UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 13, 2003. |
OR
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ______________ to ______________. |
Commission File Number: 000-31127
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Michigan |
38-0593940 |
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850 76th Street, S.W. |
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(616) 878-2000 |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|
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Yes X |
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No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).
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Yes |
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No X |
As of October 11, 2003 the registrant had 20,053,257 outstanding shares of common stock, no par value.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Quarterly Report on Form 10-Q 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 management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends," 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 2 of this Form 10-Q, are inherently forward-looking. You should not place undue reliance on these forward-lookin g statements, which speak only as of the date of this Quarterly Report.
In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, Spartan Stores' Annual Report on Form 10-K for the year ended March 29, 2003 and 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 on favorable terms assets classified as held for sale; continue to meet the terms of our debt covenants; renegotiate or refinance our credit facility; and implement the other programs, plans, strategies, objectives, goals or expectations described in this Quarterly 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 distr ibution industries and other factors including, but not limited to, 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 business segments; future business acquisitions; adverse effects on 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 uncertaint ies 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 agreements; changes in the interest rate environment; and changes in the amount of fees received or paid. The availability of our senior secured credit facility depends on compliance with the terms of the credit facility and related waiver agreements.
As discussed in this Form 10-Q, we have recently completed sales of substantially all of the assets of L&L/Jiroch Distributing Company and J.F. Walker Company, Inc., most Food Town stores and have closed all Food Town stores not sold. 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 some 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 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 obtained after the date of this Quarterly Report.
PART I
FINANCIAL INFORMATION
|
ITEM 1. |
Financial Statements |
SPARTAN STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
|
|
September 13, |
|
March 29, |
|
||
|
|
|
|
|
|
|
|
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Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
15,121 |
|
$ |
23,306 |
|
|
Marketable securities |
|
1,622 |
|
|
1,705 |
|
|
Accounts receivable, net |
|
52,283 |
|
|
70,747 |
|
|
Inventories |
|
103,857 |
|
|
138,095 |
|
|
Prepaid expenses and other current assets |
|
10,587 |
|
|
13,141 |
|
|
Refundable income taxes |
|
- |
|
|
9,349 |
|
|
Deferred taxes on income |
|
7,748 |
|
|
4,113 |
|
|
Property and equipment held for sale |
|
7,521 |
|
|
54,684 |
|
|
Total current assets |
|
198,739 |
|
|
315,140 |
|
|
|
|
|
|
|
|
|
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Other assets |
|
|
|
|
|
|
|
Goodwill, net |
|
68,700 |
|
|
68,743 |
|
|
Deferred taxes on income |
|
22,881 |
|
|
25,566 |
|
|
Other, net |
|
25,068 |
|
|
26,785 |
|
|
Total other assets |
|
116,649 |
|
|
121,094 |
|
|
|
|
|
|
|
|
|
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Property and equipment, net |
|
111,779 |
|
|
120,072 |
|
|
|
|
|
|
|
|
|
|
Total assets |
$ |
427,167 |
|
$ |
556,306 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
$ |
87,959 |
|
$ |
112,181 |
|
|
Accrued payroll and benefits |
|
19,540 |
|
|
28,533 |
|
|
Insurance reserves |
|
15,667 |
|
|
14,783 |
|
|
Accrued taxes |
|
11,762 |
|
|
16,735 |
|
|
Other accrued expenses |
|
10,105 |
|
|
19,150 |
|
|
Current maturities of long-term debt |
|
18,385 |
|
|
36,594 |
|
|
Total current liabilities |
|
163,418 |
|
|
227,976 |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
19,932 |
|
|
18,859 |
|
|
Postretirement benefits |
|
15,155 |
|
|
16,022 |
|
|
Long-term debt |
|
123,008 |
|
|
183,817 |
|
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
|
Common stock, voting, no par value; 50,000 shares |
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000 |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
(2,537 |
) |
|
(2,816 |
) |
|
Accumulated deficit |
|
(8,285 |
) |
|
(3,940 |
) |
|
Total shareholders' equity |
|
105,654 |
|
|
109,632 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
$ |
427,167 |
|
$ |
556,306 |
|
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
12 Weeks Ended |
|
24 Weeks Ended |
||||||||||
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|
September 13, |
|
September 14, |
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September 13, |
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September 14, |
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||||
|
|
|
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|
|
|
|
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Net sales |
$ |
491,371 |
|
$ |
473,313 |
|
|
$ |
953,940 |
|
$ |
924,788 |
|
|
Cost of goods sold |
|
397,991 |
|
|
382,681 |
|
|
|
774,989 |
|
|
747,144 |
|
|
Gross margin |
|
93,380 |
|
|
90,632 |
|
|
|
178,951 |
|
|
177,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
86,108 |
|
|
81,354 |
|
|
|
172,571 |
|
|
161,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
7,272 |
|
|
9,278 |
|
|
|
6,380 |
|
|
16,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense |
|
3,203 |
|
|
3,518 |
|
|
|
7,241 |
|
|
7,047 |
|
|
Interest income |
|
(144 |
) |
|
(156 |
) |
|
|
(347 |
) |
|
(355 |
) |
|
Other (gains) losses, net |
|
(6 |
) |
|
(426 |
) |
|
|
39 |
|
|
(429 |
) |
|
Total other income and expenses |
|
3,053 |
|
|
2,936 |
|
|
|
6,933 |
|
|
6,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes, discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
1,489 |
|
|
2,309 |
|
|
|
(193 |
) |
|
3,606 |
|
|
Earnings (loss) from continuing operations |
|
2,730 |
|
|
4,033 |
|
|
|
(360 |
) |
|
6,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes |
|
(958 |
) |
|
(4,619 |
) |
|
|
(3,985 |
) |
|
(15,378 |
) |
Cumulative effect of a change in accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
$ |
1,772 |
|
$ |
(586 |
) |
|
$ |
(4,345 |
) |
$ |
(44,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
$ |
0.14 |
|
$ |
0.20 |
|
|
$ |
(0.02 |
) |
$ |
0.32 |
|
|
Loss from discontinued operations |
|
(0.05 |
) |
|
(0.23 |
) |
|
|
(0.20 |
) |
|
(0.78 |
) |
|
Cumulative effect of a change in accounting principle |
|
- |
|
|
- |
|
|
|
- |
|
|
(1.78 |
) |
|
Net earnings (loss) |
$ |
0.09 |
|
$ |
(0.03 |
) |
|
$ |
(0.22 |
) |
$ |
(2.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
19,947 |
|
|
19,857 |
|
|
|
19,962 |
|
|
19,832 |
|
|
Diluted |
|
20,077 |
|
|
19,857 |
|
|
|
19,962 |
|
|
19,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -- March 31, 2002 |
|
19,766 |
|
$ |
115,722 |
|
$ |
(2,622 |
) |
$ |
118,392 |
|
$ |
231,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
- |
|
|
- |
|
|
- |
|
|
(122,332 |
) |
|
(122,332 |
) |
|
Other comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability |
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
Unrealized gain on securities |
|
- |
|
|
- |
|
|
157 |
|
|
|
|
|
157 |
|
|
Total other comprehensive loss |
|
- |
|
|
- |
|
|
(194 |
) |
|
- |
|
|
(194 |
) |
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
|
233 |
|
|
666 |
|
|
- |
|
|
- |
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -- March 29, 2003 |
|
19,999 |
|
|
116,388 |
|
|
(2,816 |
) |
|
(3,940 |
) |
|
109,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
- |
|
|
- |
|
|
- |
|
|
(4,345 |
) |
(4,345 |
) |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate |
|
- |
|
|
- |
|
|
372 |
|
|
- |
|
|
372 |
|
|
Unrealized loss on securities |
|
- |
|
|
- |
|
|
(93 |
) |
|
- |
|
|
(93 |
) |
|
Total other comprehensive income |
|
- |
|
|
- |
|
|
279 |
|
|
- |
|
|
279 |
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
(56 |
) |
|
(164 |
) |
|
|
|
|
|
|
|
(164 |
) |
|
Issuances |
|
110 |
|
|
252 |
|
|
- |
|
|
- |
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -- September 13, 2003 |
|
20,053 |
|
$ |
116,476 |
|
$ |
(2,537 |
) |
$ |
(8,285 |
) |
$ |
105,654 |
|
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
24 Weeks Ended |
||||||
|
September 13, |
September 14, |
|||||
|
Cash flows from operating activities |
||||||
|
Net loss |
$ |
(4,345 |
) |
$ |
(44,339 |
) |
|
Loss from discontinued operations |
3,985 |
15,378 |
||||
|
Cumulative effect of a change in accounting principle |
|
- |
|
35,377 |
||
|
(Loss) earnings from continuing operations |
(360 |
) |
6,416 |
|||
|
Adjustments to reconcile net loss to net cash |
||||||
|
provided by operating activities: |
||||||
|
Depreciation and amortization |
13,408 |
13,668 |
||||
|
Restricted stock compensation |
252 |
- |
||||
|
Postretirement benefits |
(867 |
) |
213 |
|||
|
Deferred taxes on income |
(960 |
) |
(3,256 |
) |
||
|
Other gains, net |
(31 |
) |
(49 |
) |
||
|
Change in operating assets and liabilities: |
||||||
|
Accounts receivable |
(1,161 |
) |
254 |
|||
|
Inventories |
5,440 |
(9,019 |
) |
|||
|
Prepaid expenses and other assets |
3,374 |
(1,452 |
) |
|||
|
Refundable income taxes |
9,349 |
- |
||||
|
Accounts payable |
(13,357 |
) |
11,446 |
|||
|
Accrued payroll and benefits |
(1,367 |
) |
(1,544 |
) |
||
|
Insurance reserves |
1,118 |
(412 |
) |
|||
|
Accrued taxes |
(4,359 |
) |
2,059 |
|||
|
Other accrued expenses and other liabilities |
|
(4,639 |
) |
|
5,946 |
|
|
Net cash provided by operating activities |
5,840 |
24,270 |
||||
|
Cash flows from investing activities |
||||||
|
Purchases of property and equipment |
(4,173 |
) |
(2,952 |
) |
||
|
Net proceeds from the sale of assets |
52 |
72 |
||||
|
Other |
|
360 |
|
403 |
||
|
Net cash used in investing activities |
(3,761 |
) |
(2,477 |
) |
||
|
Cash flows from financing activities |
||||||
|
Net proceeds (payments) from revolver |
19,700 |
(13,000 |
) |
|||
|
Repayment of long-term debt |
(25,974 |
) |
(9,880 |
) |
||
|
Financing fees paid |
(2,535 |
) |
(2,864 |
) |
||
|
Proceeds from sale of common stock |
|
- |
|
434 |
||
|
Net cash used in financing activities |
(8,809 |
) |
(25,310 |
) |
||
|
Discontinued operations: |
||||||
|
Net cash (used in) provided by discontinued operations |
|
(1,455 |
) |
|
6,826 |
|
|
Net (decrease) increase in cash and cash equivalents |
(8,185 |
) |
3,309 |
|||
|
Cash and cash equivalents at beginning of period |
|
23,306 |
|
27,954 |
||
|
Cash and cash equivalents at end of period |
$ |
15,121 |
$ |
31,263 |
||
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Basis of Presentation and Significant Accounting Policies
The Consolidated Financial Statements include the accounts of Spartan Stores, Inc. and its subsidiaries ("Spartan Stores"). All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying consolidated financial statements, taken as a whole, contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position of Spartan Stores as of September 13, 2003 and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
Stock-Based Compensation
Spartan Stores has a stock incentive plan, which is more fully described in Note 13 of the Annual Report on Form 10-K. Spartan Stores accounts for the plan under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based compensation cost is reflected in the Statements of Operations, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share as if Spartan Stores had applied the fair value recognition principles of Statement of Financial Accounting Standards ("SFAS") Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
(In thousands, except per share data)
|
12 Weeks Ended |
||||||
|
September 13, |
September 14, |
|||||
|
Net earnings (loss), as reported |
$ |
1,772 |
$ |
(586 |
) |
|
|
Deduct: Total stock-based employee compensation expense |
|
|
|
|
|
|
|
Pro forma net earnings (loss) |
$ |
1,627 |
$ |
(885 |
) |
|
|
Basic and diluted earnings (loss) per share -- as reported |
$ |
0.09 |
$ |
(0.03 |
) |
|
|
Basic and diluted earnings (loss) per share -- pro forma |
$ |
0.08 |
$ |
(0.04 |
) |
|
|
24 Weeks Ended |
||||||
|
September 13, |
September 14, |
|||||
|
Net loss, as reported |
$ |
(4,345 |
) |
$ |
(44,339 |
) |
|
Deduct: Total stock-based employee compensation expense |
|
|
|
|
|
|
|
Pro forma net loss |
$ |
(4,643 |
) |
$ |
(44,937 |
) |
|
Basic and diluted loss per share -- as reported |
$ |
(0.22 |
) |
$ |
(2.24 |
) |
|
Basic and diluted loss per share -- pro forma |
$ |
(0.23 |
) |
$ |
(2.27 |
) |
Reclassifications
Certain reclassifications have been made to the fiscal 2003 consolidated financial statements to conform to the fiscal 2004 presentation.
Note 2
New Accounting Standards
In April 2002 the Financial Accounting Standards Board ("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 No.145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." As a result, gains and losses from the extinguishment of debt should be reported as extraordinary items only if they meet the criteria of 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." Gains and losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations for all periods presented. Spartan Stores adopted the provisions of SFAS No. 145 on March 30, 2003. The adoption of this statement will impact the classification on the Statement of Operations of any costs associated w ith debt extinguishment occurring in the future.
Emerging Issues Task Force ("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 of 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 was adopted by Spartan Stores on March 30, 2003 and did not have a material impact on its financial statements.
Note 3
Discontinued Operations
The following table details the results of discontinued operations reported on the Consolidated Statements of Operations by operating segment:
|
(In thousands) |
12 Weeks Ended |
|||||
|
September 13, |
September 14, |
|||||
|
Discontinued retail operations |
||||||
|
Loss from discontinued operations (less taxes of ($1,125) and ($3,375)) |
$ |
(2,089 |
) |
$ |
(6,017 |
) |
|
Gain on disposal of discontinued operations (less taxes of $300) |
|
557 |
|
- |
||
|
Loss from discontinued retail operations |
(1,532 |
) |
(6,017 |
) |
||
|
Discontinued convenience distribution operations |
||||||
|
Earnings from discontinued operations (less taxes of $205 and $443) |
382 |
918 |
||||
|
Gain on disposal of discontinued operations (less taxes of $26) |
|
48 |
|
- |
||
|
Loss from discontinued convenience distribution operations |
429 |
918 |
||||
|
Discontinued grocery distribution, real estate and insurance operations |
||||||
|
Loss from discontinued operations (less taxes of ($615) and ($700)) |
(276 |
) |
(1,299 |
) |
||
|
Gain on disposal of discontinued operations (less taxes of $227 and $958) |
|
421 |
|
1,779 |
||
|
Earnings from discontinued grocery distribution, real estate and |
|
|
|
|
||
|
Total discontinued operations |
||||||
|
Loss from discontinued operations (less taxes of ($1,535) and ($3,632)) |
(1,983 |
) |
(6,398 |
) |
||
|
Gain on disposal of discontinued operations (less taxes of $552 and $958) |
|
1,026 |
|
1,779 |
||
|
Total loss from discontinued operations |
$ |
(958 |
) |
$ |
(4,619 |
) |
|
(In thousands) |
24 Weeks Ended |
|||||
|
September 13, |
September 14, |
|||||
|
Discontinued retail operations |
||||||
|
Loss from discontinued operations (less taxes of ($3,220) and ($9,866)) |
$ |
(5,981 |
) |
$ |
(18,426 |
) |
|
Gain on disposal of discontinued operations (less taxes of $306) |
|
569 |
|
- |
||
|
Loss from discontinued retail operations |
(5,412 |
) |
(18,426 |
) |
||
|
Discontinued convenience distribution operations |
||||||
|
Earnings from discontinued operations (less taxes of $493 and $1,126) |
334 |
2,102 |
||||
|
Gain on disposal of discontinued operations (less taxes of $644 and $32) |
|
1,195 |
|
59 |
||
|
Earnings from discontinued convenience distribution operations |
1,529 |
2,161 |
||||
|
Discontinued grocery distribution, real estate and insurance operations |
||||||
|
Loss from discontinued operations (less taxes of ($547) and ($476)) |
(523 |
) |
(895 |
) |
||
|
Gain on disposal of discontinued operations (less taxes of $227 and $960) |
|
421 |
|
1,782 |
||
|
(Loss) earnings from discontinued grocery distribution, real estate and |
|
|
|
|
|
|
|
Total discontinued operations |
||||||
|
Loss from discontinued operations (less taxes of ($3,274) and ($9,216)) |
(6,170 |
) |
(17,219 |
) |
||
|
Gain on disposal of discontinued operations (less taxes of $1,177 and $991) |
|
2,185 |
|
1,841 |
||
|
Total loss from discontinued operations |
$ |
(3,985 |
) |
$ |
(15,378 |
) |
Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.
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 $0.3 million and $2.1 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the quarters ended September 13, 2003 and September 14, 2002, respectively, and interest expense of $1.6 million and $4.1 million was allocated to, and is included in, loss on discontinued operations for the year-to-date periods ended September 13, 2003 and September 14, 2002, respectively.
Retail Operations
Spartan Stores completed the sale of 24 Food Town stores during fiscal 2004. Proceeds received on the sales of these stores approximated $42.1 million and were used to reduce outstanding borrowings and operating liabilities and pay related transaction expenses. Stores not sold have been closed as of the end of the second quarter.
Convenience Distribution Operations
During the second quarter of fiscal 2004, Spartan Stores made a decision to pursue the divestiture of its cash and carry business. As such, the results of operations of the cash and carry business have been classified as discontinued in the consolidated financial statements.
On June 9, 2003 Spartan Stores completed the sale of substantially all assets of L&L/Jiroch Distributing Company ("L&L/Jiroch") and J.F. Walker Company, Inc. ("J.F. Walker") to The H.T. Hackney Co. for approximately $40.8 million in cash and the assumption of certain liabilities.
Sales for the quarters and year-to-date periods ended September 13, 2003 and September 14, 2002 and significant assets and liabilities of discontinued operations at the end of those periods are included below:
|
|
|
|
Convenience |
|
|
|
|
|
||||
|
(In thousands, except per share data) |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended September 13, 2003 |
$ |
5,265 |
|
$ |
42,374 |
|
$ |
- |
|
$ |
47,639 |
|
|
12 Weeks Ended September 14, 2002 |
|
99,736 |
|
|
222,554 |
|
|
1,125 |
|
|
323,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 Weeks Ended September 13, 2003 |
$ |
59,802 |
|
$ |
204,092 |
|
$ |
- |
|
$ |
263,894 |
|
|
24 Weeks Ended September 14, 2002 |
|
204,767 |
|
|
430,545 |
|
|
2,249 |
|
|
637,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended September 13, 2003 |
$ |
(0.08 |
) |
$ |
0.02 |
|
$ |
0.01 |
|
$ |
(0.05 |
) |
|
12 Weeks Ended September 14, 2002 |
|
(0.30 |
) |
|
0.05 |
|
|
0.02 |
|
|
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 Weeks Ended September 13, 2003 |
$ |
(0.27 |
) |
$ |
0.08 |
|
$ |
(0.01 |
) |
$ |
(0.20 |
) |
|
24 Weeks Ended September 14, 2002 |
|
(0.93 |
) |
|
0.11 |
|
|
0.04 |
|
|
(0.78 |
) |
|
|
|
|
Convenience |
|
|
|
|
|
||||
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 13, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets * |
$ |
3,281 |
|
$ |
9,534 |
|
$ |
7,091 |
|
$ |
19,906 |
|
|
Property, net |
|
4,128 |
|
|
- |
|
|
224 |
|
|
4,352 |
|
|
Other long-term assets |
|
32 |
|
|
- |
|
|
- |
|
|
32 |
|
|
Current liabilities |
|
6,087 |
|
|
6,814 |
|
|
11,036 |
|
|
23,937 |
|
|
Long-term liabilities |
|
11,147 |
|
|
- |
|
|
- |
|
|
11,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets * |
$ |
62,108 |
|
$ |
46,483 |
|
$ |
9,859 |
|
$ |
118,450 |
|
|
Property, net |
|
5,599 |
|
|
2,829 |
|
|
- |
|
|
8,428 |
|
|
Other long-term assets |
|
206 |
|
|
43 |
|
|
7 |
|
|
256 |
|
|
Current liabilities |
|
11,274 |
|
|
15,909 |
|
|
11,401 |
|
|
38,584 |
|
|
Long-term liabilities |
|
10,182 |
|
|
- |
|
|
- |
|
|
10,182 |
|
* Includes property and equipment held for sale
Note 4
Asset Impairments and Exit Costs
Spartan Stores' recognized charges of $2.9 and $6.5 million during the quarter and year-to-date periods ended September 13, 2003, respectively, for asset impairments and exit costs related to discontinued operations.
The following table provides the activity of exit costs for fiscal year 2003 and the first twenty-four weeks of fiscal 2004. Exit costs recorded in the Consolidated Balance Sheets are included in Other accrued expenses in current liabilities and Other long-term liabilities based on when the costs are expected to be paid.
|
(In thousands) |
Lease and |
|
|||||
|
Balance at March 31, 2002 |
$ |
5,006 |
$ |
- |
|||
|
Provision for lease and related ancillary costs, net of estimated |
|
|
|
||||
|
Provision for severance |
- |
4,021 |
(b) |
||||
|
Payments, net of interest accretion |
|
(3,969 |
) |
|
(155 |
) |
|
|
Balance at March 29, 2003 |
$ |
18,973 |
$ |
3,866 |
|||
|
Provision for lease and related ancillary costs, net of estimated |
|
|
|
||||
|
Provision for severance |
- |
3,060 |
(d) |
||||
|
Payments, net of interest accretion |
|
(2,229 |
) |
|
(5,735 |
) |
|
|
Balance at September 13, 2003 |
$ |
19,322 |
$ |
1,191 |
|||
(a) Includes $14.9 million of charges recorded in discontinued Retail operations and $0.1 million recorded in discontinued Grocery Distribution operations.
(b) Includes $3.1 million of charges recorded in discontinued Retail operations and $0.9 million recorded in discontinued Grocery Distribution operations.
(c) Includes $2.0 million of charges recorded in discontinued Retail operations and $0.6 million recorded in discontinued Grocery Distribution operations.
(d) Recorded in discontinued Retail operations.
Note 5
Goodwill
The following table summarizes the changes in the carrying amount of goodwill during fiscal 2003 and the first twenty-four weeks of fiscal 2004, by reportable operating segment:
|
(in thousands) |
|
|
Grocery |
|
|
|
|
|
||||
|
Balance at March 30, 2002, net of |
|
|
|
|
|
|
$ |
43 |
|
|
|
|
|
Allocation of goodwill upon adoption of SFAS No. 142 |
(30,300 |
) |
30,300 |
- |
- |
|||||||
|
Impairment of goodwill recognized as a cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill recognized in operating |
|
|
|
|
- |
|
|
- |
|
|
|
|
|
Impairment of goodwill recognized in discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
100 |
|
|
- |
|
|
- |
|
|
100 |
|
|
Balance at March 29, 2003 |
|
38,400 |
|
|
30,300 |
|
|
43 |
|
|
68,743 |
|
|
Other |
|
- |
|
|
- |
|
|
(43 |
) |
|
(43 |
) |
|
Balance at September 13, 2003 |
$ |
38,400 |
|
$ |
30,300 |
|
$ |
- |
|
$ |
68,700 |
|
Note 6
Long-Term Debt
Spartan Stores has a $385.0 million senior secured credit facility pursuant to an Amended and Restated Credit Agreement dated July 29, 2002, as amended, consisting of (1) a revolving credit facility in the amount of $60.0 million terminating in 2005, (2) a term loan A in the amount of $100.0 million terminating in 2005, (3) an acquisition facility in the amount of $75.0 million terminating in 2006 and (4) a term loan B in the amount of $150.0 million terminating in 2007. At September 13, 2003, $123.4 million was outstanding under the credit facility. Available borrowings under the credit facility are based on stipulated levels of earnings before interest, income taxes, depreciation and amortization, as defined in the credit facility. The credit facility contains covenants that include the maintenance of certain financial ratios. Spartan Stores' creditors have waived compliance with certain financial covenants through January 12, 2004 as Spartan Stores works to restructure its existing financial structure. Should Spartan Stores not be able to obtain an amended credit facility or obtain other sources of financing, it may not be able to comply with the credit facility covenants during the remainder of fiscal 2004. However, management believes that it has the opportunity to secure alternative sources of available financing or amend its existing facility.
Effective March 31, 2003 Spartan Stores suspended the former promissory note program and all notes, amounting to approximately $8.3 million, were paid as of that date.
Note 7
Operating Segment Information
The results of operations of our cash and carry operations, previously classified under the Grocery Distribution segment, have been classified as part of the discontinued Convenience Distribution operations, in connection with our decision to pursue the divestiture of this business. See additional discussion in Note 3.
The following tables set forth information about Spartan Stores by operating segment:
|
(In thousands) |
|
Grocery |
|
||||||
|
12 Weeks Ended September 13, 2003 |
|||||||||
|
Net sales |
$ |
230,502 |
$ |
260,869 |
$ |
491,371 |
|||
|
Depreciation and amortization |
4,035 |
2,079 |
6,114 |
||||||
|
Operating earnings |
4,247 |
3,025 |
7,272 |
||||||
|
Capital expenditures |
1,813 |
577 |
2,390 |
||||||
|
12 Weeks Ended September 14, 2002 |
|||||||||
|
Net sales |
$ |
221,785 |
$ |
251,528 |
$ |
473,313 |
|||
|
Depreciation and amortization |
3,663 |
2,767 |
6,430 |
||||||
|
Operating earnings |
5,511 |
3,767 |
9,278 |
||||||
|
Capital expenditures |
1,600 |
412 |
2,012 |
||||||
|
24 Weeks Ended September 13, 2003 |
|||||||||
|
Net sales |
$ |
442,775 |
$ |
511,165 |
$ |
953,940 |
|||
|
Depreciation and amortization |
7,954 |
4,241 |
12,195 |
||||||
|
Operating earnings |
1,260 |
5,120 |
6,380 |
||||||
|
Capital expenditures |
2,592 |
1,581 |
4,173 |
||||||
|
24 Weeks Ended September 14, 2002 |
|||||||||
|
Net sales |
$ |
425,631 |
$ |
499,157 |
$ |
924,788 |
|||
|
Depreciation and amortization |
7,227 |
5,370 |
12,597 |
||||||
|
Operating earnings |
8,831 |
7,454 |
16,285 |
||||||
|
Capital expenditures |
1,857 |
1,095 |
2,952 |
||||||
|
September 13, |
March 29, |
|||||
|
Total assets |
||||||
|
Retail |
$ |
181,637 |
$ |
184,613 |
||
|
Grocery Distribution |
238,913 |
259,858 |
||||
|
Discontinued operations -- Retail |
7,441 |
67,913 |
||||
|
Discontinued operations -- Convenience Distribution |
9,534 |
49,355 |
||||
|
Discontinued operations -- Grocery Distribution |
225 |
1,368 |
||||
|
Discontinued operations -- Real Estate |
1,063 |
1,577 |
||||
|
Discontinued operations -- Insurance |
6,027 |
6,921 |
||||
|
Eliminations |
|
(17,673 |
) |
|
(15,299 |
) |
|
Total |
$ |
427,167 |
$ |
556,306 |
||
|
ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
The following table sets forth our Consolidated Statements of Operations as percentages of net sales:
|
(Unaudited) |
12 Weeks Ended |
24 Weeks Ended |
||||||
|
|
September 13, |
|
September 14, |
|
September 13, |
|
September, 14, |
|
|
Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Gross margin |
19.0 |
|
19.1 |
|
18.8 |
|
19.2 |
|
|
Selling, general and administrative |
17.5 |
|
17.2 |
|
18.1 |
|
17.4 |
|
|
Operating earnings |
1.5 |
|
1.9 |
|
0.7 |
|
1.8 |
|
|
Other income and expenses, net |
0.6 |
|
0.5 |
|
0.8 |
|
0.7 |
|
|
Earnings (loss) before income taxes, |
0.9 |
1.4 |
(0.1 |
) |
1.1 |
|||
|
Income taxes |
0.3 |
0.5 |
0.0 |
0.4 |
||||
|
Earnings (loss) from continuing operations |
0.6 |
0.9 |
(0.1 |
) |
0.7 |
|||
|
Loss from discontinued operations |
(0.2 |
) |
(1.0 |
) |
(0.4 |
) |
(1.7 |
) |
|
Cumulative effect of a change in accounting |
|
|
|
|
|
|||
|
Net earnings (loss) |
0.4 |
% |
(0.1 |
)% |
(0.5 |
)% |
(4.8 |
)% |
Net Sales. Net sales for the quarter ended September 13, 2003 increased $18.1 million, or 3.8%, from $473.3 million in the prior year quarter to $491.4 million. Net sales for the year-to-date period ended September 13, 2003 increased $29.1 million, or 3.2%, from $924.8 million in the prior year-to-date period to $953.9 million. The sales increase represents the second consecutive quarter of year-over-year sales improvement and is the result of continuing positive retail comparable-store and distribution sales trends, as well as three new retail stores which generated sales of $6.9 million and $13.8 million for the quarter and year-to-date periods ended September 13, 2003, respectively.
Net sales for the quarter ended September 13, 2003 in our Retail segment increased $8.7 million, or 3.9%, from $221.8 million in the prior year quarter to $230.5 million. Net sales for the year-to-date period ended September 13, 2003 in our Retail segment increased $17.2 million, or 4.0%, from $425.6 million in the prior year-to-date period to $442.8 million. This represents the second consecutive quarter of significant retail sales improvement. Second quarter comparable-store sales increased 0.7%, bringing our retail sales performance in line with recent industry averages. These continued comparable-store sales improvements are a result of improved merchandising and promotional programs.
Net sales for the quarter ended September 13, 2003 in our Grocery Distribution segment increased $9.4 million, or 3.7%, from $251.5 million in the prior year quarter to $260.9 million. Net sales for the year-to-date period ended September 13, 2003 in the Grocery Distribution segment increased $12.0 million, or 2.4%, from $499.2 million in the prior year-to-date period to $511.2 million. These increases were primarily due to sales to new customers of $6.3 million and $8.1 million for the quarter and year-to-date periods ended September 13, 2003, respectively, as well as sales increases to our existing customers.
Gross Margin. Gross margin for the quarter ended September 13, 2003 increased $2.8 million, or 3.0%, from $90.6 million in the prior year quarter to $93.4 million. Gross margin for the year-to-date period ended September 13, 2003 increased $1.4 million, or 0.7%, from $177.6 million in the prior year-to-date period to $179.0 million. As a percent of net sales, gross margin for the quarter and year-to-date periods ended September 13, 2003 decreased to 19.0% and 18.8%, respectively, from 19.1% and 19.2% for the prior year quarter and year-to-date
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for the quarter ended September 13, 2003 increased $4.7 million, or 5.8%, from $81.4 million in the prior year quarter to $86.1 million. SG&A expenses for the year-to-date period ended September 13, 2003 increased $11.2 million, or 6.9%, from $161.4 million in the prior year to $172.6 million. The increases were primarily due to operating costs associated with three new stores of $2.1 million and $4.2 million for the quarter and year-to-date period, respectively, increased sales volume causing SG&A expenses to increase approximately $1.3 million and $2.2 million for the quarter and year-to-date period, respectively, expenses of $1.4 million related to the retirement distribution of the former Chief Executive Officer during the first quarter of fiscal 2004 and severance costs of $0.6 million associated with corporate staff reductions in the first quarter of fiscal 2004. The remaining increases were caused primarily by higher insurance costs and increased advertising expenses due to the elimination of a joint retail and wholesale marketing program in fiscal 2003's third quarter. As a percent of net sales, SG&A for the quarter and year-to-date periods ended September 13, 2003 increased to 17.5% and 18.1%, respectively, from 17.2% and 17.4% for the prior year quarter and year-to-date period. The increase in percentage was primarily due to the cost increases described above. We expect SG&A expenditures to show improvements during the remainder of fiscal 2004.
Interest Expense. Interest expense from continuing operations for the quarter ended September 13, 2003 decreased $0.3 million, or 9.0%, from $3.5 million in the prior year quarter to $3.2 million. Interest expense from continuing operations for the year-to-date period ended September 13, 2003 increased $0.2 million, or 2.8% percent, from $7.0 million in the prior year to $7.2 million. The decrease in interest expense from continuing operations for the quarter ended September 13, 2003 is due to lower average borrowings, partially offset by bank waiver fees recorded in the second quarter of $0.2 million. The increase in interest expense from continuing operations for the year-to-date period ended September 13, 2003 is due to bank waiver fees of $1.9 million, partially offset by lower average borrowings. Total average borrowings for the year-to-date period decreased to $180.9 million from $297.7 million in the corresponding year-to-dat e period last year as a result of debt repayments resulting from the sale of Food Town stores, L&L/Jiroch Distributing Company ("L&L/Jiroch"), J.F. Walker Company, Inc. ("J.F. Walker") and real estate. See "Discontinued Operations" below.
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 $0.3 million and $2.1 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the quarters ended September 13, 2003 and September 14, 2002, and interest expense of $1.6 million and $4.1 million was allocated to, and is included in, loss on discontinued operations for the year-to-date periods ended September 13, 2003 and September 14, 2002. Allocated interest expense from discontinued operations decreased primarily as a result of lower average borrowings.
Discontinued Operations
We completed the sale of 24 Food Town stores during fiscal 2004. Proceeds received on the sales of these stores approximated $42.1 million and were used to reduce outstanding borrowings and operating liabilities and pay related transaction expenses. All Food Town stores not sold have been closed as of the end of the second quarter.
During the second quarter of fiscal 2004, we made a decision to pursue the divestiture of our cash and carry business. As such, the results of operations of the cash and carry business have been classified as discontinued in the consolidated financial statements.
On June 9, 2003, we completed the sale of substantially all 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.
Liquidity and Capital Resources
Net cash provided by operating activities was $5.8 million and $24.3 million during the year-to-date periods ended September 13, 2003 and September 14, 2002, respectively. The decrease in net cash provided by operating activities during fiscal 2004 is primarily the result of the timing of payment of invoices, including tax and interest payments, as well as the current year loss from continuing operations.
Net cash used in investing activities was $3.8 million and $2.5 million during the year-to-date periods ended September 13, 2003 and September 14, 2002, respectively. Cash used in investing activities increased during fiscal 2004 primarily due to increased capital expenditures.
Net cash used in financing activities was $8.8 million and $25.3 million during the year-to-date periods ended September 13, 2003 and September 14, 2002, respectively, primarily due to the repayment of long-term debt and financing fees related to our refinancing efforts.
Our principal sources of liquidity are cash generated from operations and borrowings under a $385.0 million senior secured credit facility pursuant to an Amended and Restated Credit Agreement dated July 29, 2002, as amended, consisting of (1) a revolving credit facility in the amount of $60.0 million terminating in 2005, (2) a term loan A in the amount of $100.0 million terminating in 2005, (3) an acquisition facility in the amount of $75.0 million terminating in 2006 and (4) a term loan B in the amount of $150.0 million terminating in 2007. At September 13, 2003, $123.4 million was outstanding under the credit facility. Available borrowings under the credit facility are based on stipulated levels of earnings before interest, income taxes, depreciation and amortization, as defined in the credit facility. The credit facility contains covenants that include the maintenance of certain financial ratios. Our creditors have waived compliance with certa in financial covenants through January 12, 2004 as we work to restructure our existing financial structure. Should we not be able to obtain revised covenants in an amended credit facility or obtain other sources of financing, we may not be able to comply with the credit facility covenants during the remainder of fiscal 2004. However, management believes that it has the opportunity to secure alternative sources of available financing or amend its existing facility.
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 40 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 improved product and promotional programs have already been implemented under the direction of these executives and we believe have resulted in our recently improved sequential 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. However, these savings have been offset by higher in surance costs, higher advertising costs and costs associated with new stores. Improved efficiencies in warehouse operations have also been realized during the first two quarters of fiscal 2004 relative to the fourth quarter of fiscal 2003. On June 9, 2003, we completed the sale of the assets of L&L Jiroch and J.F. Walker. Proceeds received from this transaction of $40.8 million were used to further reduce outstanding borrowings and operating liabilities. Total outstanding borrowings have been reduced by $79.0 million since the end of fiscal 2003. As discussed in Note 3, we have sold 24 Food Town stores and closed the remaining Food Town stores. The elimination of these operations is expected to have a positive impact on our continuing operating cash flows. Net proceeds received to date of $42.1 million have been used to further reduce outstanding borrowings and operating liabilities and pay transaction costs. Management believes that the early results and the long-term expectations of these initiatives a nd 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 was filed as an exhibit to our Annual Report on Form 10-K. While we may be allowed to pay dividends in the future, we intend to use any net earnings generated from our operations to repay debt in the short term and to improve our distribution and retail operations in the longer term. 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. Effective March 31, 2003, Spartan Stores suspended the promissory note program and all notes were repaid as of that date.
Our current ratio decreased to 1.22:1.00 at September 13, 2003 from 1.38:1.00 at March 29, 2003 and working capital decreased to $35.3 million at September 13, 2003 from $87.2 million at March 29, 2003. The improvement in our overall working capital requirements is primarily the result of more efficient management of inventory, the sales and closings of Food Town stores and the sales of L&L/Jiroch and J.F. Walker, which required a much higher investment in working capital level.
Our long-term debt to equity ratio at September 13, 2003 improved to 1.16:1.00 from 1.68:1.00 at March 29, 2003. This improvement was primarily due to reducing long-term debt, including current maturities by $79.0 million, including $58.6 million in debt payments ahead of scheduled maturities, partially offset by the year-to-date net loss. Management from time to time evaluates longer-term acquisition opportunities, which could result in additional borrowings and additional leases being entered into if consummated, in turn increasing our leverage position.
Our total capital structure includes borrowings under the senior secured credit facility, various other debt instruments, leases and shareholders' equity.
The table below presents our significant contractual obligations as of September 13, 2003:
|
|
|
|
|
|
|
Total Contractual |
|||
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
10,229 |
|
$ |
12,172 |
|
$ |
22,401 |
|
2005 |
|
|
43,147 |
|
|
21,945 |
|
|
65,092 |
|
2006 |
|
|
15,203 |
|
|
19,973 |
|
|
35,176 |
|
2007 |
|
|
65,604 |
|
|
17,532 |
|
|
83,136 |
|
2008 |
|
|
3,764 |
|
|
15,373 |
|
|
19,137 |
|
Thereafter |
|
|
3,446 |
|
|
71,479 |
|
|
74,925 |
|
Total |
|
$ |
141,393 |
|
$ |
158,474 |
|
$ |
299,867 |
New Accounting Standards
In April 2002 the Financial Accounting Standards Board ("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 No.145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." As a result, gains and losses from the extinguishment of debt should be reported as extraordinary items only if they meet the criteria of 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." Gains and losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations for all periods presented. We adopted the provisions of SFAS No. 145 on March 30, 2003. The adoption of this statement will impact the classification on the S tatement of Operations of any costs associated with debt extinguishment occurring in the future.
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 was adopted on March 30, 2003 and did not have a material impact on net loss.
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, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, exit costs, retirement benefits and contingencies and litigation. We base our estimates 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 make adjustments we consider appropriate under the facts and circumstances. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our 2003 Annual Report on Form 10-K.
|
ITEM 3. |
Quantitative and Qualitative Disclosure About Market Risk |
There were no material changes in market risk of Spartan Stores in the period covered by this Quarterly Report on Form 10-Q.
|
ITEM 4. |
Controls and Procedures |
Spartan Stores' Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Spartan Stores' disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on the evaluation of those controls and procedures required by Rule 13a-15(b), they have concluded that Spartan Stores' disclosure controls and procedures were adequate and effective as of the Evaluation Date. During the last fiscal quarter there was no change in Spartan Stores' internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Spartan Stores' internal control over financial reporting.
PART II
OTHER INFORMATION
|
ITEM 4. |
Submission of Matters to a Vote of Security Holders |
On August 6, 2003 at the 2003 annual meeting of shareholders of Spartan Stores, the shareholders voted to elect three persons to the board of directors. The following persons were duly elected:
|
|
|
|
Term Expiring |
|
|
Votes For |
|
|
Votes Withheld |
|
|
|
|
|
|
|
|
|
|
|
|
M. Shan Atkins |
|
|
2006 |
|
|
16,536,789 |
|
|
621,399 |
|
Dr. Frank M. Gambino |
|
|
2006 |
|
|
16,538,717 |
|
|
619,471 |
|
Timothy J. O'Donovan |
|
|
2006 |
|
|
16,542,502 |
|
|
615,686 |
The following five persons continue to serve as directors of Spartan Stores: Elizabeth A. Nickels, Kenneth T. Stevens and James F. Wright are currently serving terms that will expire at Spartan Stores' 2005 annual meeting of shareholders and Craig C. Sturken and Gregory P. Josefowicz are currently serving terms that will expire at Spartan Stores' 2004 annual meeting of shareholders. Alex J. DeYonker resigned from the Board of Directors on August 29, 2003, however he remains as General Counsel and Secretary.
In addition, the shareholders voted on a proposal to amend the Spartan Stores, Inc. 2001 Associate Stock Purchase Plan. With respect to this proposal, shares were voted as follows:
|
Proposal |
For |
Against |
Abstain |
|
|
|
|
|
|
Proposal to approve an amendment to the Spartan |
|
|
|
|
|
|
|
|
There were no broker non-votes with respect to matters voted on by Spartan Stores' shareholders at the meeting.
|
ITEM 6. |
Exhibits and Reports on Form 8-K |
|
|
(a) |
Exhibits: The following documents are filed as exhibits to this Quarterly Report on Form 10-Q: |
|
Exhibit Number |
|
Document |
|
|
|
|
|
2.1 |
|
Asset Purchase Agreement dated May 7, 2003, by and among The H.T. Hackney Co., Spartan Stores, Inc., L&L/Jiroch Distributing Company and J.F. Walker Company, Inc. Previously filed as an exhibit to Spartan Stores' Current Report on Form 8-K, filed June 24, 2003. Here incorporated by reference. |
|
|
|
|
|
2.2 |
|
Contract of Sale dated as of May 23, 2003, between Seaway Food Town, Inc., Gruber's Food Town, Inc., Buckeye Real Estate Management Co., Gruber's Real Estate, LLC and The Kroger Co. Previously filed as an exhibit to Spartan Stores' Annual Report on Form 10-K for the year ended March 29, 2003. Here incorporated by reference. |
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of Spartan Stores, Inc. Previously filed as Annex B to the prospectus and joint proxy statement contained in Spartan Stores' Pre-Effective Amendment No. 1 to Registration Statement on Form S-4, filed on June 5, 2000. Here incorporated by reference. |
|
|
|
|
|
3.2 |
|
Amended and Restated Bylaws of Spartan Stores, Inc. |
|
|
|
|
|
10.1 |
|
Waiver and Amendment No. 3 dated September 12, 2003, to Amended and Restated Credit Agreement dated as of July 29, 2002, among Spartan Stores, Inc., ABN AMRO Bank N.V., as Arranger, Syndication Agent, Collateral Agent and Administrative Agent, Standard Federal Bank (formerly known as Michigan National Bank), as Co-Arranger and Administrative Agent, NBD Bank, as Document Agent, and certain other financial institutions as Lenders. Previously filed as an exhibit to Spartan Stores' Current Report on Form 8-K filed on October 2, 2003. Here incorporated by reference. |
|
|
|
|
|
10.2 |
|
Spartan Stores, Inc. 2001 Associate Stock Purchase Plan, as amended. Previously filed as Appendix A to Spartan Stores' Definitive Proxy Statement on Schedule 14A, filed on July 2, 2003. Here incorporated by reference. |
|
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(b) |
Reports on Form 8-K: Spartan Stores filed the following Current Report on Form 8-K during the quarter ended September 13, 2003. |
|
|
Date of Report |
|
Filing Date |
|
Item(s) Reported |
|
|
|
|
|
|
|
|
|
June 24, 2003 |
|
June 24, 2003 |
|
Under Items 9 and 12, this Form 8-K included a press release announcing Spartan Stores' financial results for the year ended March 29, 2003. It included a summary statement of earnings for fiscal 2003, the fourth quarter of fiscal 2003 and the corresponding prior-year periods, and summary balance sheets as of March 29, 2003 and March 30, 2002. |
|
|
|
|
|
|
|
|
|
June 9, 2003 |
|
June 24, 2003 |
|
Under Item 2, this Form 8-K reported the consummation of the transactions contemplated by the Asset Purchase Agreement dated May 7, 2003 by and among The H.T. Hackney Co., as buyer, Spartan Stores, and Spartan Stores' wholly owned subsidiaries L&L/Jiroch Distributing Company and J.F. Walker Company, Inc. The Form 8-K also included an unaudited pro forma condensed consolidated balance sheet as of March 29, 2003, an unaudited pro forma condensed consolidated statement of operations for the year ended March 29, 2003, and notes thereto. |
|
|
|
|
|
|
|
|
|
July 7, 2003 |
|
July 22, 2003 |
|
Under Item 2, this Form 8-K reported that Spartan Stores had completed the sale of 18 of its Food Town retail stores in the Toledo, Ohio and southeast Michigan market area. The Form 8-K also included an unaudited pro forma condensed consolidated balance sheet as of March 29, 2003, an unaudited pro forma condensed consolidated statement of operations for the year ended March 29, 2003, and notes thereto. |
|
|
Date of Report |
|
Filing Date |
|
Item(s) Reported |
|
|
|
|
|
|
|
|
|
July 30, 2003 |
|
July 30, 2003 |
|
Under Item 9, this Form 8-K reported that Spartan Stores' 2003 annual meeting of shareholders would be webcast live. Under Item 12, this Form 8-K reported Spartan Stores' financial results for the quarter ended June 21, 2003. The Form 8-K included a summary statement of earnings for the quarter ended June 21, 2003 and the corresponding prior-year period, and summary balance sheets as of June 21, 2003 and June 22, 2002. |
|
|
|
|
|
|
|
|
|
June 9, 2003 |
|
August 6, 2003 |
|
This Form 8-K was an amendment to the Form 8-K dated June 9, 2003 filed on June 24, 2003 described above. It was filed for the purpose of presenting revised versions of the pro forma financial statements that were included in that Form 8-K. |
Certain of these Forms 8-K, or portions thereof, were furnished pursuant to Regulation FD and are considered to have been "furnished" but not "filed" with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
SPARTAN STORES, INC. |
|
|
|
|
|
|
|
|
|
|
Date: October 28, 2003 |
By /s/ David M. Staples |
|
|
David M. Staples |
EXHIBIT INDEX
|
Exhibit Number |
|
Document |
|
|
|
|
|
2.1 |
|
Asset Purchase Agreement dated May 7, 2003, by and among The H.T. Hackney Co., Spartan Stores, Inc., L&L/Jiroch Distributing Company and J.F. Walker Company, Inc. Previously filed as an exhibit to Spartan Stores' Current Report on Form 8-K, filed June 24, 2003. Here incorporated by reference. |
|
|
|
|
|
2.2 |
|
Contract of Sale dated as of May 23, 2003, between Seaway Food Town, Inc., Gruber's Food Town, Inc., Buckeye Real Estate Management Co., Gruber's Real Estate, LLC and The Kroger Co. Previously filed as an exhibit to Spartan Stores' Annual Report on Form 10-K for the year ended March 29, 2003. Here incorporated by reference. |
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of Spartan Stores, Inc. Previously filed as Annex B to the prospectus and joint proxy statement contained in Spartan Stores' Pre-Effective Amendment No. 1 to Registration Statement on Form S-4, filed on June 5, 2000. Here incorporated by reference. |
|
|
|
|
|
3.2 |
|
Amended and Restated Bylaws of Spartan Stores, Inc. |
|
|
|
|
|
10.1 |
|
Waiver and Amendment No. 3 dated September 12, 2003, to Amended and Restated Credit Agreement dated as of July 29, 2002, among Spartan Stores, Inc., ABN AMRO Bank N.V., as Arranger, Syndication Agent, Collateral Agent and Administrative Agent, Standard Federal Bank (formerly known as Michigan National Bank), as Co-Arranger and Administrative Agent, NBD Bank, as Document Agent, and certain other financial institutions as Lenders. Previously filed as an exhibit to Spartan Stores' Current Report on Form 8-K filed on October 2, 2003. Here incorporated by reference. |
|
|
|
|
|
10.2 |
|
Spartan Stores, Inc. 2001 Associate Stock Purchase Plan, as amended. Previously filed as Appendix A to Spartan Stores' Definitive Proxy Statement on Schedule 14A, filed on July 2, 2003. Here incorporated by reference. |
|
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |