Nash Finch 2006 Annual Report

Financial Highlights Fiscal years ended December 30, 2006 and December 31, 2005. (Amounts in thousands, except per share data and number of employees) 2006 2005 Sales Earnings from continuing operations As a percent of total sales Consolidated EBITDA As a percent of total sales Diluted earnings per share from continuing operations (EPS) Dividends paid per share Percentage change in same-store sales Net working capital Ratio of current assets to current liabilities Return on net assets Total stockholders’ equity Return from continuing operations on stockholders’ equity Capital expenditures Weighted-average number of shares outstanding on a diluted basis Number of employees $ 4,631,629 $ (23,328) (0.50) $ 102,730 2.22 $ (1.74) $ 0.720 (1.77) $ 178,831 1.64 (7.73) $ 294,380 (7.92) $ 27,469 13,382 8,227 % % % % % 4,555,507 41,196 0.90 % 132,672 2.91 % 3.13 0.675 (4.10) % 186,348 1.57 13.85 % 322,578 12.77 % 24,638 13,185 9,487 Sales(a) $ in billions Consolidated EBITDA(b) $ in millions (a) Fiscal 2003 results contain an additional week of sales of $68.4 million. (b) Consolidated EBITDA is a non-GAAP financial measure that is reconciled to the most directly comparable GAAP financial results on the table found on page 16 of this report. 1 Company Profile Nash Finch Company is a Fortune 500 company and one of the leading food distribution companies in the United States. Nash Finch’s core business, food distribution, serves independent retailers and military commissaries in 31 states, the District of Columbia, Europe, Cuba, Puerto Rico, the Azores, and Egypt. The Company also owns and operates a base of retail stores, primarily supermarkets under the Econofoods®, Family Thrift Center®, Sun Mart®, and Avanza® trade names. Further information is available on the Company’s website at www.nashfinch.com. 2 Alec Covington, President and Chief Executive Officer Dear Shareholders Having joined Nash Finch Company as your new Chief Executive Officer during 2006, I am thrilled to be part of an organization with a rich heritage and long-standing reputation in the food industry. I am excited about leading the Nash Finch of today and enthusiastic about helping build the Nash Finch of tomorrow. Accordingly, this letter includes a brief summary of our efforts during 2006, as well as a roadmap for where we are heading in 2007 and beyond. New Management Team and Structure New Strategy: Operation Fresh Start When I joined the Company in May, I found a lot of dedicated, hard-working people. But I also heard a lot of concern that our organization had lost momentum and focus, and that we needed reorganizing to better serve our customers. In July, we announced a number of organizational and executive changes designed to improve our organizational structure and bolster our senior executive team. We established a supply chain management group and a food distribution group, both led by industry veterans. Throughout the balance of the year, and into 2007, we continued to strengthen our executive team. At this point, I am very pleased to report that we have a first-rate senior management team consisting of high quality, experienced, and talented individuals. Stabilizing the Company Another very important focus for us during 2006 was stabilizing the Company by visiting customers, talking with employees, meeting with vendors, and discussing our organization with financial institutions. From our customers, I received honest and sincere feedback about Nash Finch and its challenges. Our associates also shared their perceptions of the Company’s performance and helped me to target specific areas of needed improvement. Vendors provided their insight on the industry and how the Company fits into their plans. Finally, investors and financial institutions reviewed their concerns with me, as well as where they see opportunity for our Company. The outcome of these meetings and discussions helped restore belief in Nash Finch among the vendor community. It created a renewed sense of purpose among associates, helped rebuild relationships with customers, and led to a renewed confidence in the future of Nash Finch within the financial community. Once we began to stabilize the business, we needed to determine the best path for our future. After a thorough and deep review of the organization, the industry, and consumer trends, we embarked upon the process of developing our strategy. Through considerable discussion and exchange, I believe we have a high degree of alignment between our management team and our Board of Directors, enabling us to create an exciting future for Nash Finch through our new strategy, Operation Fresh Start. In order to be a dynamic, successful business it was imperative to develop this new, actionable strategy for Nash Finch. Once complete, it was equally important to explain our new strategy to all stakeholders. By the end of 2006, we successfully communicated Operation Fresh Start to our customers, associates, vendors, and the financial community. I have been gratified by the reaction we have received. A more detailed overview of Operation Fresh Start is provided later in this report. Financial Results Sales for fiscal 2006 were $4.632 billion compared to $4.556 billion in fiscal 2005. The increase in sales primarily reflects the Company’s acquisition of food distribution businesses located in Lima, Ohio and Westville, Indiana effective March 31, 2005, and stronger sales in our military business, partially offset by a decline in sales associated with the closure of underperforming corporate-owned retail stores. Our net loss for fiscal 2006 was $23.0 million as compared to net earnings of $41.3 million for fiscal 2005. Fiscal 2006 pre-tax earnings were reduced by significant charges totaling $63.7 million. This compares to fiscal 2005 pre-tax special charges of 3 $3.9 million. Specifics on these charges were outlined in our fiscal 2006 and fourth quarter earnings press release. Consolidated EBITDA for fiscal 2006 was $102.7 million, or 2.2 percent of sales, compared to $132.7 million, or 2.9 percent of sales, for fiscal 2005. Consolidated EBITDA is a non-GAAP financial measure that is reconciled to the most directly comparable GAAP financial results on the table found on page 16 of this report. In reviewing our financial performance, it is important to assess results in relationship to the long-term financial targets we announced in conjunction with our strategic plan. First, it is our intention to focus our efforts on the improvement of EBITDA margin. Specifically, we aspire to move this measurement from recent levels that have been approximately 3 percent to a result closer to 4 percent of sales. We expect some of the improvement to come as we implement initiatives designed to improve our current business by better managing our inventories, growing our revenues, and driving operating efficiencies in our facilities. However, in order to fully achieve this result, we will need to gradually change our mix of business by growing our perishable volume and focusing on accretive acquisitions that expand our current product line offerings. Second, we want to place an increased emphasis on growing our business and have targeted a 2 percent growth rate resulting from the full implementation of our strategic plan. We expect that it will take the balance of 2007 and much of 2008 to fully implement our strategy, therefore, we have aligned the achievement of this target with this timeframe. We further believe that balance sheet management is critical to the success of any company, and it is our intention to focus our efforts on achieving excellence in this area by targeting a 10 percent return on net assets for our Company. While we believe that this measurement will vary each year due to changes in working capital, we believe it is possible to develop a trend in the direction of our target over the next several years. Lastly, we believe that good debt management is very important and we have been clear as to our intentions to bring our debt to EBITDA ratio down to 2.5. During 2006, we reduced our debt level by more than $57 million, evidencing our strong cash flow capability and dedication to our target. These are the specific targets that we will hold ourselves accountable to over the next several years and they will further serve as a means to evaluate our performance as a management team. In short, fiscal 2006 was a difficult year. However, much was accomplished that positions us for improved results in 2007 and beyond. Next year, I hope to be able to report improvements in our results for 2007 and show you visible evidence that our strategy is being successfully implemented. 2007: A Transition Year As we move into 2007, it is clear this will be a year of transition for Nash Finch. Led by our new management team, we have started moving forward on many initiatives contained in our strategic plan. However, many of our key initiatives require adequate time to implement in a thoughtful and precise manner. Furthermore, we are clear as a management team that in addition to the strategic work that must be accomplished, we must also do a better job of running our day to day business. Therefore, it is our intention that in addition to focusing on the implementation of our strategic plan, we must deliver improved operational results as well. We have many initiatives underway to ensure that this occurs. The future of Nash Finch remains bright. I greatly appreciate the contributions and dedication of all our associates, the partnerships with our vendors and customers, and the trust bestowed upon us by the financial community. As we work toward reshaping the Company in 2007, I am convinced we have the team and the momentum to carry out the exciting goals planned for the new Nash Finch Company. Sincerely, Alec C. Covington President and Chief Executive Officer 4 Executive Management Team “First Who, then What” – Jim Collins, Author, Good To Great According to business expert Jim Collins, building a deep and strong executive team is a key component in creating great companies. One of the key accomplishments for the Company, starting in 2006 and continuing into early 2007, has been the creation of a strong executive team. Our team consists of proven leaders offering a dynamic combination of industry expertise and professional capability. The following profiles outline the extensive backgrounds of each executive. Christopher A. Brown Executive Vice President, Food Distribution Christopher Brown joined Nash Finch in 2006. From 2003 to 2006, Christopher served as Chief Executive Officer of SimonDelivers, Inc., a leading online grocery delivery company. While at SimonDelivers he spearheaded the design and implementation of a new company structure that resulted in sales volume and gross profit margin improvements. He also led significant customer service and convenience enhancing initiatives. Prior to joining SimonDelivers, Christopher was the Executive Vice President, Merchandising at Nash Finch from 1999 to 2003 where he was responsible for all merchandising, procurement, marketing, category management, and advertising. During the eight years prior, he held various management positions of increasing responsibilities at Richfood Holdings, Inc. Christopher holds a BS degree in Business Administration — Marketing from Winona State University. Alec C. Covington President and Chief Executive Officer Alec Covington joined Nash Finch in 2006 as President and Chief Executive Officer with nearly 30 years of experience in food wholesaling and retailing. He most recently served as President and CEO of Tree of Life, Inc., a leading national distributor of natural, organic, specialty, ethnic, and gourmet food products. From 2001 to 2004, Alec was President and CEO of AmeriCold Logistics, a leading provider of supply chain solutions in the consumer packaged goods industry. From 2000 to 2001, he was Executive Vice President of SuperValu Inc., as well as President and COO of the Distribution Companies Division. Prior to that time, Alec served as President and COO of other well-known foodindustry organizations including Richfood, Inc., a regional food distribution company and Houchens Industries, Inc., a multi-state retailer. He also held the position of Division President with Wetterau, Inc. Robert B. Dimond Executive Vice President, Chief Financial Officer and Treasurer Robert Dimond joined Nash Finch in 2007 from Wild Oats Markets Inc., a leading national natural and organic foods retailer. While at Wild Oats he served as the Company's Chief Financial Officer and Senior Vice President since April 2005. Bob previously served as Executive Vice President, Chief Financial Officer and Treasurer at Nash Finch from 2000 to 2004. Bob was Group Vice President and Chief Financial Officer for the Western Region of The Kroger Company and served as Vice President, Administration and Controller for Smith's Food and Drug Centers. Bob earned his BS degree in accounting from the University of Utah and is a Certified Public Accountant. 5 Jeffrey E. Poore Executive Vice President, Supply Chain Management Jeff Poore joined Nash Finch in May of 2001 as Vice President of Distribution and Logistics, where he was responsible for overseeing and managing the Company's warehouse, transportation and logistics operations. In August 2004, Jeff was named Senior Vice President, Military. Prior to joining Nash Finch, he was Vice President of Logistics for the Eastern Region of Richfood Holdings, Inc./SuperValu Inc. He has also served in a variety of strategic and distribution roles for Computer Sciences, Hills Department Stores, Payless ShoeSource and Payless Cashways. Jeff holds a BA in Business Administration from Loyola Marymount University. St. Paul Office of Larson King, LLP. She also spent 13 years with the law firm of Oppenheimer, Wolff & Donnelly, LLP. Kathy also worked as Special Assistant Attorney General in the Minnesota Attorney General's Office for six years. Kathy earned her JD degree from Syracuse University College of Law, cum laude, and a BA from Keene State College. She is a member of the American Bar Association and the Minnesota State, Wisconsin State, and Ramsey County Bar Associations. Edward L. Brunot Senior Vice President, Military Ed Brunot, an addition to the management team in 2006, served from 2002 to 2006 as the Senior Vice President of Operations at AmeriCold Logistics. While working at Americold, Ed had financial and operational oversight of 29 facilities within eight western states. He has also served in a variety of distribution and logistics leadership roles for CS Integrated, Power Logistics, and Exel Logistics. Ed holds a BS from the United States Military Academy at West Point and an MS from the University of Scranton. Calvin S. Sihilling Executive Vice President, Chief Information Officer Cal Sihilling joined Nash Finch in 2006 and most recently served as CIO of AmeriCold Logistics, a leading third-party provider of supply chain solutions in the consumer packaged goods industry. He was responsible for the oversight of Information Technology (IT), Transportation, Project Support, and the National Service Center. Before that, Cal was CIO of the Eastern Region of Richfood Holdings, Inc./SuperValu Inc. for three years. In the ten years prior, he was Vice President, Information Systems at Alex Lee, Inc. Prior to that, Cal held various leadership positions servicing IT systems at such companies as Pepsico Food Systems, Dr. Pepper Company and Electronic Data Systems. Cal holds a BS from the Northrop Institute of Technology. Denise M. Wilson Senior Vice President, Human Resources Denise Wilson joined Nash Finch in 2007 from NRG, Energy, Inc., a wholesale power generation company, most recently acting as NRG’s Executive Vice President and Chief Administrative Officer, with responsibility for oversight of Information Technology (IT), Human Resources, Regulatory & Government Affairs, and Office Services. Prior to that position, she served as NRG’s Vice President of Human Resources. Before her seven years of service with NRG, Denise was the Vice President of Human Resources at Metris Companies, Inc., and earlier served as Director, Human Resources at General Electric, GE Capital IT Solutions. Denise earned her Bachelor of Science degree in Education and her Master of Arts degree in Industrial Relations from the University of Minnesota. Kathleen M. Mahoney Senior Vice President, General Counsel and Secretary Kathy Mahoney most recently served as Interim General Counsel and Secretary at Nash Finch. She joined the Company in 2004 as Vice President, Deputy General Counsel. Prior to working at Nash Finch, Kathy was the Managing Partner in the 6 Operation Fresh Start Operation Fresh Start, our new strategy, charts a bold and exciting course for Nash Finch Company. Created through experienced leadership, in-depth research and extensive industry knowledge, this new approach focuses our every effort on delighting shoppers. A Changing Marketplace The rapid pace of change in today’s marketplace manifests itself in many significant ways. Alternative formats and supercenters continue to rise in numbers. The gap between economically challenged income groups and the highest income earners continues to widen. The growth rate among ethnic groups, such as the Hispanic and Asian populations, remains noteworthy in a variety of markets, large and small. Some of the largest population segments, such as Baby Boomers, grow older with profound implications for retailing. The increased interest in health and wellness has resulted in massive growth in certain product categories, such as organic foods and beverages, as well as functional foods and personal care items. All of these changes illustrate the need for supermarkets to reinvent themselves by developing effective niche opportunities to serve specific shoppers. Delighting Shoppers As is evident by looking at the retail landscape, consumers of today are offered a plethora of shopping options. But not all of these choices are finely tuned to the wants and desires of specific shoppers. Operation Fresh Start, designed to address this opportunity, focuses on several distinct format opportunities, with the goal of delighting customers shopping these stores. Focused Businesses In order to delight customers, Nash Finch is reengineering its business model to more closely align with and exceed the requirements of retailers. A major component of this new approach is the refocusing of our core departments as businesses, each with in-depth expertise and knowledge. These businesses include: Produce – offering a full-service produce program with the highest quality and deepest variety possible, including organics and emerging varieties, all supplied through a dedicated, efficient logistics network. Meat & Deli – providing full-service meat and deli programs offering extensive variety, including a complete line of natural products, coupled with dedicated logistics and focused specialists to ensure thorough store support. Center Store – focusing on an extensive variety of Our Family® products, grocery items, health and beauty care products, general merchandise offerings, dairy goods, and frozen food items. Seafood – delivering full-service seafood merchandise, including wild and farm-raised offerings, paired with a complete line of related supplies and services. Bakery – including dry mix, scratch and frozen bakery assortments, as well as training, quality assurance, supplies, and a dedicated delivery program. Wellness/Specialty – supplying full lines of premium products, multicultural items, natural and organic lines, supplements, vitamins, and minerals. Operation Fresh Start format development centers on stores that “make customers smile.” 7 Pharmacy – making available a complete wellness program and pharmacy management services. Military – providing a product assortment customized for the military resale system through dedicated facilities, logistics, management team and systems. Minneapolis Service Center Rather than considering our Minneapolis office the corporate headquarters, we prefer to think of it as a service center. We believe this approach places a strong, focused emphasis on serving the needs of all customers by providing several key elements to Nash Finch-supplied retailers, as well as internal customers. Retail Support Center – creating the nucleus of our retail formats, the Retail Support Center includes marketing and advertising, retail operations and pricing, merchandising support, consumer and site research, store design and construction services, and format licensing. Supply Chain Services – overseeing supply chain solutions, this team of professionals provides warehouse management, inbound freight consolidation, outbound transportation management, and customized logistics solutions. Store Brand Management – managing primarily the century-old Our Family® brand, as well as the IGA brand, this experienced group handles product development, pricing and marketing support, and quality assurance. Shared Services – tying together the support services in the organization — IT support and infrastructure, accounting, finance, human resources, and legal services fall within this organization. We are excited and optimistic about Operation Fresh Start, as well as the potential it holds. By focusing on what makes shoppers smile, through targeted formats and focused businesses, anchored by dedicated support services, there is an exciting future for Nash Finch and our many retailer partners. 8 Food Distribution Customers Martin’s Super Markets: Focus on the Fundamentals “Our business is based on excelling in customer service, executing the basics, and adding value to the shopping experience for our customers,” says Rob Bartels, President and CEO of Martin's Super Markets. After nearly 60 years in business, this privately held, third-generation family business includes 20 grocery and three pet supply stores, a central bakery, a distribution center, and more than 3,000 employees. Across their northern Indiana and southern Michigan market, Martin's directly competes against 14 supercenters. “While we are the smallest company among the dominant retail players,” says Bartels, “we excel at customer service and the fresh side of the store. As a result, customers reward us with their business.” Concentrating on the basics, managing the details at the point of execution, and using resources responsibly are the logic behind Martin's success. “Our most important competitive advantage is our tremendous team; they understand the business and know how to accomplish our goals,” says Bartels. “Nash Finch shares our dedication to the fundamentals. They manage the details and get the job done right.” Central Market: Keep It Fresh When a new supercenter opened in Detroit Lakes, Minnesota, Central Market’s owners Kathy Dickson and John Lofberg met them head-on. “We bought out our competition,” says Dickson, “and shifted our emphasis to freshness.” From the deli and bakery to perishables and meat, the freshness concept has proven a success. “Nash Finch Angus Pride does very well for us,” says Lofberg. “Nash Finch also helped us identify customer perceptions, as well as new trends in dry goods.” With a store in Detroit Lakes, Minnesota, as well as stores in Mandan and Bismarck, North Dakota, the family continues a rich tradition in the grocery industry. Kathy’s father owned many stores throughout a four state area over the years and her son, John Lofberg, partners with her in the business today. Nash Finch has long been part of the family’s business equation. “When you’re a Nash Finch retailer,” says Dickson, “there is a real partnership.” 9 Hugo’s: Beyond Price and Product Hugo and Dorothy Magnuson opened Pure Foods in 1939 with the goal of providing great service and quality products at a competitive price. For 68 years, the commitment remained the same, but the store—now known as Hugo’s—changed dramatically. Under the leadership of their son, Curt Magnuson, Hugo’s grew to eight stores serving eastern North Dakota and northwestern Minnesota. From the beginning, Hugo’s was closely aligned with Nash Finch. “Originally, Curt’s father was a Nash Finch associate,” says Doug Driscoll, Hugo’s Director of Operations. “Nash Finch is still our number one partner.” Excellent products and on-time deliveries from the Fargo distribution center help Hugo’s maintain a strong position in a market that includes several supercenters. “We find Nash Finch’s market research essential for maintaining our competitive edge,” says Driscoll. Beyond providing the right price and product, Driscoll believes Nash Finch is uniquely committed to their retailers. “This relationship goes beyond business,” says Driscoll. “Nash Finch is concerned about our well-being.” Remembering Curt Magnuson Curt Magnuson was born on February 26, 1941, in Grand Forks, North Dakota. The son of Hugo and Dorothy Magnuson, Curt’s first foray into the family-owned grocery business was delivering groceries on his bicycle. In 1967, Curt assumed a new role as president of Hugo’s, taking over the position formerly held by the founder and his father, Hugo. During the years of Curt’s leadership, the company grew from two to eight stores. As a businessman, he cared deeply about his employees and customers. Curt also shared his father’s passion for the community. He served as chairman of the Chamber of Commerce and won the Henry Havig Award for civic and business leadership. He was honored as North Dakota Grocer of the Year in 1993 and won the National Grocers Association’s Spirit of America award in 1999. Curt Magnuson passed away on March 8, 2007. Nash Finch Company remembers Curt not only as a loyal Nash Finch customer, but more importantly, for the care and compassion he exhibited in his business, among those in his community, and with his family. 10 Buehler’s Food Markets: Staying Current After working for A&P, the leap to independent retailer was a logical step for E. L. (Ed) Buehler. Now, nearly 80 years later, this family owned, east-central Ohio grocer continues to evolve, with 11 grocery stores—and two more opening soon, nine pharmacies and five Ace Hardware stores. “By keeping up with trends and emphasizing courtesy and customer service we make shopping pleasant,” says Bob Buehler, Director of Marketing and Merchandising. An excellent fresh department is a strong differentiator for this retailer, which competes against supercenters in every market. Buehler also credits their success to the attached hardware stores. Buehler’s turned to Nash Finch Market Research for help evaluating the marketplace. “Their studies gave us a better understanding of our competitors, and how we could maintain our edge in the market,” says Buehler. And he appreciates Nash Finch’s willingness to listen and work through challenges. Adds Buehler, “They’ve done a nice job for us.” Miracle Mart: Minot’s Grocery Phenomenon “Shortly after we purchased three Miracle Mart stores in Minot, North Dakota, we joined hands with Nash Finch as our supplier,” says Keith Johanneson. “It’s been a fabulous relationship.” Prior to the acquisition, Johanneson was Miracle Mart’s competitor. Today the Miracle Mart stores—which contain liquor stores— account for 75 percent of the grocery and over 80 percent of the liquor business in an area with a supercenter. “Our stores are a cut above,” says Johanneson. “The big difference is our people. We invest heavily in training.” Johanneson’s family has nearly six decades of grocery expertise. Plus, he also owns five MarketPlace Food & Drug stores in North Dakota and Minnesota. By providing immediate replenishments, quality products, and competitive freight rates, Nash Finch has helped his Miracle Marts become Minot’s leading retailer. Says Johanneson: “Their efforts at wholesale let us create an outstanding shopping experience at retail.” 11 Consumer-Centered Retailing stores in Nebraska, Iowa, and Colorado. Mor For Less is an extreme value format licensed to some of our customers east of the Mississippi. Military commissaries, while not an exclusive Nash Finch format, have been served by MDV for many years through our specialized military supply business. As we research and develop potential new formats for our corporate-owned stores and independent retail customers, exceeding the expectations of consumers remains the guiding force behind every decision. Once each format undergoes thorough testing and proves successful, our independent retail customers will be able to obtain a license for the format. By knowing and understanding what makes shoppers of these various formats smile, Nash Finch plans to provide the right experience to delight each and every shopper, whether the store is owned by Nash Finch or by one of our outstanding independent retailers. Developing appealing formats for today’s shoppers is a key component of Operation Fresh Start. As part of our strategic planning process we conducted a detailed assessment of consumer demographics, market dynamics, and existing retail formats. The result led us to concentrate on providing an appropriate shopping experience for several specific consumer groups ranging from lower-income to upscale shoppers, as well as multicultural and more mainstream consumers. While we do not serve all of these consumers today at Nash Finch, we already supply some groups through our existing formats. For example, our highly focused multicultural format, Avanza, geared toward serving the rapidly growing first-generation Hispanic population, already operates successfully with two stores in Denver, Colorado. We also assist customers looking for value through our corporateowned Food Bonanza® and Wholesale Food Outlet 12 Military Focus No better example of Nash Finch supporting a current retail format exists than the focused, dedicated servicing of the military resale system through our military division, MDV. Through this business, MDV serves military commissaries and exchanges in 25 states, the District of Columbia, Europe, Cuba, Puerto Rico, the Azores, and Egypt with format-specific systems, facilities, processes, and management team. MDV sales of nearly $1.2 billion in 2006 makes us the largest military distributor worldwide. Like other formats supplied by Nash Finch, this format focuses on a specific consumer we strive to delight — active and retired military personnel and their families. MDV leads the way in supplying commissaries and exchanges due to the unique, tailored systems designed specifically to support their needs in the areas of procurement, accounting, warehouse, transportation, and human resources. Our website, a leading-edge tool, provides critical information regarding sales, purchase orders, order management, shipments, and item data to commissary/exchange personnel and vendors. A true testimony to our system capability, the Defense Commissary Agency (DeCA) chooses to partner with MDV for system testing, design, and development on many key business initiatives. Another reason MDV is a preferred partner of DeCA revolves around the more than 1 million square feet of dedicated “military only” warehouse space in Norfolk, Virginia and Jessup, Maryland. This dedicated space, combined with nearly 200 trailers and 83 tractors, provides industry-leading fill rates and service. MDV processes are also specifically designed to meet the needs of the military resale system. We tailor accounting and financial systems, design operational methods and transportation processes, and measure operations and quality, all with the goal of satisfying our customers’ needs. Finally, our management team and the operational structure at MDV reflect best practices. For example, we employ field representatives both domestically and internationally to work on-site with commissaries and exchanges for promotional planning, operational support, delivery issues, and problem resolution. We also provide dedicated business managers and customer service teams to provide a single point of contact for manufacturers and food brokers on business development, new items, promotional management, seasonal and event planning, as well as problem resolution. Our efforts result in the military customer receiving the greatest item selection, at the lowest cost, delivered on-time, and available in-stock, at his local commissary or exchange. To MDV, nothing is more important than providing the very best to those serving our country. MDV proudly supplies food and related products to our nation’s military personnel and their families. Photo Credits: Top Right – Defense Commissary Agency Lower Left – United States Army 13 Our Family Pride Our Family®, a century-old brand with more than 2,000 store brand products offered exclusively by Nash Finch, has a well-deserved reputation for delivering “at or better than national brand quality.” In 2006, we capitalized on the outstanding quality perception of Our Family® products, coupled with the demands of today’s consumers, by launching a new line of super premium, unique, and distinctive items under the Our Family® Pride label. As of the end of 2006, we introduced more than 50 individual items in a dozen categories including preserves, olive oil, balsamic vinegar, marinara sauce, roasted bell peppers, olives, oatmeal, frozen appetizers and entrees, frozen meats, frozen pastas, and frozen cheesecakes. Also in 2006, we introduced the first Our Family® Organic products. These products are made with 95 to 100 percent organic ingredients with thirdparty organic certification. More Our Family® Organic and Our Family® Natural products — meeting a high standard of quality, containing no artificial colors, flavors, preservatives or synthetic additives — are being researched and will be introduced as they become available. ® Food Shows During 2006, we focused on taking food shows to a whole new level. In the past, food shows were held locally for independent retail customers of each distribution center. That approach failed to realize the synergies and deals that could be available to our customers by centralizing shows in larger venues. With this in mind, Nash Finch moved to regional food shows in 2006, with the theme “Bigger, Better & Together,” first in the Midwest and then throughout the Southeast and Great Lakes Regions. This major transformation resulted in significant increases in food show sales for the year. Double-digit sales growth came from increased fresh product merchandising presentations and deeper food show allowances. Regional food shows encourage more participation from the vendor community due to the fact they reach significantly more retailers at a single event. Regional food shows have proven to be a winning combination for retailers, vendors, and Nash Finch Company. Above: Our Family® Pride products offer super premium, unique, and distinctive items. Below: “Bigger, Better & Together” regional food shows in 2006. 14 Community Involvement The NFC Foundation, the charitable giving foundation for Nash Finch, remains strongly committed to supporting the needs of families and communities in which our associates live and work. From supporting many long-standing partners, to launching an exciting new educational program, a great deal was accomplished in 2006. The NFC Foundation introduced a significant initiative during the year — Feeding Imagination — an educational program providing books to children in need. The program was formally launched at the Minnesota Children’s Museum in St. Paul, Minnesota, in partnership with First Book, an international nonprofit organization focused on giving children from low-income families the opportunity to read and own their first new books. As part of the Feeding Imagination launch event, St. Paul Mayor Chris Coleman spoke to the assembled guests, showing his support for the new program. Children from the New Visions School in Minneapolis and Excell Academy in Brooklyn Park participated in a story time with award-winning children’s author, John Coy, as well as other local celebrities. This groundbreaking program included the donation of 10,000 reading books, valued at more than $70,000, to ten local schools and community organizations. The involvement of Nash Finch associates further fueled the excitement of Feeding Imagination. From jean days to chili feeds, associates wholeheartedly supported the program, donating thousands of books and raising funds to further the reach of the program. One significant and heartwarming result of this outstanding effort was helping a local charter school create its very first library. Another important way the NFC Foundation continues to make a difference is through financial support of selected nonprofit institutions. These organizations benefit the homeless, those in need of food or a meal, those serving military personnel, as well as food industry educational programs, to name just a few areas of involvement. It is a privilege and honor to assist many of the outstanding organizations working hard every day to help others. Above: Celebrity Reader Sue Zelickson explores a book with children during a Feeding Imagination event. Below: Alec Covington, Nash Finch CEO, announces the creation of the Feeding Imagination program. There is nothing more important than providing others with a helping hand during a time of need, whether providing children with their very first books or aiding an organization that puts meals on their table. The NFC Foundation looks forward to helping keep our communities strong in the future. 15 Company Information Board of Directors + William R. Voss (1998) Managing Director, Lake Pacific Partners, LLC (private equity investment company) Executive Officers Alec C. Covington President and Chief Executive Officer Operating Officers Philip A. Andre Vice President, Planning Christopher A. Brown †° Robert L. Bagby (2005) Chairman and Chief Executive Officer, A.G. Edwards, Inc. (national brokerage firm) Executive Vice President, Food Distribution Jason B. Burnett Vice President, Procurement & Supply Chain Robert B. Dimond Executive Vice President, Chief Financial Officer and Treasurer Daniel M. Davidson Vice President, Transportation & Logistics †* Carole F. Bitter (1993) President and Chief Executive Officer, Harold Friedman, Inc. (operator of retail supermarkets) L. René Hunter Jeffrey E. Poore Executive Vice President, Supply Chain Management Vice President, Finance & Accounting, MDV Alec C. Covington (2006) President and Chief Executive Officer Randy J. Jaeger Vice President, Food Distribution Calvin S. Sihilling Executive Vice President, Chief Information Officer Danny F. Lane Vice President, Food Distribution *° Jerry L. Ford (1997) Independent Business Consultant Kathleen M. Mahoney †* Mickey P. Foret (2005) President, Aviation Consultants, LLC (airline consulting services) Senior Vice President, General Counsel & Secretary Blaine T. McGuire Vice President, Internal Audit Edward L. Brunot Senior Vice President, Military Joy F. Sgro Vice President, Non-Perishable Merchandising ‡ Allister P. Graham (1992) Retired Chairman and Chief Executive Officer, The Oshawa Group Limited (Canadian food distributor) *° John Grunewald (1992) Retired Executive Vice President, Finance and Administration, Polaris Industries, Inc. (manufacturer of recreational equipment) †* Douglas Hacker (2005) Independent Business Executive and former Executive Vice President, Strategy, UAL Corporation (airline holding company) †° William H. Weintraub (2002) Professor, University of Colorado (Year Elected) + Chairman of the Board ‡ Chairman Emeritus * Member of the Audit and Finance Committees † Member of the Compensation Commitee ° Member of the Corporate Governance Committee 16 Performance Graph The following graph compares the cumulative total stockholder return on Nash Finch common stock for the last five fiscal years with the cumulative total return over the same period of the S&P SmallCap 600 Index (in which Nash Finch is included) and a peer group of companies selected by Nash Finch (weighted according to the peer companies’ market capitalization at the beginning of each fiscal year). The peer group of companies consists of the ten companies in the Russell 2000 index (besides Nash Finch) that operate grocery wholesale distribution and/or retail supermarket businesses, and SuperValu Inc. (SVU), the other publicly-traded full-line distributor of grocery products at wholesale and retail. The Russell 2000 companies are Arden Group Inc. (ARDNA), Great Atlantic & Pacific Tea Co. Inc. (GAP), Ingles Markets Inc. (IMKTA), Pathmark Stores Inc. (PTMK), Ruddick Corporation (RDK), Smart & Final Inc. (SMF), Spartan Stores, Inc. (SPTN), United Natural Foods Inc. (UNFI), Weis Markets Inc (WMK) and Wild Oats Markets Inc. (OATS). The Compensation Committee has approved the selection of the companies in the peer group. The comparison assumes the investment of $100 in our common stock, the S&P SmallCap 600 Index and the Peer Group at the end of fiscal 2001, and the reinvestment of all dividends. Comparison of Cumulative Five Year Total Return $200 $150 $100 $50 $0 12/29/2001 12/28/2002 Nash Finch Company 1/3/2004 1/1/2005 S&P SmallCap 600 Index 12/31/2005 12/30/2006 Peer Group Company /Index Name Nash-Finch Company S&P SmallCap 600 Index Peer Group Starting Point 12/29/01 $ 100 100 100 Return 12/28/02 $ 26.27 84.55 69.57 Return 1/3/04 $ 82.76 117.69 106.41 Return 1/1/05 $ 135.36 144.11 132.93 Return 12/31/05 $ 93.13 155.18 144.82 Return 12/30/06 $ 102.68 178.64 172.42 Source: Standard & Poor’s Investment Services Consolidated EBITDA Reconciliation 2002 Earnings (loss) before income taxes Interest expense Depreciation and amortization LIFO charge (benefit) Closed store lease costs Goodwill impairments Asset impairments Special charge Gains on sale of real estate Share-based compensation Extinguishment of debt Curtailment of post-retirement benefits Subsequent cash payment on non-cash charges Total consolidated EBITDA Earnings (loss) before income taxes Interest expense Depreciation and amortization LIFO charge (benefit) Closed store lease costs Goodwill impairments Asset impairments Special charge Gains on sale of real estate Share-based compensation Extinguishment of debt Curtailment of post-retirement benefits Subsequent cash payment on non-cash charges Total consolidated EBITDA $ 50,132 30,429 39,988 (2,234) 1,454 6,585 (765) (3,826) 896 (2,098) 120,561 1.3 0.9 1.0 -0.1 0.0 0.2 0.0 -0.1 0.0 -0.1 3.1 2003 51,933 34,729 42,412 (1,120) 1,156 2,706 (748) 761 (4,004) (2,240) 125,585 1.3 0.9 1.1 0.0 0.0 0.1 0.0 0.0 -0.1 -0.1 3.2 2004 19,199 27,181 40,241 3,525 4,871 853 34,779 (5,586) 845 7,204 (3,516) 129,596 0.5 0.7 1.0 0.1 0.1 0.0 0.9 -0.1 0.0 0.2 -0.1 3.3 2005 66,866 24.732 43,721 724 203 5,170 (1,296) (3,697) 1,718 (5,469) 132,672 1.5 0.5 1.0 0.0 0.0 0.1 0.0 -0.1 0.0 -0.1 2.9 2006 (17,493) 26,644 41,451 2,630 9,359 26,419 11,443 6,253 (1,130) 1,166 (4,012) 102,730 -0.4% 0.6% 0.9% 0.1% 0.2% 0.6% 0.2% 0.1% 0.0% 0.0% -% -% -0.1% 2.2% $