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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number: 000-31127

SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)

DOCUMENTS INCORPORATED BY REFERENCE

Forward-Looking Statements

          The matters discussed in this Annual Report on Form 10-K include "forward-looking statements" about the plans, strategies, objectives, goals or expectations of Spartan Stores, Inc. (together with its subsidiaries, "Spartan Stores"). These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or its management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends" or is "optimistic" or "confident" that a particular occurrence "will," "may," "could," "should" or "will likely" result or that a particular event "will," "may," "could," "should" or "will likely" occur in the future, that the "trend" is toward a particular result or occurrence, or similarly stated expectations. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7 of this Annual Report on Form 10-K, are inherently forward-looking. You should not place undue reliance on these forward-looking sta tements, which speak only as of the date of this Annual Report.

          In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Annual Report and our other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to differ materially. Our ability to strengthen our retail'store performance; improve sales growth; increase gross margin; reduce operating costs; sell assets classified as held for sale on favorable terms; continue to meet the terms of our debt covenants; and implement the other programs, plans, strategies, objectives, goals or expectations described in this Annual Report will be affected by changes in economic conditions generally or in the markets and geographic areas that we serve, adverse effects of the changing food and distribution industries and other factors including, among others, those discussed below.

          Anticipated future sales are subject to competitive pressures from many sources. Our Retail and Grocery Distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Future sales will be dependent on the number of retail stores that we own and operate, competitive pressures in the retail industry generally and our geographic markets specifically, and our ability to implement effective new marketing and merchandising programs. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.

          Our operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: difficulties in the operation of our current business segments; future business acquisitions; adverse effects on existing business relationships with independent retail grocery store customers; difficulties in the retention or hiring of employees; labor shortages, stoppages or disputes; business and asset divestitures; increased transportation or fuel costs; current or future lawsuits and administrative proceedings; and losses of, or financial difficulties of, customers or suppliers. Our operating and administrative expenses could also be adversely affected by changes in our sales mix. Our ongoing cost reduction initiatives and changes in our marketing and merchandising programs may not be as successful as we anticipate. Acts of terrorism or war have in the past and may in the future result in considerable economic and political uncertainties that could have adverse effects on consumer buying behavior, fuel costs, shipping and transportation, product imports and other factors affecting our company and the grocery industry generally.

          Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings; changes in our borrowing arrangements and agreements; changes in the interest rate environment; and the amount of fees received on delinquent accounts. The availability of our senior secured credit facility depends on compliance with the terms of the credit facility.

          As discussed in this Form 10-K, we have recently completed sales of or contracted to sell material assets, including substantially all of the assets of L&L/Jiroch Distributing Company ("L&L/Jiroch") and J.F. Walker Company, Inc. ("J.F. Walker"), and we are in the process of selling or closing additional Food Town stores. We believe that these sales and closings will allow us to better focus our efforts and capital on key strategic markets where we have the strongest growth and value creation opportunities. However, we cannot assure you that these transactions will be beneficial to our company. The agreements relating to many of these transactions require us to indemnify these asset buyers for breaches of our representations and warranties contained in the agreements and certain other matters.

          This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information that we obtain after the date of this Annual Report.

PART I

Overview

          Spartan Stores is a leading regional grocery retailer and grocery distributor, operating principally in Michigan and Ohio. We operate two primary business segments: Retail and Grocery Distribution. We are the ninth largest distributor to grocery stores in the United States and have been the largest distributor to grocery stores in Michigan for more than 10 years. Our retail and distribution operations hold a combined #1 or #2 market share in many of the key Michigan markets we serve. For the fiscal year ended March 29, 2003 ("fiscal 2003"), we generated net sales from continuing operations of $2.1 billion, which excludes sales of $1.1 billion from discontinued operations.

          Established in 1917 as a cooperative, Spartan Stores converted to a for-profit business corporation in 1973. In over 85 years as a distributor, we have built a strong infrastructure and have developed extensive knowledge of the merchandising and marketing required for successful retail operations. In January 1999, we began to acquire retail grocery stores in our focused geographic regions. In August 2000, our common stock became listed on The NASDAQ Stock Market under the symbol "SPTN."

          We believe that the vertical integration of distribution and retail operations allows us to achieve improved distribution, transportation, merchandising and marketing expense leverage, and increased purchasing power. In addition, this integration allows us to enhance the services we provide to both our company-owned stores and our independent grocery distribution customers. The large number of independent retail grocers in our markets (many of which are our customers) may offer continued consolidation opportunities, although we are currently focused on our operational performance. We believe that our experience and expertise in grocery distribution and our new merchandising team for our retail operations provide us with the tools for successful operation of our integrated business.

          Since the beginning of our transformation from a wholesale distributor to an integrated distributor and retailer in January 1999, we have made significant enhancements to the infrastructure of our Grocery Distribution and Retail segments in order to better integrate these operations where efficiencies exist,

Discontinued Operations

          As a result of the transactions described below, certain of our retail operations, convenience distribution operations, grocery distribution operations, and real estate operations are recorded as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, for all years presented, the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and all related financial and non-financial disclosures in the notes to the consolidated financial statements and this Annual Report on Form 10-K have been adjusted and the discontinued operations information is excluded, unless otherwise noted.

          Discontinued Retail Operations. In March 2003, we announced our decision to close 13 Food Town stores principally located in Toledo, Ohio and outlying areas and that we were, as part of our strategic evaluation process, considering options for our remaining 26 Food Town stores. We had closed six Food Town, two Family Fare Supermarkets, one Glen's Markets and four The Pharm stores earlier in fiscal 2003.

          Discontinued Convenience Operations. During the fourth quarter of 2003, we began to actively market two of our subsidiaries in our Convenience Distribution segment. On June 9, 2003 we completed the sale of substantially all the assets of L&L/Jiroch and J.F. Walker to The H.T. Hackney Co. for approximately $40.8 million in cash and the assumption of certain liabilities.

          Discontinued Grocery Distribution Operations. We consolidated our Toledo, Ohio distribution operations into our Michigan facilities during the fourth quarter of fiscal 2003. As a result of the decision to exit the Food Town stores, the operating results related to these facilities have been classified as discontinued operations in the consolidated financial statements because the operations and cash flows of these facilities have been substantially eliminated from ongoing operations.

          Discontinued Real Estate Operations. During 2003, we completed the sale of 11 properties within our Real Estate segment for net proceeds of approximately $52.2 million in cash.

          Discontinued Insurance Segment. Discontinued operations also include our discontinued Insurance segment, which continues to be accounted for under Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."

Retail Segment

          Our Retail segment operates 55 retail grocery stores and 21 deep discount drug stores predominantly in small metropolitan and rural areas of Michigan and Ohio. Our retail grocery stores are operated under the banners Family Fare Supermarkets, Glen's Markets, Great Day Food Centers,

          We believe that our strong market share positions result from our distinct "neighborhood market" focus and the favorable name recognition from many of our banner names. Our neighborhood market strategy distinguishes our stores from supercenters and limited assortment stores by emphasizing convenient locations, demographically targeted merchandise selections, strong perishables offerings, customer service, value pricing and community involvement.

          Our 55 retail grocery stores typically offer dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, beverages, tobacco products, health and beauty care products, delicatessen items and bakery goods. Twenty-two of our grocery stores also offer pharmacy facilities. In addition to nationally advertised products, the stores carry our private label items, the "Spartan" brand, and the "HomeHarvest" and "Pharm" brands, which are our value brand labels. These private label items provide above-average retail margins and we believe they help generate increased customer loyalty. See "Merchandising and Marketing-Private Label Brands." Our retail grocery stores range in size from approximately 20,000 to 64,000 square feet and average approximately 38,000 square feet per store.

          Our 21 deep discount drug stores, which operate under the banner The Pharm, offer a unique combination of a full'service pharmacy, general merchandise products and basic food offerings. These stores operate under a deep discount format that emphasizes everyday low prices that are typically less than those of a traditional supermarket or drug store. The Pharm stores range in size from approximately 16,000 to 43,000 square feet and average approximately 29,000 square feet per store.

          We have acquired our stores as a result of several acquisitions since 1999:

          Since the acquisitions, we have closed 31 stores as a result of our continual evaluation of store performance against chain-wide profitability benchmarks. We also relocated one store in Harrison, Michigan and changed that store's retail banner from Ashcraft's Markets to Glen's Markets and changed a Cadillac, Michigan store's retail banner from Prevo's Family Markets to Glen's Markets to benefit from the strong name recognition of Glen's Markets in the region. In fiscal 2003, we opened two new stores under the Family Fare Supermarkets banner and assumed operations of a former Grocery Distribution customer, Madison Family Market.

          The following chart details the changes in the number of our retail stores from fiscal 1999 through fiscal 2003:

          As noted above, in March 2003 we announced that we were considering options for our remaining 26 Food Town stores. As of June 20, 2003, we have entered into asset sale agreements and letters of intent for 20 of these 26 Food Town stores. See "Discontinued Operations" above.

          Capital expenditures, including remodeling, are expected to approximate $10.0 to $15.0 million per year, inclusive of "maintenance" capital. We will evaluate proposed retail projects based on demographics and competition within each market, and prioritize projects based on their expected returns on investment. We require projects to meet a targeted internal rate of return to be approved; however, we may undertake projects that do not meet this standard to the extent they represent required maintenance or necessary infrastructure improvements. We believe that focusing on such measures provides us with an appropriate level of discipline in our capital expenditures process.

Grocery Distribution Segment

          Spartan Stores is the ninth largest distributor to grocery stores in the United States and the largest distributor to grocery stores in Michigan. We have been the largest distributor to grocery stores in Michigan for more than 10 years. Our Grocery Distribution segment provides approximately 400 stores with a selection of approximately 40,000 products, including dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, pharmacy, and health and beauty care items. In addition, we offer our grocery distribution customers approximately 1,800 private label grocery and general merchandise items. We also operate 12 cash and carry outlets in Michigan and Ohio that serve approximately 2,800 additional stores. Total distribution revenues from continuing operations of our Grocery Distribution segment, including shipments to our company-owned stores, were $1.7 billion for fiscal 2003.

          Customers. Our Grocery Distribution segment supplies our company-owned stores and a diverse group of independent grocery store operators that range from single stores to supermarket chains with as many as 20 stores. We offer our customers payment terms on a net six-day basis from the weekly billing statement date. Pricing is generally based upon a "cost plus" model for grocery, frozen, dairy, pharmacy and health and beauty care items and a "variable mark-up" model for meat, deli, bakery, produce, seafood, floral products and general merchandise.

          Our Grocery Distribution customer base is very diverse, with no single customer exceeding 7% of consolidated net sales. Our five largest Grocery Distribution customers (excluding company-owned stores) accounted for approximately 17.5% of our fiscal 2003 consolidated net sales.

          Distribution Functions. Our Grocery Distribution business utilizes approximately 2.2 million square feet of warehouse, distribution and office space. We supply our company-owned stores and our independent grocery distribution customers from our distribution centers located in Grand Rapids and Plymouth, Michigan and our convenience store customers from 12 cash and carry locations in Michigan and Ohio. We believe that our distribution facilities are strategically located to serve our customers. During fiscal 2003, we implemented a network rationalization initiative, which involved shifting stock-keeping units (SKUs) within our distribution centers to create dedicated slow and fast-moving sections as well as the consolidation of both of our Ohio distribution centers. We believe that this realignment will reduce our labor and inventory carrying costs.

          To supply our Grocery Distribution customers, we operate a fleet of approximately 100 tractors, 200 conventional trailers and 170 refrigerated trailers, substantially all of which are leased. We are currently undertaking several initiatives intended to minimize our vehicles' outbound miles and increase inbound freight revenue based on our new logistics programs.

          In October 2001, we signed a five-year labor contract with our Grand Rapids grocery distribution center associates. The contract provides for improved work-rule flexibility that has improved overall distribution center productivity and created a more efficient distribution operation. In addition, these union associates share in rising healthcare and welfare benefit costs. Subsequent to the labor negotiations, we adopted a gain'share compensation program at our Grand Rapids grocery distribution center that provides for incentive-based compensation and has resulted in improved productivity and reduced direct labor costs. During fiscal 2003, through-put (defined as cases shipped per hour) increased in comparison to fiscal 2002 by 4.0% in our grocery warehouse and by 13.1% in our perishables warehouse.

          Additional Services. We also provide our independent grocery distribution customers with many value-added services, including:

          We have agreements with certain Grocery Distribution customers whereby they agree to purchase a minimum percentage of their total purchases from us for the term of the agreement. At March 29, 2003, we had such agreements with 22 customers covering 71 retail grocery stores with terms ranging from one to 13 years. The minimum purchase requirements under these agreements varied from approximately 50% to 55% of the total retail sales of the grocery stores covered by the agreements. For fiscal 2003, these stores had total retail sales of approximately $744 million and total distribution purchases from us of approximately $369 million. When combined with sales to our own stores, these sales approximate 50% of our total Grocery Distribution sales volume.

Operating Segment Financial Data

          More detailed information about our operating segments may be found in Note 14 to the consolidated financial statements included in Item 8 below, which is herein incorporated by reference. All of our sales and virtually all of our assets are in the United States of America.

Marketing and Merchandising

          General. In fiscal 2003, we implemented changes to our organizational structure that are intended to better support our system-wide efforts to improve sales growth and profitability. These changes are also intended to improve the effectiveness of our retail and wholesale marketing and merchandising functions, and to advance our organization's customer orientation.

          In March 2003, we hired an experienced Executive Vice President of Marketing and Merchandising, charged with the expectation to improve the top line sales and gross margin performance of both our Retail and Grocery Distribution segments. This change is expected to improve our category management function by better coordinating our retail and distribution marketing and merchandising efforts. The heads of Marketing and Merchandising for both our Retail and Grocery Distribution segments now report to the Executive Vice President of Marketing and Merchandising. In addition, in May 2003, a new Vice President of Retail Merchandising and Director of Pharm Merchandising were hired.

          We believe these changes are fundamental to restoring retail operations to profitability, improving our competitive market position, driving better incremental sales growth and capturing more of the natural synergies that exist between our retail stores, customer stores and distribution operations.

          Private Label Brands. We currently market and distribute approximately 1,800 highly recognized private label brand items under three exclusive store brands: the "Spartan" brand, and two value brands, "HomeHarvest" and "Pharm."

          We believe that the Spartan brand product line, first introduced in 1954, is one of the most widely accepted and recognized private label brands in Michigan. Michigan consumers have come to expect high quality products from Spartan Stores at below national brand pricing. Our value brands, HomeHarvest and Pharm, are effective in combating limited assortment store competitors. These brands appeal to consumers who are looking for a consistent quality brand at a low price.

Competition

          Our Retail and Grocery Distribution segments compete with, among others, other grocery distributors, independently owned retail grocery stores, large chain stores that have integrated wholesale and retail operations, mass merchandisers, limited assortment stores and wholesale membership clubs, some of whom have greater resources than we do. The principal competitive factors in the retail grocery business include the location and image of the store; the price, quality and variety of the products; and the quality and consistency of service.

          We believe we have developed and implemented strategies and processes to meet competition in our Retail segment. We monitor planned store openings by our competitors and have established strategies for proactively responding to new competition. Our goal is to have a comprehensive plan to address new competition in place six months prior to a competitor's opening. Strategies to combat competition vary based on many factors, such as the competitor's format, strengths, weaknesses, pricing and sales focus.

          Our Retail and Grocery Distribution segments operate in highly competitive markets, which typically result in lower profit margins. Our Grocery Distribution segment competes with a number of national and regional distributors, some of whom have greater resources than we do. The primary competitive factors in the Grocery Distribution segment include price, product quality, variety and service.

Suppliers

          We purchase products from a large number of national, regional and local suppliers of name brand and private label merchandise. We have not encountered any material difficulty in procuring or maintaining an adequate level of products to serve our customers. No single supplier accounts for more than 8% of our purchases. We have enjoyed long'standing relationships with these business partners, based on trust, respect and integrity.

Intellectual Property

          We own valuable intellectual property, including trademarks and other proprietary information, some of which, including "Spartan," "Family Fare," "The Pharm," "HomeHarvest" and other related marks, are of material importance to our business.

Technology

          We invest in technology as a means of improving service to our customers and maximizing the efficiency of our operations. During the last two years, we have consolidated and standardized many of our systems across our businesses as we have consolidated the organization. Our focus during the last year has been to provide incremental functionality in our existing systems and to maximize the utilization of our current systems and information.

          Retail Systems. We completed the consolidation of multiple price management systems to a single system for all company-owned stores, we added enhanced functionality to our electronic payment system and we significantly enhanced our retail reporting system including specific functionality for shrink and margin management. Additionally, we completed the required changes in our pharmacies for compliance with the Health Insurance Portability and Accountability Act ("HIPAA").

          Supply Chain. We continued the upgrading of our warehouse management systems and began upgrading our onboard transportation management system.

          Financial Systems. We streamlined processes and enhanced controls for many aspects of our financial and retail systems.

          Human Resource Systems. We consolidated all associates to one benefits administration system and made other human resources reporting improvements. We completed the required changes in our Human Resource systems for compliance with HIPAA.

          Information Technology. During the last year we significantly improved our business continuity strategy and made many improvements in the security of our internal network and systems.

Subsidiaries

          Our Grocery Distribution segment consists primarily of our wholly owned subsidiaries, Spartan Stores Distribution, LLC and United Wholesale Grocery Company. We operate our Retail segment primarily through two wholly owned subsidiaries, Family Fare, LLC and Seaway Food Town, Inc. and their respective subsidiaries. L&L/Jiroch and J.F. Walker comprised our discontinued Convenience Distribution segment. Substantially all assets of L&L/Jiroch and J.F. Walker were sold in the first quarter of fiscal 2004. See "Discontinued Operations," above.

Associates

          We currently employ approximately 7,400 associates, approximately 4,100 of which are full-time and approximately 3,300 of which are part-time. These numbers do not include those employees that work for a discontinued operation as described above in "Discontinued Operations."

          Unions represent approximately 22% of our associates, with contracts for 927 distribution center and transportation associates expiring between April 2005 and October 2006, contracts for 27 distribution associates at our 12 cash and carry outlets expiring by location from 2004 to 2007 and contracts for 645 retail associates expiring between June 2003 and March 2005.

          We consider our relations with our union and non-union associates to be satisfactory and have not had any material work stoppages in the last five years.

Regulation

          We are subject to federal, state and local laws and regulations covering the purchase, handling, sale and transportation of our products. Several of our products are subject to federal Food and Drug Administration regulation. We believe that we are in substantial compliance with all Food and Drug Administration and other federal, state and local laws and regulations governing our businesses.

Forward-Looking Statements

          The matters discussed in this Item 1 include forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.

          We own real estate totaling approximately 2.6 million square feet under roof, including one shopping center and eight freestanding retail locations. Approximately 67,000 square feet is leased to customers that we supply and to other retailers. We also own certain non-operating real estate assets. Management estimates that the market value of our real estate is approximately $72 million and exceeds its book value by approximately $20 million.

Retail Segment Real Estate

          The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our retail grocery stores.

          In addition to the stores listed above, we own a 65% interest in a joint venture that operates a grocery store of approximately 45,700 square feet located in southeastern Michigan.

          The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our deep discount drug stores.

Grocery Distribution Segment Real Estate

          The following table lists the location, approximate size and ownership of the facilities used in our Grocery Distribution segment.

          Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against Spartan Stores and its subsidiaries. While the ultimate effect of such lawsuits and claims cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of Spartan Stores.

          No matters were submitted to a vote of Spartan Stores' shareholders during the fourth quarter of fiscal 2003 through the solicitation of proxies or otherwise.

PART II

          Spartan Stores common stock is traded on the National Market System of The NASDAQ Stock Market under the trading symbol "SPTN."

          Stock sale prices are based on transactions reported on The NASDAQ Stock Market. Information on quarterly high and low sales prices for Spartan Stores' common stock appears in Note 15 to the consolidated financial statements and is incorporated herein by reference. At June 20, 2003, there were approximately 870 shareholders of record of Spartan Stores common stock (excluding participants in security position listings).

          During fiscal 2002 and 2003, we did not pay any dividends. The payment of future dividends will be determined by our board of directors. We anticipate that we will use any net earnings from our operations to repay debt and to acquire additional retail operations, and that we will not pay any dividends for the foreseeable future, even if we are permitted to do so under our senior secured credit facility.

          Our senior secured credit facility contains restrictions that do not allow us to pay future dividends or make a variety of other restricted payments. See the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 below for a more detailed discussion of these restrictions, as well as Note 8 to the consolidated financial statements.

          The information required by Item 201(d) of Securities and Exchange Commission Regulation S-K is incorporated herein by reference from the section entitled "Equity Compensation Plans" in Spartan Stores' definitive proxy statement relating to its annual meeting of shareholders to be held August 6, 2003.

          The following table provides selected historical consolidated financial information of Spartan Stores. The historical information was derived from our audited consolidated financial statements for and as of each of the five fiscal years ended March 27, 1999 through March 29, 2003. Fiscal 2001 was a 53-week year. Certain reclassifications have been made to the fiscal 1999 through fiscal 2002 selected financial data to conform to the fiscal 2003 presentation. As noted elsewhere in this Form 10-K, for all years presented, the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and all related financial and nonfinancial disclosures in the notes to the consolidated financial statements have been adjusted and the discontinued operations information is excluded, unless otherwise noted. See Notes 3 and 5 for additional information on discontinued operations and acquisitions occurring in the periods presented below.

(In thousands, except per share data)

Overview

          Spartan Stores is a leading regional grocery retailer and grocery distributor, operating principally in Michigan and Ohio. Spartan Stores was originally formed as a food distribution cooperative in 1917 but converted to a for-profit business corporation in 1973. We historically focused on the distribution of groceries and related merchandise to independently owned stores. However, since January 1999, we have completed several acquisitions of grocery store chains. We currently operate two business segments: Retail and Grocery Distribution.

          Our Retail segment operates 55 retail grocery stores in Michigan under the banners Family Fare Supermarkets, Glen's Markets, Great Day Food Centers, Prevo's Family Markets, Ashcraft's Markets and Madison Family Market and 21 deep discount drug stores in Ohio and Michigan under the banner The Pharm. Our retail grocery stores average approximately 38,000 square feet and have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores. Our deep discount drug stores average approximately 29,000 square feet and offer a unique combination of full'service pharmacy, general merchandise products and basic food offerings.

          Our Grocery Distribution segment provides approximately 40,000 products and 1,800 private label grocery and general merchandise items to approximately 400 stores, including 330 independently owned grocery stores and 76 company-owned stores. We provide many value-added services to our grocery distribution customers, including advertising, merchandising and other administrative services. We also operate 12 cash and carry outlets in Michigan and Ohio that serve approximately 2,800 convenience and smaller grocery stores.

          Our results of operations from period to period can be significantly impacted by fluctuations in the level of net sales between our business segments. Our Retail segment generally produces significantly higher gross margins as a percent of net sales than our Grocery Distribution segment. However, our Retail segment also generally incurs significantly higher selling, general and administrative ("SG&A") expenses as a percent of sales.

          The matters discussed in this Item 7 include forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.

Results of Operations

          The following table sets forth items from our Consolidated Statements of Operations as a percentage of net sales:

          Results of Continuing Operations for the Fiscal Year Ended March 29, 2003 Compared to the Fiscal Year Ended March 30, 2002

          Net Sales. Net sales decreased $121.9 million, or 5.4%, from $2,270.0 million in fiscal 2002 to $2,148.1 million in fiscal 2003.

          We estimate that fiscal 2002 sales were higher than fiscal 2003 sales by approximately $7.5 million due to the early Easter holiday in fiscal 2002. Fiscal 2003 did not include an Easter holiday. Excluding the estimated effect of the early Easter holiday during fiscal 2002, net sales decreased 5.1%, from $2,224.8 million to $2,110.4 million.

          Net sales in our Retail segment decreased $51.5 million, or 5.5%, from $932.0 million to $880.5 million. Same'store sales decreases of 9.5% were driven by increased competitive conditions, a shift in the Easter holiday from the fourth quarter of fiscal 2002 to the first quarter of fiscal 2004, representing a 1.3% decline, and the weak economic environment in Michigan.

          On March 3, 2003, Craig C. Sturken was appointed our President and Chief Executive Officer. Mr. Sturken has more than forty years of retail experience including ten years as Chief Executive Officer of the Great Atlantic & Pacific Tea Company's Atlantic and Midwest regions. Additionally, we hired an Executive Vice President of Merchandising and Marketing and replaced our Vice President of Merchandising and Director of Pharm Merchandising for our retail operations. The new management brings strong leadership and experience in retail merchandising and marketing that we believe will

          Net sales in our Grocery Distribution segment, after intercompany eliminations, declined $70.4 million, or 5.3%, from $1,338.0 million to $1,267.6 million. The decrease resulted from the weak Michigan economy, the ineffectiveness of our previous promotional program canceled in October 2002, increased competitive conditions affecting our distribution customers and the loss of a customer in the second quarter of fiscal 2002 which generated sales of $25.7 million in fiscal 2002. The shift in the Easter holiday, noted above, also accounted for a 0.3% decline.

          The declining sales trend was much improved during the third and fourth quarters of fiscal 2003 as a result of the elimination of our previous promotional program and the implementation of new programs. To continue the improvement during the last two quarters of fiscal 2003, we reinstated a program of strong value on every product category and everyday low costs on certain categories that allows our customers to better compete in today's economic environment.

          Gross Margin. Gross margin decreased by $31.0 million, or 7.7%, from $404.7 million to $373.7 million. As a percent of net sales, gross margin decreased from 17.8% to 17.4%. The decrease was primarily the result of more aggressive promotional activities in our Retail segment to respond to the increasingly competitive market conditions and to protect market share. While we expect the difficult economic and competitive environment to continue, our new merchandising group is implementing programs that we believe will improve our gross margin percentage in fiscal 2004.

          Selling, General and Administrative Expenses. SG&A expenses decreased $8.8 million, or 2.4%, from $369.6 million to $360.8 million, and were 16.8% of net sales compared to 16.3% last year. SG&A expenses decreased primarily as a result of improved labor productivity. Also contributing to the decrease in SG&A expenses was the elimination of goodwill amortization expense. In fiscal 2002, goodwill amortization expense was $3.3 million. Offsetting these decreases were SG&A expenses of $6.2 million related to the addition of three new retail stores in fiscal 2003 and severance of $0.9 million associated with staffing reductions made in fiscal 2003.

          In the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004, we took steps to further reduce our corporate staff by approximately 11%. This reduction is expected to reduce overhead costs by up to $8.0 million annually. For fiscal 2004, we have also suspended the accrual of service and transition credits to our cash balance pension plan, covering qualifying non-union associates. Interest credits will continue to accrue. The suspension of these credits will reduce cash funding of the plan in the range of $3.0 to $4.0 million in fiscal 2004. We will continue to assess the competitiveness of our benefit programs to improve our cost structure while allowing us to maintain a high quality workforce.

          Asset Impairments and Exit Costs. In fiscal 2003, asset impairments and exit costs consist of goodwill impairment of $43.2 million, other long-lived asset impairments of $1.6 million and exit costs of $2.9 million. Based on unfavorable operating results in the third quarter of fiscal 2003, the earnings forecast was revised and a valuation of the Retail segment was conducted. Fair value was determined based on the discounted cash flows and comparable market values for the segment. As a result of the impairment analysis, a loss was recorded to reduce the carrying value of goodwill at the Retail segment to its implied fair value. The other long-lived asset impairments and exit costs relate to the closure of an administrative office for our Retail segment. In fiscal 2002, asset impairments and exit costs consisted primarily of exit costs related to the closure of underperforming stores.

          Interest Expense. Interest expense from continuing operations increased $0.1 million, or 0.8%, from $18.0 million to $18.1 million, and was 0.8% of net sales in each year. Total average borrowings decreased to $270.8 million from $333.6 million as a result of debt repayments.

          In accordance with Emerging Issues Task Force ("EITF") Issue No. 87-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the interest on debt that will be required or was required to be repaid as a result of disposal transactions. Interest expense of $7.8 million and $8.6 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for fiscal 2003 and fiscal 2002, respectively. Allocated interest expense decreased in fiscal 2003 due to the effect of debt paydowns as a result of the disposal of certain discontinued operations, partially offset by an increase in the interest rate.

          The increase in interest expense from continuing operations was primarily due to a $1.2 million fee incurred for a covenant compliance waiver and a $0.7 million charge made in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," which required us to recognize a portion of our interest rate swap exposure as interest expense. This expense had previously been included in accumulated other comprehensive income (loss) ("AOCI") in the shareholders' equity section of the consolidated balance sheets. These increases were partially offset by lower average borrowings.

          The weighted average interest rate (including the effect of interest rate swap agreements) increased to 9.59% for fiscal 2003 from 8.02% for fiscal 2002.

          Interest Income. Interest income decreased $0.9 million, or 56.0%, from $1.6 million in fiscal 2002 to $0.7 million in fiscal 2003, and was equal to 0.0% and 0.1% of net sales in the respective fiscal years. The fiscal 2002 balance includes $0.4 million in interest related to federal income tax refunds for prior years' filings. Interest income has been adversely impacted by lower interest rates in fiscal 2003.

          Other Gains, Net. Other gains, net decreased by $1.3 million, or 89.6%, from $1.4 million in fiscal 2002 to $0.1 million in fiscal 2003. During fiscal 2002, Other gains, net consisted primarily of $1.4 million in sales of stock in a supplier and a service provider.

          Income Taxes. Our effective tax rate increased from 32.8% for fiscal 2002 to 34.7% for fiscal 2003. During the second quarter of fiscal 2002, we reached a settlement with the Internal Revenue Service regarding certain deductions taken in prior years. The resulting refund reduced income tax expense by $0.7 million, resulting in a lower effective tax rate in fiscal 2002.

          Results of Continuing Operations for the Fiscal Year Ended March 30, 2002 Compared to the Fiscal Year Ended March 31, 2001

          Net Sales. Net sales decreased $90.9 million, or 3.8%, from $2,360.9 million in fiscal 2001 to $2,270.0 million in fiscal 2002.

          Fiscal 2002 consisted of 52 weeks compared with 53 weeks in fiscal 2001. We estimate that this factor, net of increased Easter holiday sales, caused fiscal 2002 sales to be lower than fiscal 2001 sales by approximately $56.9 million. Excluding the estimated effect of an early Easter holiday during fiscal 2002 and the 53rd week of sales in fiscal 2001, net sales would have decreased 1.5%, from $2,259.0 million to $2,225.0 million.

          Net sales in our Retail segment increased $159.2 million, or 20.6%, from $772.8 million to $932.0 million. The increase reflects additional sales of $156.4 million by The Pharm stores acquired in the merger with Seaway Food Town, Inc. ("Food Town") in the second quarter of fiscal 2001 and our acquisition of Prevo's Family Markets, Inc. ("Prevo's") in the fourth quarter of fiscal 2001. Excluding the 53rd week of sales in the prior year and the early Easter holiday in fiscal 2002, we estimate that sales would have increased $172.2 million, or 23.2%. Excluding the 53rd week of sales in fiscal 2001 and the early Easter holiday in fiscal 2002, we estimate that same'store sales increased 1.3%.

          Net sales in our Grocery Distribution segment, after intercompany eliminations, declined $250.1 million, or 15.7%, from $1,588.1 million to $1,338.0 million. The decrease primarily resulted from our acquisition of a Grocery Distribution segment customer during fiscal 2001 (requiring the reclassification of $62.3 million of sales to that customer from our Grocery Distribution segment to our Retail segment), the loss of a customer in both the second quarter of fiscal 2002 and the third quarter of fiscal 2001 totaling $114.6 million in sales for the comparable periods, a 53rd week of sales in fiscal 2001 which favorably affected sales in that year by an estimated $22.1 million, and declines in sales of grocery and general merchandise products due to current unfavorable Michigan economic conditions and continued competitive market conditions. Partially offsetting the decrease were increases in sales of perishables of $12.1 million and an estimated increase in sales of $4.3 m illion as a result of the early Easter holiday in fiscal 2002.

          Gross Margin. Gross margin increased by $24.6 million, or 6.5%, from $380.1 million to $404.7 million. As a percent of net sales, gross margin increased from 16.1% to 17.8%. The increase was primarily the result of the increase in retail grocery sales as a percent of consolidated net sales, from 32.7% in fiscal 2001 to 41.1% in fiscal 2002. This increase was partially offset by competitive pricing pressures. Additionally, we believe that declining economic conditions, layoff announcements and uncertain employment conditions in our region caused many grocery customers to purchase lower margin food products.

          Selling, General and Administrative Expenses. SG&A expenses increased $31.9 million, or 9.5%, from $337.7 million to $369.6 million, and were 16.3% of net sales compared to 14.3% in fiscal 2001. The increase was primarily due to the increased sales of our Retail segment, which generates a higher SG&A expense percent than our Grocery Distribution segment, and lower sales volumes, which resulted in less leveraging of existing infrastructure.

          Asset Impairments and Exit Costs. In fiscal 2002, asset impairments and exit costs of $1.0 million consisted primarily of exit costs related to the closure of underperforming stores. In fiscal 2001, an impairment loss of $1.1 million was incurred on technology equipment.

          Interest Expense. Interest expense from continuing operations decreased $1.5 million, or 7.7%, from $19.5 million to $18.0 million, and was 0.8% of net sales for fiscal 2002 compared to 0.9% for fiscal 2001. Total average borrowings increased to $333.6 million from $318.0 million for the prior year as a result of the Food Town and Prevo's acquisitions and borrowings on the revolving credit component of our senior secured credit facility, partially offset by debt repayments of $42.2 million.

          In accordance with EITF Issue No. 87-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the interest on debt that will be required or was required to be repaid as a result of disposal transactions. Interest expense of $8.6 million and $10.0 million was allocated to, and is included in, (loss) earnings on discontinued operations in the Consolidated Statements of Operations for fiscal 2002 and fiscal 2001, respectively.

          Interest expense from continuing operations and allocated interest expense from discontinued operations decreased primarily as a result of lower interest rates.

          The weighted average interest rate (including the effect of the interest rate swap agreements) decreased to 8.02% at March 30, 2002 from 9.83% at March 31, 2001.

          Interest Income. Interest income was unchanged as a percentage of sales compared to fiscal 2001. In the second quarter of fiscal 2002, we received $0.4 million in interest related to federal income tax refunds for prior years' filings. Interest income was adversely impacted by lower interest rates in fiscal 2002.

          Other Gains, Net. Other gains, net increased by $1.0 million from $0.3 million in fiscal 2001 to $1.3 million in fiscal 2002. During fiscal 2002, Other gains, net consisted primarily of $1.4 million in sales of stock in a supplier and a service provider. During fiscal 2001, Other gains, net resulted primarily from sales of stock of $0.2 million.

          Income Taxes. Our effective tax rate decreased from 38.4% for fiscal 2001 to 32.8% for fiscal 2002. During the second quarter of fiscal 2002, we reached a settlement with the Internal Revenue Service regarding certain deductions taken in prior years. The resulting refund reduced income tax expense by $0.7 million in fiscal 2002.

Discontinued Operations

          Retail Operations. On March 6, 2003, we announced the closing of 13 of our Food Town retail stores principally located in Toledo, Ohio and outlying areas with the remaining 26 Food Town stores to be sold or closed. Furthermore, during the first three quarters of fiscal 2003, 15 retail stores were closed. As a result of these actions, the results of operations of the Food Town stores and other stores closed during fiscal 2003 have been classified as discontinued operations in the consolidated financial statements. Discontinued retail operations include asset impairments and exit costs of $53.5 million in fiscal 2003, respectively. See Note 4 to the consolidated financial statements.

          In the first quarter of fiscal 2004, definitive sales agreements were entered into for 20 of the 26 remaining Food Town stores. Completion of the sales for the 20 stores is contingent upon the satisfaction of contractual requirements and conditions. Management expects that proceeds from the transactions will be approximately $25 to $30 million and will be used to reduce outstanding borrowings. We expect to complete the sales of these stores in the first and second quarters of fiscal 2004.

          We expect an improvement in operating profit and cash flow from operations upon completion of these store sales and closings. Management believes that the store sales and closings will allow us to better focus our efforts and capital on key strategic markets where we have the strongest growth and value creation opportunities.

          Grocery Distribution Operations. We consolidated our Toledo, Ohio distribution operations into our Michigan facilities during the fourth quarter of fiscal 2003. As a result of the decision to exit the Food Town stores, the operations related to these facilities have been classified as discontinued operations in the consolidated financial statements because the operations and cash flows of these facilities have been substantially eliminated from ongoing operations. We will continue to distribute to our Pharm stores in Ohio from our distribution facilities in Michigan. Discontinued grocery distribution operations include asset impairments and exit costs of $9.7 million in fiscal 2003.

          Convenience Distribution Operations. During the fourth quarter of 2003, we began to actively market two of our subsidiaries in our Convenience Distribution segment. On June 9, 2003 we completed the sale of substantially all the assets of L&L/Jiroch Distributing Company ("L&L/Jiroch") and J.F. Walker Company ("J.F. Walker") to The H.T. Hackney Co. for approximately $40.8 million in cash and the assumption of certain liabilities. The operations of these subsidiaries have been classified as discontinued operations in the consolidated financial statements.

          Real Estate Operations. In 2003, we completed the sale of 11 properties for net proceeds of $52.2 million in cash and recorded pre-tax gains of $18.6 million. These assets represented substantially all of the remaining assets and operations of our Real Estate segment; accordingly, we have reported the results of operations of the discontinued components of the Real Estate segment and the net gain on disposal as discontinued operations.

          Insurance Operations. During the fourth quarter of fiscal 2001, we sold the insurance agency component of our Insurance segment and approved a plan to discontinue the remaining operations of our Insurance segment. Accordingly, results of operations of our Insurance segment and the estimated net loss on disposal were recorded as discontinued operations.

          On December 31, 2001, we paid approximately $5.0 million to cede (transfer) a portion of our reinsurance loss portfolio to an unrelated third party. At that time, we also transferred the remaining underwriting, safety and claims components that had been previously retained to another unrelated third party. At March 29, 2003, we had approximately $6.6 million remaining in insurance reserves for open claims liabilities related to policies that were not ceded. We will remain obligated under these policies until all claims are closed and have retained an independent third party administrator to manage these claims. We have not retained any further insurance operations. Additional costs of $1.5 million in fiscal 2003 associated with this segment resulted from revised loss exposure estimates as additional data was received related to outstanding claims.

          For all years presented, the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and all related financial and nonfinancial disclosures in the notes to the consolidated financial statements in this Annual Report on Form 10-K have been adjusted and the discontinued operations information is excluded, unless otherwise noted.

Critical Accounting Policies

          This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts. On an ongoing basis, we evaluate our estimates, which are based on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we will make adjustments as we consider appropriate under the current facts and circumstances.

          We believe that the following represent the more critical estimates and assumptions used in the preparation of our consolidated financial statements.

          Goodwill. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we are no longer recording amortization expense related to goodwill and intangible assets with indefinite lives. Intangible assets with definite lives, including non-compete agreements and favorable lease treatments, continue to be amortized over the life of the agreement. We adopted the provisions of SFAS No. 142 on March 31, 2002. Under the transitional provisions of SFAS No. 142, goodwill was tested for impairment as of March 31, 2002. As a result of the impairment testing, a non-cash goodwill impairment charge of

          SFAS No. 142 requires that we evaluate goodwill for impairment on an annual basis and on a more frequent basis if circumstances indicate that an impairment has occurred. As a result of our impairment analysis, in the third quarter of fiscal 2003 we recorded an impairment charge of $45.0 million (including $1.8 million in discontinued operations), prior to tax benefit of $15.7 million, in the Retail segment.

          Fair value was determined based on the discounted cash flows and comparable market values of the segment. Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based on historical experience, current market trends and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures and a 3% long-term assumed growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based on recent sales data for existing operations and other factors.

          During our impairment testing, we estimated that future discounted cash flows projected for individual business units were less than the carrying values related to those business units. An increase in estimated discounted cash flows of 10% would have reduced the recorded impairment charge by $15.0 million. In contrast, if the current estimate of future discounted cash flows was 10% lower, we would have recorded an additional impairment charge of $15.0 million.

          Impairment of Long-Lived Assets Other Than Goodwill. Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. When the undiscounted future cash flows are not sufficient to recover an asset's carrying amount, the fair value is compared to the carrying value to determine the impairment loss to be recorded. No material impairments for long-lived assets to be held and used were determined to exist for fiscal 2003.

          Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less costs to sell. During fiscal 2003, asset impairment charges of $43.9 million (including $42.3 million in discontinued operations), prior to provision for tax benefit of $15.8 million, were recorded on assets at retail stores, office and warehouse facilities. The related assets are recorded in the Consolidated Balance Sheets as Property and equipment held for sale. Fair values are determined by independent appraisals, quotes or expected sales prices developed by internal specialists. Estimates of expected sales prices are judgments based upon our experience, knowledge of market conditions and current offers received. Changes in market conditions, the economic environment and other factors can significantly impact these estimates. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different assumptions could result in a different outcome. An increase in estimated appraisal values or sales prices, as applicable, of 10% would have reduced the recorded pre-tax impairment charge by $3.6 million. In contrast, if the current estimate of appraised values or sales prices was 10% lower, we would have recorded an additional pre-tax impairment charge of $3.9 million.

          Exit Costs. We record exit costs for closed stores that are subject to long-term lease commitments based upon the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease rentals that could be reasonably obtained for the property. Future cash flows are based on contractual lease terms and knowledge of the market in which the closed store is located. These estimates are subject to multiple factors, including inflation,

          Pension. Accounting for defined-benefit pension plans involves estimating the cost of benefits to be provided in the future, based on vested years of service, and attributing those costs over the time period each employee works. The most significant factor affecting our pension costs is the fair value of plan assets and the selection of key assumptions, including the discount rate, expected return on plan assets, and rate of compensation increases used by our actuary to calculate our liability. We consider current market conditions, including changes in interest rates and investment returns, in selecting these assumptions. In fiscal 2003, we reduced our discount rate to 6.75% from 7.25%. We also lowered our expected return on plan assets to 8.75% from 9.25% and our rate of compensation increase to 4.25% from 4.50%. While we believe the assumptions selected are reasonable, significant differences in our actual experience or significant changes in our assumpt ions may materially affect our pension obligations and our future expense. For example, a 50 basis point change in the long-term rate of return would change our expense by approximately $250,000.

          During fiscal 2003, the unfunded portion of our defined benefit plans increased to $19.0 million from $4.6 million. The increase in the unfunded balance is a result of an increase in the projected benefit obligation based on the changes to the key actuarial assumptions, lower return on assets, decreased company contributions and a higher level of benefits paid. The plan assets declined by 11.65% due to lower return, as compared to a decline of 30.95% in the composite NASDAQ Stock Market.

Liquidity and Capital Resources

          Net cash provided by operating activities of continuing operations was $24.5 million in fiscal 2003, $58.1 million in fiscal 2002 and $45.9 million in fiscal 2001. The decrease in net cash provided by operating activities of continuing operations in fiscal 2003 is primarily the result of decreased earnings from continuing operations and changes in working capital related to prepaid expenses and other assets and income taxes. Net cash provided by operating activities of continuing operations increased in fiscal 2002 due to changes in working capital related to better payables management.

          Net cash used in investing activities of continuing operations was $11.1 million, $14.6 million and $123.0 million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Cash used in investing activities of continuing operations decreased in fiscal 2003 primarily due to lower capital expenditures and no acquisition activity. Cash used by investing activities of continuing operations decreased in fiscal 2002 primarily due to fiscal 2001 use of cash in the Food Town and Prevo's acquisitions and reduced capital expenditures in fiscal 2002.

          Net cash used in financing activities of continuing operations was $47.5 million for fiscal 2003 due primarily to debt repayments and payment of debt issuance costs. Net cash used by financing activities of continuing operations was $21.4 million for fiscal 2002 due primarily to repayments of long-term debt, partially offset by borrowings on the revolving credit facility and other long-term borrowings. Net cash provided by financing activities of continuing operations was $49.9 million in fiscal 2001 due primarily to proceeds from long-term borrowings partially offset by debt repayments and common stock purchased.

          Our principal sources of liquidity are cash generated from operations and borrowings under a $390.0 million senior secured credit facility pursuant to an Amended and Restated Credit Agreement

          Management has recently taken many actions designed to improve operating results and cash flows. In March 2003, the executive management team was strengthened with the appointment of a new President and Chief Executive Officer with over forty years of retail experience. Shortly thereafter, an Executive Vice President with extensive retail and wholesale expertise was hired to lead the Merchandising and Marketing function. Various initiatives involving category management and promotional programs have already been implemented under the vision of these executives and we believe have resulted in improved sales trends. Cost controls and efficiency have also been priorities of management. Late in the first quarter of fiscal 2004, we eliminated approximately 11% of our corporate staff, resulting in estimated annualized savings of approximately $8.0 million. Improved efficiencies in warehouse operations and store labor costs have also been realized in the first quarter of fiscal 2004 relative to the fourth quarter of fiscal 2003. Total outstanding borrowings were reduced by $100.8 million during fiscal 2003. On June 9, 2003, we completed the sale of the assets of our Convenience Distribution segment. Proceeds received to date from this transaction of $39.5 million were used to further reduce outstanding borrowings and operating liabilities. Additionally, as discussed in Note 2, we are in the process of selling or closing our under-performing Food Town stores. The elimination of these operations will have a positive impact on our continuing operating cash flows. The estimated proceeds of approximately $25 to $30 million from the sales of these stores will be used to further reduce outstanding borrowings and operating liabilities. Management believes that the early results and the long-term expectations of these initiatives and sales transactions will improve ongoing operating results and cash flows.

          The credit agreement which governs our senior secured credit facility does not allow us to make "restricted payments." "Restricted payments" include cash dividends, as well as redemption of shares and a variety of other types of payments as defined in the bank credit agreement, which is filed as an exhibit to this Form 10-K. The covenants in the bank credit agreement could allow for the payment of dividends in the future. However, we intend to use any net earnings generated from our operations, to repay debt and to acquire additional retail operations. We do not anticipate paying any cash dividends for the foreseeable future, regardless of whether they are permitted by the credit agreement.

          We have in the past offered non-subordinated variable rate promissory notes to the public. The notes have been issued in minimum denominations of $1,000 and may be issued by us at any time, although our credit facility restricts the total amount outstanding under the offering to approximately $15.0 million. The non-subordinated variable rate promissory notes are issued under a "shelf" registration statement filed with the Securities and Exchange Commission, effective February 26, 2001, which provides for the issuance of up to $100 million of debt securities. At March 29, 2003, approximately $8.3 million of these notes were outstanding. Effective March 31, 2003, Spartan Stores suspended the promissory note program and all notes were repaid as of that date.

          Our current ratio decreased from 1.59:1.00 at March 30, 2002 to 1.39:1.00 at March 29, 2003 and working capital decreased from $115.6 million at March 30, 2002 to $88.5 million at March 29, 2003. The decrease is the result of store closings and more effective working capital management.

          Our long-term debt to equity ratio at March 29, 2003 increased to 1.68:1.00 from 1.28:1.00 at March 30, 2002. The increase was primarily due to the asset impairment and exit costs recorded during the year partially offset by a reduction in the long-term debt balance.

          Our total capital structure includes borrowings under the senior secured credit facility, non-subordinated variable rate promissory notes, various other debt instruments, leases and shareholders' equity. Management believes that cash generated from operating activities and available borrowings under the credit facility will likely be sufficient to support operations under current circumstances.

          The table below presents our significant contractual obligations as of March 29, 2003:

(In thousands)

          In addition to the above amounts for operating leases are $17.6 million of obligations associated with closed facilities that have been included at their present value in other accrued expenses and other long-term liabilities in the Consolidated Balance Sheets. See Note 4 to the consolidated financial statements for additional information.

Cumulative Effect of a Change in Accounting Principle and New Accounting Standards

          In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142. SFAS No. 141 requires the purchase method of accounting to be applied to all business combinations after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. We adopted SFAS No. 141 on March 31, 2002. There was no material impact as a result of the adoption. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. As a result of adopting this statement, we recorded a cumulative effect of a change in accounting principle to recognize an impairment of goodwill in the Retail Grocery segment of $35.4 million, net of provision for tax benefit of $6.2 million.

          In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, SFAS

          In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a liability for the costs associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan as required under EITF Issue No. 94-3. SFAS No. 146 primarily impacts the timing of the recognition of costs associated with exit or disposal activities. We adopted SFAS No. 146 for exit and disposal activities initiated after December 31, 2002.

          In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation; however, it does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method. The statement also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in the summary of significant accounting policies in annual and interim financial statements. The disclosure provisions of SFAS No. 148 were adopted on March 29, 2003. As allowed by SFAS No. 148, we have not adopted the fair value method of accounting for stock options.

          EITF Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from a Vendor," provides that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction in cost of goods sold. If such payment is for assets or services delivered to the vendor, the cash consideration should be characterized as revenue, or if such payment is a reimbursement of costs incurred to sell the vendor's products, the cash consideration should be characterized as a reduction of that cost. EITF Issue No. 02-16 became effective for us on March 30, 2003. We have determined that the adoption of EITF Issue No. 02-16 will not have a material impact on our net earnings.

          In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," was issued. FIN 45 requires the initial measurement and recognition, on a prospective basis only, to guarantees issued or modified after December 31, 2002. Additionally, certain disclosure requirements are effective for interim or annual periods ending after December 15, 2002. We have complied with the disclosure provisions of FIN No. 45.

          On April 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be reported on the balance sheets at fair value. If the derivative is designated as a cash-flow

          We are exposed to interest rate risk related to our outstanding debt and notes receivable from customers. The interest rate paid on a portion of our outstanding debt is vulnerable to changes in the prime rate, the federal funds rate or the Eurodollar rate. We do not use financial instruments or derivatives for trading or speculative purposes.

          We manage interest rate risk on a majority of our debt through the use of interest rate swap agreements that are effective through June 30, 2003. Under the terms of the agreements, we are protected against increases in interest rates from and after the date of the agreement in the initial aggregate notional amount of $162.5 million, which amount decreases in proportion to scheduled principal payments made on term loan A and term loan B under our senior secured credit facility. The aggregate notional amount will be $123.7 million at the end of the agreements' four-year term. During fiscal 2003, the interest rate swap agreements had a weighted average pay rate of 5.60% and a weighted average receive rate of 1.78%.

          The following table sets forth the maturities of our debt outstanding as of March 29, 2003:

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
Spartan Stores, Inc.
Grand Rapids, Michigan

We have audited the accompanying consolidated balance sheets of Spartan Stores, Inc. and subsidiaries as of March 29, 2003 and March 30, 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 29, 2003. These financial statements are the responsibility of Spartan Stores, Inc. management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Spartan Stores, Inc. and subsidiaries as of March 29, 2003 and March 30, 2002 and the results of their operations and their cash flows for each of the three years in the period ended March 29, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in the notes to the consolidated financial statements, during the year ended March 29, 2003 Spartan Stores, Inc. changed its method of accounting for goodwill (Notes 2 and 6) and for discontinued operations (Note 3) to conform to Statements of Financial Accounting Standards Nos. 142 and 144.

/s/Deloitte & Touche LLP

Grand Rapids, Michigan
May 6, 2003 (June 20, 2003 as to Notes 3 and 8)

CONSOLIDATED BALANCE SHEETS

Spartan Stores, Inc. and Subsidiaries
(In thousands)

See notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS (continued)

Spartan Stores, Inc. and Subsidiaries
(In thousands)

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

Spartan Stores, Inc. and Subsidiaries
(In thousands, except per share data)

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Spartan Stores, Inc. and Subsidiaries
(In thousands, except per share data)