040,013				51.1	%			2,034,129				59.0	%			5,884				0.3	%
Military			1,508,312				37.8	%			956,593				27.8	%			551,719				57.7	%
Retail			441,893				11.1	%			454,330				13.2	%			(12,437	)			(2.7	)%
Total Sales		$	3,990,218				100.0	%			3,445,052				100.0	%			545,166				15.8	%