UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| 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 |
OR
| 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 |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes X |
| No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).
Yes | No X |
As of February 1,July 25, 2003 the registrant had 20,000,83819,943,257 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-looking 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 distribution industries and ot her 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 uncertainties that could have adver se 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.
As discussed in this Form 10-Q, we have recently completed sales of or contracted to sell material assets, including substantially all of the assets of L&L/Jiroch Distributing Company and J.F. Walker Company, Inc. and several Food Town stores, 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 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 |
CONDENSED CONSOLIDATED BALANCE SHEETS
SPARTAN STORES, INC. AND SUBSIDIARIESCondensed Consolidated Balance SheetsSpartan Stores, Inc. and Subsidiaries
(In thousands)
(Unaudited)
ASSETS |
| January 4, 2003 |
| March 30, 2002 |
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| June 21, |
| March 29, |
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Current assets: |
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Current assets |
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Cash and cash equivalents | Cash and cash equivalents | $ | 19,041 | $ | 13,903 |
| $ | 18,492 |
| $ | 23,306 |
| ||||
Marketable securities | Marketable securities |
| 1,906 |
| 10,370 |
|
| 1,765 |
|
| 1,705 |
| ||||
Accounts receivable, net | Accounts receivable, net |
| 74,905 |
| 84,533 |
|
| 55,335 |
|
| 70,747 |
| ||||
Inventories | Inventories |
| 166,052 |
| 179,319 |
|
| 111,042 |
|
| 138,095 |
| ||||
Prepaid expenses |
| 9,921 |
| 8,427 |
| |||||||||||
Deferred income taxes |
| 2,286 |
| 692 |
| |||||||||||
Prepaid expenses and other current assets |
| 10,707 |
|
| 13,141 |
| ||||||||||
Refundable income taxes |
| - |
|
| 9,349 |
| ||||||||||
Deferred taxes on income |
| 4,092 |
|
| 4,113 |
| ||||||||||
Property and equipment held for sale | Property and equipment held for sale |
| 4,036 |
| - |
|
| 38,012 |
|
| 54,684 |
| ||||
Total current assets | Total current assets |
| 278,147 |
| 297,244 |
|
| 239,445 |
|
| 315,140 |
| ||||
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Other assets: |
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Other assets |
|
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Goodwill, net | Goodwill, net |
| 68,643 |
| 155,243 |
|
| 68,700 |
|
| 68,743 |
| ||||
Deferred income taxes |
| 21,536 |
| - |
| |||||||||||
Deferred taxes on income |
| 25,567 |
|
| 25,566 |
| ||||||||||
Other, net | Other, net |
| 22,324 |
| 25,738 |
|
| 26,487 |
|
| 26,785 |
| ||||
Total other assets | Total other assets |
| 112,503 |
| 180,981 |
|
| 120,754 |
|
| 121,094 |
| ||||
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|
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|
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| ||||
Property and equipment, net | Property and equipment, net |
| 176,634 |
| 268,315 |
|
| 117,228 |
|
| 120,072 |
| ||||
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|
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| ||||
Total assets | Total assets | $ | 567,284 | $ | 746,540 |
| $ | 477,427 |
| $ | 556,306 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Current liabilities |
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Accounts payable | Accounts payable | $ | 116,925 | $ | 90,327 |
| $ | 95,015 |
| $ | 112,181 |
| ||||
Accrued payroll and benefits | Accrued payroll and benefits |
| 27,623 |
| 26,624 |
|
| 26,140 |
|
| 28,533 |
| ||||
Insurance reserves | Insurance reserves |
| 17,833 |
| 17,263 |
|
| 14,805 |
|
| 14,783 |
| ||||
Accrued taxes | Accrued taxes |
| 15,826 |
| 14,451 |
|
| 22,033 |
|
| 16,735 |
| ||||
Other accrued expenses | Other accrued expenses |
| 7,767 |
| 8,892 |
|
| 14,117 |
|
| 19,150 |
| ||||
Current maturities of long-term debt | Current maturities of long-term debt |
| 28,419 |
| 25,948 |
|
| 24,538 |
|
| 36,594 |
| ||||
Total current liabilities | Total current liabilities |
| 214,393 |
| 183,505 |
|
| 196,648 |
|
| 227,976 |
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Deferred income taxes |
| - |
| 14,490 |
| |||||||||||
Other long-term liabilities |
| 18,678 |
|
| 18,859 |
| ||||||||||
Postretirement benefits | Postretirement benefits |
| 12,937 |
| 12,133 |
|
| 15,362 |
|
| 16,022 |
| ||||
Other long-term liabilities |
| 19,723 |
| 9,707 |
| |||||||||||
Long-term debt | Long-term debt |
| 188,114 |
| 295,213 |
|
| 143,016 |
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| 183,817 |
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Shareholders' equity: |
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Common stock, voting, no par value; 50,000 shares |
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authorized; 20,001 and 19,766 shares outstanding |
| 116,394 |
| 115,722 |
| |||||||||||
Preferred stock, no par value; |
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10,000 shares authorized; no shares outstanding |
| - |
| - |
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Shareholders' equity |
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Common stock, voting, no par value; 50,000 shares |
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Preferred stock, no par value, 10,000 |
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Accumulated other comprehensive loss | Accumulated other comprehensive loss |
| (1,255 | ) | (2,622 | ) |
| (2,444 | ) |
| (2,816 | ) | ||||
Retained earnings |
| 16,978 |
| 118,392 |
| |||||||||||
Accumulated deficit |
| (10,057 | ) |
| (3,940 | ) | ||||||||||
Total shareholders' equity | Total shareholders' equity |
| 132,117 |
| 231,492 |
|
| 103,723 |
|
| 109,632 |
| ||||
|
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|
|
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|
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| ||||
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | $ | 567,284 | $ | 746,540 |
| $ | 477,427 |
| $ | 556,306 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of OperationsSpartan Stores, Inc. and Subsidiaries
(In thousands, except per share data)
(Unaudited)
|
| Third Quarter (16 Weeks) Ended |
| |||||||
|
| January 4, |
|
| January 5, |
| ||||
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| ||||
Net sales | $ | 995,353 |
| $ | 1,061,563 |
| ||||
Cost of goods sold |
| 842,032 |
|
| 885,892 |
| ||||
Gross margin |
| 153,321 |
|
| 175,671 |
| ||||
|
|
|
|
|
|
| ||||
Operating expenses |
|
|
|
|
|
| ||||
Selling, general and administrative |
| 163,895 |
|
| 169,967 |
| ||||
Provision for asset impairments and exit costs |
| 85,195 |
|
| - |
| ||||
Total operating expenses |
| 249,090 |
|
| 169,967 |
| ||||
|
|
|
|
|
|
| ||||
Operating (loss) earnings |
| (95,769 | ) |
| 5,704 |
| ||||
|
|
|
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|
| ||||
Other income and expenses |
|
|
|
|
|
| ||||
Interest expense |
| 8,213 |
|
| 7,708 |
| ||||
Interest income |
| (175 | ) |
| (577 | ) | ||||
Other gains, net |
| (787 | ) |
| (411 | ) | ||||
Total other income and expenses |
| 7,251 |
|
| 6,720 |
| ||||
|
|
|
|
|
|
| ||||
Loss before income taxes and discontinued operations |
| (103,020 | ) |
| (1,016 | ) | ||||
|
|
|
|
|
|
| ||||
Income taxes |
| (35,972 | ) |
| (361 | ) | ||||
|
|
|
|
|
|
| ||||
Loss from continuing operations |
| (67,048 | ) |
| (655 | ) | ||||
|
|
|
|
|
|
| ||||
Discontinued real estate operations: |
|
|
|
|
|
| ||||
Earnings from discontinued real estate operations (net of taxes) |
| 394 |
|
| 420 |
| ||||
Gain on disposal of real estate operations (net of taxes) |
| 10,749 |
|
| 255 |
| ||||
Earnings from discontinued real estate operations |
| 11,143 |
|
| 675 |
| ||||
|
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|
|
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|
| ||||
(Loss) earnings from discontinued insurance segment (net of taxes) |
| (1,170 | ) |
| 34 |
| ||||
|
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|
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|
| ||||
Net (loss) earnings | $ | (57,075 | ) | $ | 54 |
| ||||
|
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| ||||
Basic and diluted (loss) earnings per share: |
|
|
|
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|
| ||||
Loss from continuing operations | $ | (3.37 | ) | $ | (0.03 | ) | ||||
Earnings from discontinued real estate operations |
| 0.56 |
|
| 0.03 |
| ||||
(Loss) earnings from discontinued insurance segment |
| (0.06 | ) |
| 0.00 |
| ||||
Net (loss) earnings | $ | (2.87 | ) | $ | 0.00 |
| ||||
|
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| ||||
Weighted average shares outstanding: |
|
|
|
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| ||||
Basic |
| 19,916 |
|
| 19,758 |
| ||||
Diluted |
| 19,916 |
|
| 20,009 |
|
| First Quarter (12 Weeks) Ended |
| ||||
| June 21, |
| June 22, |
| ||
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Net sales | $ | 502,039 |
| $ | 490,835 |
|
Cost of goods sold |
| 414,712 |
|
| 401,680 |
|
Gross margin |
| 87,327 |
|
| 89,155 |
|
|
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|
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|
Selling, general and administrative expenses |
| 87,675 |
|
| 81,171 |
|
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|
|
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|
Operating (loss) earnings |
| (348 | ) |
| 7,984 |
|
|
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Other income and expenses |
|
|
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Interest expense |
| 4,202 |
|
| 3,693 |
|
Interest income |
| (203 | ) |
| (199 | ) |
Other losses (gains), net |
| 45 |
|
| (3 | ) |
Total other income and expenses |
| 4,044 |
|
| 3,491 |
|
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|
(Loss) earnings before income taxes, |
|
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Income taxes |
| (1,538 | ) |
| 1,598 |
|
(Loss) earnings from continuing operations |
| (2,854 | ) |
| 2,895 |
|
|
|
|
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|
Loss from discontinued operations, net of taxes |
| (3,263 | ) |
| (11,271 | ) |
Cumulative effect of a change in accounting principle, |
|
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|
Net loss | $ | (6,117 | ) | $ | (43,753 | ) |
|
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Basic and diluted earnings per share: |
|
|
|
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|
|
(Loss) earnings from continuing operations | $ | (0.14 | ) | $ | 0.14 |
|
Loss from discontinued operations |
| (0.17 | ) |
| (0.57 | ) |
Cumulative effect of a change in accounting principle |
| - |
|
| (1.78 | ) |
Net loss | $ | (0.31 | ) | $ | (2.21 | ) |
|
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|
Weighted average shares: |
|
|
|
|
|
|
Basic |
| 19,977 |
|
| 19,795 |
|
Diluted |
| 19,977 |
|
| 19,796 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of OperationsSpartan Stores, Inc. and Subsidiaries
(In thousands, except per share data)
(Unaudited)
|
| Year-to-Date (40 Weeks) Ended |
| |||
|
| January 4, 2003 |
|
| January 5, 2002 |
|
|
|
|
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|
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|
Net sales | $ | 2,555,461 |
| $ | 2,732,775 |
|
Cost of goods sold |
| 2,146,279 |
|
| 2,265,021 |
|
Gross margin |
| 409,182 |
|
| 467,754 |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
Selling, general and administrative |
| 413,527 |
|
| 430,874 |
|
Provision for asset impairments and exit costs |
| 98,195 |
|
| - |
|
Total operating expenses |
| 511,722 |
|
| 430,874 |
|
|
|
|
|
|
|
|
Operating (loss) earnings |
| (102,540 | ) |
| 36,880 |
|
|
|
|
|
|
|
|
Other income and expenses |
|
|
|
|
|
|
Interest expense |
| 19,388 |
|
| 19,766 |
|
Interest income |
| (531 | ) |
| (1,369 | ) |
Other gains, net |
| (1,211 | ) |
| (2,405 | ) |
Total other income and expenses |
| 17,646 |
|
| 15,992 |
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes, discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
| (41,850 | ) |
| 6,983 |
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations |
| (78,336 | ) |
| 13,905 |
|
|
|
|
|
|
|
|
Discontinued real estate operations: |
|
|
|
|
|
|
Earnings from discontinued real estate operations (net of taxes) |
| 1,456 |
|
| 1,242 |
|
Gain (loss) on disposal of real estate operations (net of taxes) |
| 12,078 |
|
| (48 | ) |
Earnings from discontinued real estate operations |
| 13,534 |
|
| 1,194 |
|
|
|
|
|
|
|
|
Loss from discontinued insurance segment (net of taxes) |
| (1,235 | ) |
| (226 | ) |
|
|
|
|
|
|
|
Net (loss) earnings before cumulative effect of a change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings | $ | (101,414 | ) | $ | 14,873 |
|
(Continued)
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Operations (Continued)(In thousands, except per share data)(Unaudited)
|
| Year-to-Date (40 Weeks) Ended |
| |||
|
| January 4, |
|
| January 5, |
|
|
|
|
|
|
|
|
Basic (loss) earnings per share: |
|
|
|
|
|
|
(Loss) earnings from continuing operations | $ | (3.94 | ) | $ | 0.71 |
|
Earnings from discontinued real estate operations |
| 0.68 |
|
| 0.06 |
|
Loss from discontinued insurance segment |
| (0.06 | ) |
| (0.01 | ) |
Cumulative effect of a change in accounting principle |
| (1.78 | ) |
| - |
|
Net (loss) earnings | $ | (5.10 | ) | $ | 0.76 |
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share: |
|
|
|
|
|
|
(Loss) earnings from continuing operations | $ | (3.94 | ) | $ | 0.70 |
|
Earnings from discontinued real estate operations |
| 0.68 |
|
| 0.06 |
|
Loss from discontinued insurance segment |
| (0.06 | ) |
| (0.01 | ) |
Cumulative effect of a change in accounting principle |
| (1.78 | ) |
| - |
|
Net (loss) earnings | $ | (5.10 | ) | $ | 0.75 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
Basic |
| 19,865 |
|
| 19,483 |
|
Diluted |
| 19,865 |
|
| 19,748 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
|
|
|
|
|
|
Balance - March 31, 2002 |
| 19,766 |
| $ | 115,722 |
| $ | (2,622 | ) | $ | 118,392 |
| $ | 231,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| - |
|
| - |
|
| - |
|
| (122,332 | ) |
| (122,332 | ) |
Other comprehensive (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| - |
|
| - |
|
| - |
|
| (6,117 | ) | (6,117 | ) | |
Other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities |
| - |
|
| - |
|
| 39 |
|
| - |
|
| 39 |
|
Total other comprehensive income |
| - |
|
| - |
|
| 372 |
|
| - |
|
| 372 |
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
| (5,745 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
| (56 | ) |
| (164 | ) |
| - |
|
| - |
|
| (164 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 21, 2003 |
| 19,943 |
| $ | 116,224 |
| $ | (2,444 | ) | $ | (10,057 | ) | $ | 103,723 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Shareholders' EquitySpartan Stores, Inc. and Subsidiaries
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - April 1, 2001 |
| 19,262 |
| $ | 109,868 |
| $ | - |
| $ | 108,545 |
| $ | 218,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
| - |
|
| - |
|
| - |
|
| 9,847 |
| 9,847 |
| |
Other comprehensive loss, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities |
| - |
|
| - |
|
| (36 | ) |
| - |
|
| (36 | ) |
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
| - |
|
| - |
|
| (2,622 | ) |
| - |
|
| (2,622 | ) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
| 7,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
| (4 | ) |
| (33 | ) |
| - |
|
| - |
|
| (33 | ) |
Issuances |
| 508 |
|
| 5,887 |
|
| - |
|
| - |
|
| 5,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 30, 2002 |
| 19,766 |
|
| 115,722 |
|
| (2,622 | ) |
| 118,392 |
|
| 231,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| - |
|
| - |
|
| - |
|
| (101,414 | ) | (101,414 | ) | |
Other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities |
| - |
|
| - |
|
| 133 |
|
| - |
|
| 133 |
|
Net gain on interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total other comprehensive income |
| - |
|
| - |
|
| 1,367 |
|
| - |
|
| 1,367 |
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
| (100,047 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
| 235 |
|
| 672 |
|
| - |
|
| - |
|
| 672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 4, 2003 |
| 20,001 |
| $ | 116,394 |
| $ | (1,255 | ) | $ | 16,978 |
| $ | 132,117 |
|
| First Quarter (12 Weeks) Ended |
| ||||
| June 21, 2003 |
| June 22, 2002 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
Net loss | $ | (6,117 | ) | $ | (43,753 | ) |
Loss from discontinued operations |
| 3,263 |
|
| 11,271 |
|
Cumulative effect of a change in accounting principle |
| - |
|
| 35,377 |
|
(Loss) earnings from continuing operations |
| (2,854 | ) |
| 2,895 |
|
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
| 6,754 |
|
| 6,686 |
|
Postretirement benefits |
| (660 | ) |
| 507 |
|
Deferred taxes on income |
| (1 | ) |
| (6,182 | ) |
Other, net |
| 45 |
|
| (3 | ) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
| (2,968 | ) |
| (736 | ) |
Inventories |
| 5,943 |
|
| (11,455 | ) |
Prepaid expenses and other assets |
| 2,797 |
|
| (1,766 | ) |
Refundable income taxes |
| 9,349 |
|
| - |
|
Accounts payable |
| (10,424 | ) |
| 16,124 |
|
Accrued payroll and benefits |
| (514 | ) |
| 3,472 |
|
Insurance reserves |
| 212 |
|
| 387 |
|
Accrued taxes |
| (2,761 | ) |
| (141 | ) |
Other accrued expenses and other liabilities |
| (3,815 | ) |
| 13,866 |
|
Net cash provided by operating activities |
| 1,103 |
|
| 23,654 |
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
Purchases of property and equipment |
| (1,786 | ) |
| (944 | ) |
Net proceeds from the sale of assets |
| 16 |
|
| 14 |
|
Other |
| 125 |
|
| 210 |
|
Net cash used in investing activities |
| (1,645 | ) |
| (720 | ) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Net proceeds (payments) from revolver |
| 3,000 |
|
| (13,000 | ) |
Repayment of long-term debt |
| (14,316 | ) |
| (1,326 | ) |
Financing fees paid |
| (1,782 | ) |
| (976 | ) |
Proceeds from sale of common stock |
| - |
|
| 266 |
|
Net cash used in financing activities |
| (13,098 | ) |
| (15,036 | ) |
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations |
| 8,826 |
|
| (4,245 | ) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
| (4,814 | ) |
| 3,653 |
|
Cash and cash equivalents at beginning of period |
| 23,306 |
|
| 27,954 |
|
Cash and cash equivalents at end of period | $ | 18,492 |
| $ | 31,607 |
|
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(In thousands)(Unaudited)
|
| Year-to-Date (40 Weeks) Ended |
| |||
|
| January 4, |
|
| January 5, |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net (loss) earnings | $ | (101,414 | ) | $ | 14,873 |
|
Adjustments to reconcile net (loss) earnings to |
|
|
|
|
|
|
net cash provided by operating activities: |
|
|
|
|
|
|
Cumulative effect of a change in accounting principle |
| 35,377 |
|
| - |
|
Provision for asset impairments and exit costs |
| 98,195 |
|
| - |
|
Depreciation and amortization |
| 34,236 |
|
| 36,663 |
|
Postretirement benefits |
| 804 |
|
| (1,589 | ) |
Deferred taxes on income |
| (32,133 | ) |
| 839 |
|
Other gains, net |
| (19,078 | ) |
| (2,365 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Marketable securities |
| 8,669 |
|
| 11,567 |
|
Accounts receivable |
| 9,628 |
|
| (6,777 | ) |
Inventories |
| 13,268 |
|
| (29,358 | ) |
Prepaid expenses and other assets |
| (4,852 | ) |
| (131 | ) |
Accounts payable |
| 26,298 |
|
| (8,352 | ) |
Accrued payroll and benefits |
| 999 |
|
| (7,812 | ) |
Insurance reserves |
| 570 |
|
| (1,884 | ) |
Accrued taxes |
| 1,375 |
|
| 8,174 |
|
Other accrued expenses and other liabilities |
| (535 | ) |
| (3,447 | ) |
Net cash provided by operating activities |
| 71,407 |
|
| 10,401 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
| (13,608 | ) |
| (26,547 | ) |
Net proceeds from the sale of assets |
| 55,137 |
|
| 14,262 |
|
Acquisition costs |
| - |
|
| (2,106 | ) |
Other |
| 1,198 |
|
| (1,514 | ) |
Net cash provided by (used in) investing activities |
| 42,727 |
|
| (15,905 | ) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Net (payments) proceeds on Revolving Credit Facility |
| (7,600 | ) |
| 27,300 |
|
Proceeds from long-term borrowings |
| - |
|
| 3,988 |
|
Repayment of long-term debt |
| (98,013 | ) |
| (33,414 | ) |
Debt issuance costs |
| (4,055 | ) |
| (276 | ) |
Proceeds from sale of common stock |
| 672 |
|
| 784 |
|
Common stock purchased |
| - |
|
| (33 | ) |
Net cash used in financing activities |
| (108,996 | ) |
| (1,651 | ) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
| 5,138 |
|
| (7,155 | ) |
Cash and cash equivalents at beginning of period |
| 13,903 |
|
| 21,577 |
|
Cash and cash equivalents at end of period | $ | 19,041 |
| $ | 14,422 |
|
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 unaudited 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 January 4,June 21, 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.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis, except as disclosed below andStock-Based Compensation
Spartan Stores has a stock incentive plan, which is more fully described in Note 2. These policies are presented in Note 1 to13 of the Consolidated Financial Statements included in Spartan Stores' Annual Report on Form 10-K10-K. Spartan Stores accounts for the fiscal year ended March 30, 2002, filed withplan under the Securitiesrecognition and Exchange Commissionmeasurement 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 net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on June 28, 2002.
Propertythe date of grant. The following table illustrates the effect on net loss and equipment held for sale consists of land, buildings and equipment thatloss per share as if Spartan Stores expectshad applied the fair value recognition principles of Statement of Financial Accounting Standards ("SFAS") Statement No. 123, "Accounting for Stock-Based Compensation," to sell within twelve months. The assets are included in the following segments (in thousands):stock-based employee compensation:
|
|
|
|
|
| Retail Grocery | $ | 1,412 |
|
| Grocery Distribution |
| 914 |
|
| Real Estate |
| 1,710 |
|
| Total | $ | 4,036 |
|
(In thousands, except per share data)
| June 21, 2003 |
| June 22, 2002 |
| ||
|
|
|
|
|
|
|
Net loss, as reported | $ | (6,117 | ) | $ | (43,753 | ) |
Deduct: Total stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss | $ | (6,270 | ) | $ | (44,052 | ) |
|
|
|
|
|
|
|
Basic and diluted loss per share - as reported | $ | (0.31 | ) | $ | (2.21 | ) |
Basic and diluted loss per share - pro forma | $ | (0.31 | ) | $ | (2.23 | ) |
Reclassifications
Certain reclassifications have been made to the fiscal 20022003 consolidated financial statements to conform to the fiscal 20032004 presentation.
Note 2Cumulative Effect of a Change in Accounting Principle and New Accounting Standards
In June 2001,April 2002 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." 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. SFAS No. 141 was adopted 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. SFAS No. 142 also requires that goodwill be assigned to reporting units based upon the expected benefits to be derived from synergies resulting from the business combination.
SFAS No. 142 was adopted on March 31, 2002. In accordance with the provisions of SFAS No. 142, goodwill of approximately $30.3 million previously included in the Retail Grocery segment was assigned to the Grocery Distribution segment based upon the expected benefits to be realized by each segment. Under the transitional provisions of SFAS No. 142, goodwill was tested for impairment as of March 31, 2002. Each reporting unit was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on the discounted cash flows and comparable market values of the segment. As a result of the impairment testing, an impairment loss was recorded to reduce the carrying value of goodwill at the Retail Grocery segment by $41.6 million (prior to provision for tax benefit of $6.2 million) to its implied fair value. Impairment was due to a number of factors including operating performance and the impact of new competition. In accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations for the first quarter of fiscal 2003.
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 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 Accounting Principles Board ("APB")APB Opinion No. 30, "Reporting the Results of
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 rescissionvendor, the cash consideration should be characterized as revenue, or if such payment is a reimbursement of SFAScosts incurred to sell the vendor's products, the cash consideration should be characterized as a reduction of that cost. EITF Issue No. 4 are required to be02-16 was adopted by Spartan Stores on March 30, 2003.2003 and did not have a material impact on its net loss.
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) | First Quarter (12 Weeks) Ended |
| ||||
| June 21, |
| June 22, |
| ||
Discontinued retail operations |
|
|
|
|
|
|
Loss from discontinued operations (less taxes of ($2,089) and ($6,491)) | $ | (3,880 | ) | $ | (12,408 | ) |
|
|
|
|
|
|
|
Discontinued convenience distribution operations |
|
|
|
|
|
|
(Loss) earnings from discontinued operations (less taxes of $345 and $382) |
| (283 | ) |
| 672 |
|
Gain on disposal of discontinued operations (less taxes of $618 and $32) |
| 1,147 |
|
| 59 |
|
Earnings from discontinued convenience distribution operations |
| 864 |
|
| 731 |
|
|
|
|
|
|
|
|
Discontinued grocery distribution, real estate and insurance operations |
|
|
|
|
|
|
(Loss) earnings from discontinued operations (less taxes of ($134) and $225) |
| (247 | ) |
| 406 |
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
|
|
|
|
Loss from discontinued operations (less taxes of ($1,878) and ($5,884)) |
| (4,410 | ) |
| (11,330 | ) |
Gain on disposal of discontinued operations (less taxes of $618 and $32) |
| 1,147 |
|
| 59 |
|
Total loss from discontinued operations | $ | (3,263 | ) | $ | (11,271 | ) |
Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all years presented, unless otherwise noted.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associatedaccordance with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("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. 14687-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the interest on debt that will primarily impact the timingbe required or was required to be repaid as a result of the recognitiondisposal transactions. Interest expense of costs associated with any future exit or disposal activities. Spartan Stores has adopted SFAS No. 146 for exit or disposal activities initiated after December 31, 2002.
On December 31, 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition$1.1 million and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation,"$1.8 million was allocated 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 compensationand is included in, loss on reported net income and earnings per sharediscontinued operations in the summaryConsolidated Statements of significant accounting policies in annualOperations for the quarters ended June 21, 2003 and interim financial statements. The transition and disclosure provisionsJune 22, 2002, respectively. Allocated interest expense from discontinued operations decreased primarily as a result of SFAS No. 148 will be applicable to Spartan Stores on March 29, 2003. Spartan Stores has not determined what effect SFAS No. 148 will have on future consolidated results of operations or financial position when adopted.lower average borrowings.
Note 3Goodwill and Other Intangible AssetsRetail Operations
Spartan Stores' adoption of SFAS No. 142 eliminated the amortization of goodwill beginning inIn the first quarter of fiscal 2003.
The following table adjusts net (loss) earnings and (loss) earnings per share for the adoption of SFAS No. 142:
(In thousands, except per share data) | Third Quarter (16 Weeks) Ended | |||||
|
| January 4, 2003 |
|
| January 5, 2002 |
|
Net (loss) earnings: |
|
|
|
|
|
|
Reported net (loss) earnings | $ | (57,075 | ) | $ | 54 |
|
Add: |
|
|
|
|
|
|
Goodwill amortization, net of tax |
| - |
|
| 862 |
|
Adjusted net (loss) earnings | $ | (57,075 | ) | $ | 916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share: |
|
|
|
|
|
|
Reported net (loss) earnings | $ | (2.87 | ) | $ | 0.00 |
|
Add: |
|
|
|
|
|
|
Goodwill amortization, net of tax |
| - |
|
| 0.04 |
|
Adjusted net (loss) earnings | $ | (2.87 | ) | $ | 0.04 |
|
(In thousands, except per share data) |
| Year-to-Date (40 Weeks) Ended |
| ||||
|
| January 4, 2003 |
|
| January 5, 2002 |
| |
Net (loss) earnings: |
|
|
|
|
|
| |
Reported net (loss) earnings | $ | (101,414 | ) | $ | 14,873 |
| |
Add: |
|
|
|
|
|
| |
Goodwill amortization, net of tax |
| - |
|
| 2,235 |
| |
Cumulative effect of a change in accounting |
|
|
|
|
|
| |
Adjusted net (loss) earnings | $ | (66,037 | ) | $ | 17,108 |
| |
|
|
|
|
|
|
| |
Basic (loss) earnings per share: |
|
|
|
|
|
| |
Reported net (loss) earnings | $ | (5.10 | ) | $ | 0.76 |
| |
Add: |
|
|
|
|
|
| |
Goodwill amortization, net of tax |
| - |
|
| 0.11 |
| |
Cumulative effect of a change in |
|
|
|
|
|
| |
Adjusted net (loss) earnings | $ | (3.32 | ) | $ | 0.87 |
|
Diluted (loss) earnings per share: |
|
|
|
|
|
|
Reported net (loss) earnings | $ | (5.10 | ) | $ | 0.75 |
|
Add: |
|
|
|
|
|
|
Goodwill amortization, net of tax |
| - |
|
| 0.11 |
|
Cumulative effect of a change in |
|
|
|
|
|
|
Adjusted net (loss) earnings | $ | (3.32 | ) | $ | 0.86 |
|
Changes in the carrying amount of goodwill were as follows:
|
| Retail |
|
| Grocery |
|
|
|
|
|
Balance at March 30, 2002, net of |
|
|
|
|
|
|
|
|
|
|
Allocation of goodwill upon |
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill recognized in |
|
|
|
|
|
|
|
|
|
|
Balance at January 4, 2003 | $ | 38,343 |
| $ | 30,300 |
| $ | 68,643 |
|
|
Due to increased competition, the continued difficult economy and operational challenges in our Retail Grocery segment, operating results and cash flows were significantly lower than anticipated in the third quarter of fiscal 2003. Based on this trend, the earnings forecast was revised and a valuation of the Retail Grocery 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 Grocery segment by $45.0 million (prior to provision for tax benefit of $15.7 million) to its implied fair value.
The following table reflects the components of amortized intangible assets, included in other, net on the Condensed Consolidated Balance Sheets:
|
| January 4, 2003 |
| March 30, 2002 |
| ||||
|
| Gross |
|
|
| Gross |
|
|
|
Non-compete |
|
|
|
|
|
|
|
|
|
Favorable leases |
| 2,954 |
| 1,106 |
| 2,954 |
| 953 |
|
|
|
|
|
|
|
|
|
|
|
Total | $ | 10,567 | $ | 6,129 | $ | 10,567 | $ | 5,421 |
|
These intangible assets are amortized over the terms of the agreements (3 to 15 years) or the length of the leases (3 to 20 years). There are no expected residual values related to these intangible assets.
Amortization expense, excluding goodwill, was $0.3 million for the quarters ended January 4, 2003 and January 5, 2002. Estimated amortization expense for each of the five succeeding fiscal years is as follows:
| Fiscal Year |
| Amortization Expense |
|
| 2003 | $ | 919 |
|
| 2004 |
| 878 |
|
| 2005 |
| 540 |
|
| 2006 |
| 467 |
|
| 2007 |
| 375 |
|
|
|
|
|
|
| Total | $ | 3,179 |
|
Note 4Divestiture of Real Estate
During the third quarter,2004, Spartan Stores completed the sale of eight Michigan properties for net proceeds of $48.2 million in cash. These assets represented substantially allfive of the remaining assets of its Real Estate segment; accordingly, Spartan Stores reportedFood Town stores that had been designated for sale or closure. No significant gains or losses were recognized on the results of operations of the discontinued components of the Real Estate segment and the estimated net gain on disposal as discontinued operations. Thus, amounts in the consolidated financial statements and related notes for all periods presented have been reclassified to reflect discontinued operations. Duringtransactions. To date during the second quarter Spartan Stores sold three properties for net proceeds of $4.0fiscal 2004, an additional 16 stores have been sold. Proceeds received on the sale of these stores are approximately $40.4 million in cash. The net proceeds received wereand have been used to reduce long-term debt. The total year-to-date gainoutstanding borrowings and pay related transaction expenses.Additional store sales are currently pending and any Food Town stores not sold are expected to be closed. Future gains or losses may be recorded depending on the outcome of these potential sales transactions.
Convenience Distribution Operations
On June 9, 2003 Spartan Stores completed the sale of substantially all the assets of $12.1L&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 (netin cash and the assumption of tax) is included in gain on disposalcertain liabilities.
Sales for the quarters ended June 21, 2003 and June 22, 2002 and significant assets and liabilities of real estatediscontinued operations inat the Consolidated Statementend of Operations. The sale of these properties is part of Spartan Stores' ongoing strategy of concentrating resources on its core grocery retail and distribution operations.
As of January 4, 2003 the remaining assets of the discontinued real estate operations totaling $1.9 million consist primarily of land and buildings that are being actively marketed with the expectation of being sold within the next twelve months andthose quarters are included inbelow:
|
|
| Convenience |
|
|
|
|
| ||||
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
June 21, 2003 | $ | 54,537 |
| $ | 122,248 |
| $ | - |
| $ | 176,785 |
|
June 22, 2002 |
| 105,031 |
|
| 168,631 |
|
| 1,124 |
|
| 274,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
June 21, 2003 | $ | (0.20 | ) | $ | 0.04 |
| $ | (0.01 | ) | $ | (0.17 | ) |
June 22, 2002 |
| (0.63 | ) |
| 0.04 |
|
| 0.02 |
|
| (0.57 | ) |
|
|
| Convenience |
|
|
|
|
| ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 21, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets * | $ | 44,719 |
| $ | 3,502 |
| $ | 8,565 |
| $ | 56,786 |
|
Property, net |
| 7,202 |
|
| - |
|
| - |
|
| 7,202 |
|
Other long-term assets |
| 681 |
|
| - |
|
| 8 |
|
| 83 |
|
Current liabilities |
| 11,458 |
|
| 13,320 |
|
| 10,629 |
|
| 35,407 |
|
Long-term liabilities |
| 10,764 |
|
| - |
|
| - |
|
| 10,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets * | $ | 62,108 |
| $ | 41,949 |
| $ | 9,859 |
| $ | 113,916 |
|
Property, net |
| 5,599 |
|
| - |
|
| - |
|
| 5,599 |
|
Other long-term assets |
| 716 |
|
| 43 |
|
| 7 |
|
| 766 |
|
Current liabilities |
| 11,274 |
|
| 11,813 |
|
| 11,401 |
|
| 34,488 |
|
Long-term liabilities |
| 10,182 |
|
| - |
|
| - |
|
| 10,182 |
|
* Includes property and equipment held for sale in the Consolidated Balance Sheets. The remaining portion of the Real Estate segment consists primarily of properties used in the Grocery Distribution segment operation. As such, the remaining assets have been reclassified to the Grocery Distribution segment for reporting purposes.
Net sales for the discontinued real estate operations were $1.1 million for the quarters ended January 4, 2003 and January 5, 2002 and $3.4 million for the forty week periods ended January 4, 2003 and January 5, 2002. Earnings per share for the discontinued real estate operations, including the gain on disposal were $0.56 and $0.03 for the quarters ended January 4, 2003 and January 5, 2002 and $0.68 and $0.06 for the forty week periods ended January 4, 2003 and January 5, 2002.
As a result of the disposition of these properties, future rental income will be reduced. Future minimum rentals to be received under operating leases in effect as of January 4, 2003 are as follows:
Fiscal Year |
|
| Owned Property |
|
| Leased Property |
|
| Total |
|
|
|
|
|
|
|
|
|
|
2003 * |
| $ | 143 |
| $ | 269 |
| $ | 412 |
2004 |
|
| 574 |
|
| 1,075 |
|
| 1,649 |
2005 |
|
| 539 |
|
| 1,075 |
|
| 1,614 |
2006 |
|
| 504 |
|
| 902 |
|
| 1,406 |
2007 |
|
| 504 |
|
| 844 |
|
| 1,348 |
Thereafter |
|
| 1,255 |
|
| 5,580 |
|
| 6,835 |
Total |
| $ | 3,519 |
| $ | 9,745 |
| $ | 13,264 |
* Fiscal year 2003 future minimum rentals include only rental income to be received for the fourth quarter of the fiscal year.
Note 54
Asset Impairments and Exit Costs
Due to increased competition,The discontinued retail operations recognized charges of $3.6 million during the continued difficult economy and operational challenges in our Retail Grocery segment, operating results and cash flows were significantly lower than anticipated in the thirdfirst quarter of fiscal 2003. Spartan Stores is in the process of evaluating various strategic alternatives2004 for the improvement of profitability in its Retail Grocery segment. Spartan Stores has considered the possible outcomes of the various strategic alternatives in its assessmentasset impairments and has recognized an estimated impairment charge during the third quarter as a result of the significant decline in operating results and cash flows. The charge of $28.7 million (prior to provision for tax benefit of $10.1 million) was recognized on long-lived assets at certain stores and office facilities currently being operated. The actual charge to be realized may ultimately vary significantly depending on the strategic alternatives implemented. In addition, any exit costs associated with any alternative will be recognized in the period incurred as required by SFAS No. 146.
Furthermore, an impairment charge of $8.4 million (priorrelated to provision for tax benefit of $2.9 million) was recognized on long-lived assets of the Grocery Distribution segment at a warehouse distribution facility in Ohio that will be closed in the fourth quarter of fiscal 2003.
During the quarters ended January 4, 2003transaction costs and June 22, 2002, the Retail Grocery segment recognized charges of $2.8 million and $7.7 million, respectively, for store and office facility exit costs, which include the present value of future minimum lease payments, calculated using a risk-free interest rate, and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease recoveries. Ten of the thirteen stores closed near the end of the second quarter and the remaining three stores closed during the third quarter of fiscal 2003. Management determined in the third quarter that one store that had been designated for closure in a previous year would not be closed because market conditions in the area changed. The office facilities, located in Michigan and Ohio, will be closed during the fourth quarter of fiscal 2003.
All exit costs recognized in the quarters ended January 4, 2003 and June 22, 2002 were recorded in accordance with EITF Issue No. 94-3. As stated in Note 2, Spartan Stores has adopted SFAS No. 146 for exit or disposal activities initiated after December 31, 2002.
Additionally, during the quarters ended January 4, 2003 and June 22, 2002, the Retail Grocery segment recognized impairment charges of $0.3 million and $5.3 million, respectively, on long-lived assets at the thirteen stores closed. The carrying amount of these assets is $1.4 million and they are classified as property and equipment held for sale on the Consolidated Balance Sheets as of January 4, 2003.severance.
The following table provides a rollforward from March 30, 2002 to January 4,the activity of exit costs for fiscal year 2003 and the first twelve weeks of exitfiscal 2004. Exit costs recorded in the balance sheet asConsolidated Balance Sheets are included in Other accrued expenses in current liabilities in other accrued expenses or otherand Other long-term liabilities based on when the costs are expected to be paid:paid.
|
| Exit Costs |
|
|
|
|
|
Balance at March 30, 2002 | $ | 4,912 |
|
|
|
|
|
Provision, charged to operations (net of sublease recoveries) |
| 10,464 |
|
|
|
|
|
Reductions: |
|
|
|
|
|
|
|
Payments, net of interest accretion, and other |
| (2,348 | ) |
|
|
|
|
|
|
|
|
Balance at January 4, 2003 | $ | 13,028 |
|
(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 severance |
| - |
|
|
| 2,808 | (c) |
Payments, net of interest accretion |
| (675 | ) |
|
| (2,681 | ) |
Balance at June 21, 2003 | $ | 18,298 |
|
| $ | 3,993 |
|
(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) 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 twelve 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 June 21, 2003 | $ | 38,400 |
| $ | 30,300 |
| $ | 0 |
| $ | 68,700 |
|
Note 6Notes Payable and Long-Term Debt
On July 29, 2002, an amendment to theSpartan Stores has a $390.0 million senior secured credit facility was approved by Spartan Stores' bank group. The credit facilitypursuant to an Amended and Restated Credit Agreement dated March 18, 1999, as amended and restated July 29, 2002, consistsconsisting of (1) a revolving credit facility in the amount of $75$60.0 million with a maximum term of six years from the date of the original credit facility,terminating in 2005, (2) a term loan A in the amount of $100$100.0 million with a maximum term of six years from the date of the original credit facility,terminating in 2005, (3) an acquisition facility in the amount of $75$75.0 million with a maximum term of seven years from the date of the original credit facilityterminating in 2006 and (4) a term loan B in the amount of $150$150.0 million with a maximum term of eight years fromterminating in 2007. At June 21, 2003, $148.8 million was outstanding under the date of the original credit facility. Interest rates payable on amounts borrowedAvailable borrowings under the credit facility are based on stipulated levels of earnings before interest, income taxes, depreciation and amortization, as defined in the prime rate, the federal funds rate or the Eurodollar rate, plus a stipulated margin. Under the amended and restated credit agreement, the interest rates for the revolvingfacility. The credit facility increased by .50% forcontains covenants that include the revolving credit facility and term loan A and .75% for the acquisition facility and term loan B. Under the amended and restated agreement,maintenance of certain financial ratios. Spartan Stores' ability to borrow on the revolving credit facility may be limited based uponcreditors have waived compliance with certain covenants. As of January 4,financial covenants through September 12, 2003 as they work with Spartan Stores was in compliance withon alternatives to amend the credit facility covenants and had $56.8 million available for borrowing on the revolvingexisting credit facility. Should Spartan Stores continuesnot be able to make significant progress on its debt reduction objectives. However, if its operating trends continue through the fourth quarter,obtain an amended credit facility, it may not be able to meetcomply with the termscredit facility covenants during the remainder of fiscal 2004. However, management believes that it has the opportunity to amend the existing financing arrangements with its increasingly restrictive debt covenants.creditors and, if necessary, secure alternative sources of available financing.
Effective March 31, 2003, Spartan Stores is reviewing financing options,suspended the promissory note program and all notes amounting to approximately $8.3 million were paid as well as moving forward with other debt reduction and operating income improvement initiativesof that it expects will help temper these trends.date.
Note 7
Operating Segment Information
As more fully described in Note 4, Spartan Stores has discontinued substantially all of the operations of its Real Estate segment. Thus, amounts in the consolidated financial statements and related notes for all periods presented have been reclassified to reflect discontinued operations. The remaining assets of the Real Estate segment primarily represent facilities used in the Grocery Distribution segment. The remaining operations have been combined with the Grocery Distribution segment for reporting purposes. The following tables set forth segment information in thousands.about Spartan Stores by operating segment:
|
| Third Quarter (16 Weeks) Ended |
| |||
|
| January 4, 2003 |
|
| January 5, 2002 |
|
Net sales |
|
|
|
|
|
|
Retail Grocery | $ | 384,147 |
| $ | 439,310 |
|
Grocery Distribution |
| 346,738 |
|
| 356,670 |
|
Convenience Distribution |
| 264,468 |
|
| 265,583 |
|
Total | $ | 995,353 |
| $ | 1,061,563 |
|
|
| Year-to-Date (40 Weeks) Ended | |||
|
| January 4, 2003 |
|
| January 5, 2002 |
Net sales |
|
|
|
|
|
Retail Grocery | $ | 1,014,545 |
| $ | 1,121,643 |
Grocery Distribution |
| 845,903 |
|
| 918,594 |
Convenience Distribution |
| 695,013 |
|
| 692,538 |
Total | $ | 2,555,461 |
| $ | 2,732,775 |
(In thousands) |
|
| Grocery |
|
|
| |||
First Quarter (12 Weeks) Ended June 21, 2003 |
|
|
|
|
|
|
|
|
|
Net sales | $ | 212,273 |
| $ | 289,766 |
| $ | 502,039 |
|
Depreciation and amortization |
| 3,919 |
|
| 2,209 |
|
| 6,128 |
|
Operating (loss) earnings |
| (2,987 | ) |
| 2,639 |
|
| (348 | ) |
Capital expenditures |
| 779 |
|
| 1,007 |
|
| 1,786 |
|
First Quarter (12 Weeks) Ended June 22, 2002 |
|
|
|
|
|
|
|
|
|
Net sales | $ | 203,846 |
| $ | 286,989 |
| $ | 490,835 |
|
Depreciation and amortization |
| 3,564 |
|
| 2,661 |
|
| 6,225 |
|
Operating earnings |
| 3,320 |
|
| 4,664 |
|
| 7,984 |
|
Capital expenditures |
| 257 |
|
| 687 |
|
| 944 |
|
| June 21, |
| March 29, |
| ||
Total assets |
|
|
|
|
|
|
Retail | $ | 331,033 |
| $ | 313,774 |
|
Grocery Distribution |
| 862,592 |
|
| 883,553 |
|
Discontinued operations - Retail |
| 51,996 |
|
| 68,423 |
|
Discontinued operations - Convenience Distribution |
| 3,502 |
|
| 41,992 |
|
Discontinued operations - Grocery Distribution |
| 817 |
|
| 1,368 |
|
Discontinued operations - Real Estate |
| 1,563 |
|
| 1,577 |
|
Discontinued operations - Insurance |
| 6,194 |
|
| 6,921 |
|
Eliminations |
| (780,270 | ) |
| (761,302 | ) |
Total | $ | 477,427 |
| $ | 556,306 |
|
|
| Third Quarter (16 Weeks) Ended |
| |||
|
| January 4, 2003 |
|
| January 5, 2002 |
|
Operating (loss) earnings |
|
|
|
|
|
|
Retail Grocery* | $ | (93,118 | ) | $ | (2,294 | ) |
Grocery Distribution** |
| (3,617 | ) |
| 5,441 |
|
Convenience Distribution |
| 966 |
|
| 2,557 |
|
Total | $ | (95,769 | ) | $ | 5,704 |
|
|
| Year-to-Date (40 Weeks) Ended |
| |||
|
| January 4, 2003 |
|
| January 5, 2002 |
|
Operating (loss) earnings |
|
|
|
|
|
|
Retail Grocery* | $ | (112,026 | ) | $ | 16,079 |
|
Grocery Distribution** |
| 4,374 |
|
| 13,645 |
|
Convenience Distribution |
| 5,112 |
|
| 7,156 |
|
Total | $ | (102,540 | ) | $ | 36,880 |
|
|
| January 4, 2003 |
|
| March 30, 2002 |
|
Total assets |
|
|
|
|
|
|
Retail Grocery | $ | 386,318 |
| $ | 498,783 |
|
Grocery Distribution |
| 856,424 |
|
| 917,052 |
|
Convenience Distribution |
| 90,466 |
|
| 82,824 |
|
Discontinued operations - Real Estate |
| 1,863 |
|
| 36,036 |
|
Discontinued operations - Insurance |
| 14,228 |
|
| 23,729 |
|
Less - eliminations |
| (782,015 | ) |
| (811,884 | ) |
Total | $ | 567,284 |
| $ | 746,540 |
|
*Includes a $76.8 million and $89.8 million charge for asset impairment and exit costs for the third quarter and year-to-date period ended January 4, 2003, respectively.
**Includes an $8.4 million charge for long-lived asset impairment for the third quarter and year-to-date period ended January 4, 2003.
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:
| Third Quarter (16 Weeks) Ended |
| Year-to-Date (40 Weeks) Ended |
| ||||
| January 4, |
| January 5, |
| January 4, |
| January 5, |
|
|
|
|
|
|
|
|
|
|
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
|
|
|
|
|
|
|
| |
Gross margin | 15.4 |
| 16.5 |
| 16.0 |
| 17.1 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling, general and administrative | 16.5 |
| 16.0 |
| 16.2 |
| 15.8 |
|
Provision for asset impairments and exit |
|
|
|
|
|
|
|
|
Total operating expenses | 25.0 |
| 16.0 |
| 20.0 |
| 15.8 |
|
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|
Operating (loss) earnings | (9.6 | ) | 0.5 |
| (4.0 | ) | 1.3 |
|
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Other income and expenses | (0.7 | ) | (0.6 | ) | (0.7 | ) | (0.6 | ) |
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(Loss) earnings before income taxes, |
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|
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|
|
| |
Income taxes | (3.6 | ) | - |
| (1.6 | ) | 0.2 |
|
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(Loss) earnings from continuing |
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Earnings from discontinued operations | 1.0 |
| 0.1 |
| 0.5 |
| - |
|
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Cumulative effect of a change in |
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Net (loss) earnings | (5.7 | )% | (0.0 | )% | (4.0 | )% | 0.5 | % |
| First Quarter (12 Weeks) Ended |
| ||
| June 21, 2003 |
| June 22, 2002 |
|
|
|
|
|
|
Net sales | 100.0 | % | 100.0 | % |
Gross margin | 17.4 |
| 18.2 |
|
Selling, general and administrative | 17.5 |
| 16.5 |
|
Operating (loss) earnings | (0.1 | ) | 1.7 |
|
Other (income) and expenses | 0.8 |
| 0.8 |
|
(Loss) earnings before income taxes, discontinued operations and |
|
|
|
|
Income taxes | (0.3 | ) | 0.3 |
|
(Loss) earnings from continuing operations | (0.6 | ) | 0.6 |
|
Loss from discontinued operations | (0.6 | ) | (2.3 | ) |
Cumulative effect of a change in accounting principle | - |
| (7.2 | ) |
|
|
|
|
|
Net loss | (1.2 | )% | (8.9 | )% |
Net Sales.Consolidated net sales for the quarter ended January 4,June 21, 2003 decreased $66.2increased $11.2 million, or 6.2 percent,2.3%, from $1,061.6$490.8 million in the prior year quarter to $995.4 million. Net sales for$502.0 million primarily due to the year-to-date period ended January 4, 2003 decreased $177.3 million, or 6.5 percent, from $2,732.8 millionopening of three new retail stores in the prior year-to-date period, to $2,555.5 million. The overall sales declines were due to economic and competitive pressures in our operating markets, under-performance of our former marketing program that was discontinued in October 2002, and fifteen store closings that took place during the second and third quartershalf of fiscal 2003 and the fourthbenefit resulting from the fact that the Easter holiday occurred in the first quarter of fiscal 2002. The overall negative trend was significantly reduced over the second half of the quarter as the grocery distribution business improved due to the revised marketing program2004 and the separation of our retail and wholesale merchandising teams. Net sales for the closed stores for the quarter e nded January 4, 2003 were $1.9 million versus $31.1 milliondid not occur in the prior year quarter. Net sales for the closed stores for the year-to-date period ended January 4, 2003 were $35.0
Net sales for the quarter ended January 4,June 21, 2003 in our Retail Grocery segment decreased $55.2increased $8.4 million, or 12.6 percent,4.1%, from $439.3$203.8 million in the prior year quarter, to $384.1$212.3 million. NetSame-store sales forincreased 0.7% during the year-to-date period ended January 4, 2003 decreased $107.1 million, or 9.5 percent, from $1,121.6 million in the prior year-to-date period, to $1,014.5 million. Excludingfirst quarter, however, excluding the effect of closed stores, netthe shift in the Easter holiday, same-store sales decreased by 6.4 percent and 6.0 percent for the quarter and year-to-date periods ended January 4, 2003. Same-store sales declined 8.5 percent in the third quarter, compared to the same period last year and declined 7.3 percent for the year-to-date period. The same-store sales declines were driven by increased competitive conditions and economic weakness in our operating markets, particularly in our southern region. To address these trends we changed our merchandising structure by establishing a separate team for our retail operations and implemented new promotiona l programs to improve our price image. We believe changes in our structure and revised pricing strategies are already contributing to the more favorable traffic trends that we experienced near the end of third quarter.1.0%.
Net sales for the quarter ended January 4,June 21, 2003 in theour Grocery Distribution segment decreased $10.0increased $2.8 million, or 2.8 percent,1.0%, from $356.7$287.0 million in the prior year quarter, to $346.7$289.8 million. Net sales forThe increase was due primarily to the year-to-date period ended January 4, 2003shift in the Grocery Distribution segment decreased $72.7 million, or 7.9 percent, from $918.6 million in the prior year-to-date period, to $845.9 million. The decline was principally due to the ineffectiveness of our previous promotional program canceled in October and the current economic situation, offset by increased sales as a result of the new promotional strategy launched in October 2002.Easter holiday.
Net sales for the quarter ended January 4, 2003 in the Convenience Distribution segment remained relatively consistent at $264.5 million versus $265.6 million in the prior year quarter. Net sales for the year-to-date period ended January 4, 2003 in the Convenience Distribution segment also remained relatively consistent at $695.0 million versus $692.5 million in the prior year period. The slight decrease in the third quarter is primarily due to increased cigarette taxes and cost of cigarettes, which drove prices up but volumes down and the loss of sales to K-Mart of $14.7 million, offset by new business gained. The increase for the year-to-date period is due to a more favorable impact of new business gained, offset by the volume reductions caused by tax and price inflation and the loss of sales to K-Mart of $37.9 million.
Gross Margin.Gross margin for the quarter ended January 4,June 21, 2003 decreased $22.4$1.9 million, or 12.7 percent,2.1%, from $175.7$89.2 million in the prior year quarter, to $153.3 million. Gross margin for the year-to-date period ended January 4, 2003 decreased $58.6 million, or 12.5 percent, from $467.8 million in the prior year-to-date period, to $409.2$87.3 million. As a percentpercentage of net sales, gross margin for the quarter and year-to-date period ended January 4,June 21, 2003 decreased to 15.4 and 16.0 percent, respectively,17.4% from 16.5 and 17.1 percent18.2% for the prior year quarter, but was comparable to the rates achieved in the third and year-to-date period. These declines were partially due to a deliberate effort on our part to reinvest gross margin to protect retail market position. In addition, declines were driven by a higher percentagefourth quarters of consolidated sales coming from the lower margin Convenience Distribution segment.fiscal 2003.
Selling, General and Administrative Expenses.Selling, general and administrative ("SG&A&A") expenses for the quarter ended January 4,June 21, 2003 decreased $6.1increased $6.5 million, or 3.6 percent,8.0%, from $170.0$81.2 million in the prior year quarter to $163.9$87.7 million. SG&A expenses forThe majority of the year-to-date period ended January 4, 2003 decreased $17.4 million, or 4.0 percent, from $430.9 million in the prior year, to $413.5 million.The reductions in costs are primarilyincrease was due to the reductionadditional operating costs of costs associated with the fifteen closed stores and the elimination of goodwill amortization expense, partially offset by SG&A expenses related to our three new stores opened in the third quarter. Goodwill amortization expense was $0.9quarter of fiscal 2003 of approximately $2.0 million, expenses of $1.4 million related to a distribution to the former Chief Executive Officer from the Supplemental Executive Retirement Plan, higher advertising costs of $.7 million, accrued incentive bonuses of $.7 million and $2.2severance costs of $0.6 million for the quarter and year-to-
Interest Expense.Interest expense from continuing operations increased $0.5 million, or 13.5%, from $3.7 million to $4.2 million, and was 0.8% of net sales for the quarters ended June 21, 2003 and June 22, 2002. The increase in interest expense from continuing operations is due to bank waiver fees recorded in the first quarter of fiscal 2004 of $1.7 million, partially offset by a reduction in expense due to lower average borrowings. Total average borrowings decreased to $206.3 million from $309.4 million for the prior year quarter as a result of the debt repayments resulting from proceeds from the sales of real estate, L&L/Jiroch Distributing Company ("L&L/Jiroch"), J.F. Walker Company, Inc. ("J.F. Walker") and year-to-date period,Food Town stores.
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 $1.1 million and $1.8 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the quarters ended June 21, 2003 and June 22, 2002, respectively. Allocated interest expense from discontinued operations decreased primarily as a result of lower average borrowings.
Discontinued Operations
In the first quarter of fiscal 2004, we completed the sale of five of the Food Town stores that had been designated for sale or closure. To date during the second quarter of fiscal 2004, an additional 16 stores have been sold. Proceeds received on the sale of these stores are approximately $40.4 million and have been used to reduce outstanding borrowings and pay related transaction expenses.Additional store sales are currently pending and any Food Town stores not sold are expected to be closed. Future gains or losses may be recorded depending on the outcome of these potential sales transactions.
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. A gain of approximately $1.1 million was recognized on the sale.
Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations was $1.1 million and $23.7 million during the quarters ended June 21, 2003 and June 22, 2002, respectively. The increasesdecrease in percentage werenet cash provided by operating activities of continuing operations during the first quarter of fiscal 2004 is primarily the result of changes in working capital due to the Easter shift and seasonal inventory composition and the net loss from continuing operations, partially offset by the receipt of an income tax refund of $9.3 million.
Net cash used in investing activities of continuing operations was $1.6 million and $0.7 million during the quarters ended June 21, 2003 and June 22, 2002, respectively. Cash used in investing activities of continuing operations increased during the first quarter of fiscal 2004 primarily due to lower cost leverageincreased capital expenditures.
Net cash used in financing activities of continuing operations was $13.1 million and $15.0 million during the quarters ended June 21, 2003 and June 22, 2002, respectively, primarily due to the repayment of long-term debt.
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 dated July 29, 2002, consisting of (1) a revolving credit facility in the declineamount of $60.0 million terminating in net sales. We2005, (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 June 21, 2003, $148.8 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 decidedwaived compliance with certain financial covenants through September 1 2, 2003 as they work with us on alternatives to suspendamend our existing credit facility. Should we not be able to obtain revised covenants in an amended credit facility, we may not be able to comply with the accrualcredit facility covenants during the remainder of service and transition credits to our cash balance pension plan, covering qualifying non-union associates, for fiscal 2004. Interest credits will continueHowever, management believes that it has the opportunity to accrue. The suspensionamend the existing financing arrangements with its creditors and, if necessary, secure alternative sources of these credits will result in a reduction of SG&A expenses and reduce cash funding of the plan by approximately $3available financing.
Management has recently taken many actions designed to $4 million in fiscal 2004. During fiscal 2004, we will perform a competitive assessment of our retirement benefit programs.
Asset Impairments and Exit Costs. During the third quarter and year-to-date periods, the following provisions for asset impairments and exit costs were recognized in the Consolidated Statement of Operations:
|
| Third Quarter |
|
| Year-to-Date |
|
|
|
|
|
|
|
|
Exit costs | $ | 2,759 |
| $ | 10,464 |
|
Asset impairments |
| 37,436 |
|
| 42,731 |
|
Goodwill impairment |
| 45,000 |
|
| 45,000 |
|
Total | $ | 85,195 |
| $ | 98,195 |
|
Due to increased competition, the continued difficult economy and operational challenges in our Retail Grocery segment,improve operating results and cash flows were significantly lower than anticipatedflows. 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 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 thirdfirst quarter of fiscal 2003. Based on this trend, the earnings forecast was revised and a valuation2004, we eliminated approximately 11% of the Retail Grocery segment was conducted. Fair value was determined based on the discounted cash flows and comparable market values for the segment. As a resultour corporate staff, resulting in estimated annualized savings of the impairment analysis, a loss was recorded to reduce the carrying value of goodwill at the Retail Grocery segment by $45.0 million (prior to provision for tax benefit of $15.7 million) to its implied fair value.
We areapproximately $8.0 million. Improved efficiencies in the process of evaluating various strategic alternatives for improving profitability of the Retail Grocery segment. During the thirdwarehouse operations have also been realized in t he first quarter of fiscal 2003, an estimated impairment charge of $28.7 million (prior2004 relative to provision for tax benefit of $10.1 million) was recognized on long-lived assets at certain stores and office facilities currently being operated based on our evaluation of operating trends and possible outcomes of the alternatives considered. The actual charge to be realized may ultimately vary significantly depending on the strategic alternatives implemented. Any exit costs associated with any alternative will be recognized in the period incurred as required by SFAS No. 146.
In addition, an impairment charge of $8.4 million (prior to provision for tax benefit of $2.9 million) was recognized on long-lived assets of the Grocery Distribution segment held at a warehouse distribution facility in Ohio that is expected to be closed in the fourth quarter of fiscal 2003.
During the first three quarters of fiscal 2003, management decided to close thirteen under-performing stores, ten in the Ohio market and three in the Michigan market. These stores were located in outlying geographic areas and did not meet our market share goals. It was also decided that one store designated for closure in a previous year would remain open because market conditions in the area had changed which resulted in a $1.1 million change in our reserve. In addition, management decided to close two office facilities, one in Ohio and one in Michigan. As a result of these decisions, asset impairment charges of $5.6 million and exit costs of $10.5 million were recorded. Ten of the stores were closed late in the second quarter; the remaining stores were closed during the third quarter of fiscal 2003. The office facilities are expected to be closed during the fourth quarter of fiscal 2003. Asset liquidations will provide
Interest Expense.Interest expense for the quarter ended January 4,On June 9, 2003, increased $0.5 million, or 6.5 percent, from $7.7 million in the prior year quarter, to $8.2 million. Interest expense for the year-to-date period ended January 4, 2003 decreased $0.4 million, or 2.0 percent, from $19.8 million in the prior year, to $19.4 million. Total average borrowings for the year-to-date period decreased to $268.8 million from $344.6 million in the corresponding year-to-date period last year as a result of debt repayments. The debt reduction and lower interest rates led to the decrease in interest expense offset in the current quarter by a $0.7 million charge to interest expense related to 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 loss in the shareholders' eq uity section of the consolidated balance sheets.
Other gains, net.In fiscal 2003, the Retail Grocery segment and the Convenience Distribution segment recognized gains fromwe completed the sale of propertythe assets of $1.0our Convenience Distribution segment. Proceeds received from this transaction of $40.8 million were used to further reduce outstanding borrowings and $0.2operating liabilities. Total outstanding borrowings have been reduced by $52.9 million respectively. Insince the end of fiscal 2002,2003. Additionally, as discussed in Note 3, we have sold 16 stores. Additional store sales are currently pending and any Food Town stores not sold are expected to be closed. The elimination of these operations is expected to have a positive impact on our continuing operating cash flows. Net proceeds received to date of $40.4 million have been used to further reduce outstanding borrowings and operating liabilities and pay transaction costs. Management believes that the Grocery Distribution segment recognized a gain of $0.8 million on the sale of stock in a service providerearly results and the Retail Grocery segment recognized gainslong-term expectations of $1.6 million on the salethese 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 properties.
Discontinued Operations.The Insurance segmentshares and a majorityvariety of other types of payments as defined in the Real Estate segment are reflectedbank credit agreement, which was filed as discontinuedan exhibit to our Annual Report on 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 in the short term and to improve our distribution and retail operations in the consolidated financial statements. During fiscal 2003,longer term. We do not anticipate paying any cash dividends for the discontinued real estate operations recognizedforeseeable 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 were issued in minimum denominations of $1,000. The non-subordinated variable rate promissory notes were issued under a gain on the sale of eleven properties for $12.1 million (net of tax). As of January 4, 2003, the remaining assets of the discontinued real estate operation totaling $1.9 million consist primarily of land and buildings that are being actively marketed"shelf" registration statement filed with the expectationSecurities and Exchange Commission, effective February 26, 2001, which provides for the issuance of being sold overup to $100 million of debt securities. Effective March 31, 2003, Spartan Stores suspended the next twelve months. The remaining portionpromissory note program and all notes were repaid as of the Real Estate segment consiststhat date.
Our current ratio decreased to 1.22:1.00 at June 21, 2003 from 1.38:1.00 at March 29, 2003 and working capital decreased to $42.8 million at June 21, 2003 from $87.2 million at March 29, 2003. These declines are primarily of properties used in the Grocery Distribution segment operation. As such, the remaining assets have been combined with the Grocery Distribution segment for reporting purposes.
We recorded a $1.5 million charge in the third quarter of fiscal 2003 in the Insurance segment as an estimate of additional amounts owed for claims liabilities ceded (transferred) to an unrelated third party in December 2001 as a result of updated actuarial studies reflectingmore efficient management of inventory and the sales of L&L/Jiroch and J.F. Walker which carried a larger than originally anticipated obligation. We will remain obligatedmuch higher working capital level.
Our long-term debt to equity ratio at June 21, 2003 improved to 1.38:1.00 from 1.68:1.00 at March 29, 2003. This decrease was primarily due to reducing long-term debt by $52.9 million, including $30.9 million in debt payments ahead of scheduled maturities, partially offset by first quarter net losses. 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 these policies until all claims are closed.the senior secured credit facility, various other debt instruments, leases and shareholders' equity.
Cumulative Effect The table below presents our significant contractual obligations as of a Change in Accounting Principle and June 21, 2003:
|
|
|
|
|
| Total Contractual | |||
|
|
|
|
|
|
|
|
|
|
2004 |
| $ | 18,781 |
| $ | 18,708 |
| $ | 37,489 |
2005 |
|
| 33,165 |
|
| 23,131 |
|
| 56,296 |
2006 |
|
| 19,895 |
|
| 20,940 |
|
| 40,835 |
2007 |
|
| 88,156 |
|
| 18,386 |
|
| 106,542 |
2008 |
|
| 4,111 |
|
| 16,162 |
|
| 20,273 |
Thereafter |
|
| 3,446 |
|
| 69,125 |
|
| 72,571 |
Total |
| $ | 167,554 |
| $ | 166,452 |
| $ | 334,006 |
New Accounting Standards
In June 2001,April 2002 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." 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 will not be amortized, but are 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 subsequ ent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. As a result of adopting these statements, 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 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 Accounting Principles Board ("APB")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 are required to adoptadopted the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 on March 30, 2003.
In June 2002, The adoption of this statement will impact the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting forclassification on the Statement of Operations of any costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurreddebt extinguishment occurring 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 underfuture.
EITF Issue No. 94-3. SFAS No. 146 will primarily impact the timing02-16, "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 recognitionprices 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 associated with any future exit or disposal activities. Weincurred 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 SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.
On December 31, 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 transition and disclosure provisions of SFAS No. 148 are applicable on March 29, 2003. We30, 2003 and did not have not determined what effect SFAS No. 148 will havea material impact on our future consolidated results of operations or financial position when adopted.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.
We believe that the following represent the more critical estimates and assumptions used in the preparation of our The accompanying condensed consolidated financial statements.
Allowance for Losses on Receivables. In determining the adequacy of the allowances for receivables, we analyze the value of collateral, customer financial statements historical collection experience, aging of receivables and other economic and industry factors. If the financial condition of our customers or the fair value of the collateral were to deteriorate, additional allowances may be required.
Insurance Reserves.We are primarily self-insured for workers' compensation and health care costs. Additionally, the discontinued Insurance segment has provided commercial insurance coverage for fire and other casualties, liability, automobile, fidelity, theft, bonds, workers' compensation, business interruption and group health plans. We record substantially all of our insurance liabilities based upon actuarial computationsprepared using actual claims data and estimates of claims incurred but not yet reported. If a greater amount of claims is incurred compared to estimates or health care costs increase more than anticipated, recorded reserves may be insufficient and additional costs could be recorded in the consolidated financial statements.
Asset Impairment.We review and evaluate long-lived assets 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, a discounted cash flow model is utilized to determine the impairment loss to be recorded. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less the cost to sell. Fair values are determined by independent appraisals or expected sales prices developed by certified valuation specialists. Estimates of future cash flows and expected sales prices are judgments based upon our experience and knowledge of operations. These estimates project cash flows several years into the future and are affected by changes in the economy, real estate market conditions and inflation.
Exit Costs. For stores and other facilities to be closed that are subject to long-term lease commitments, reserves are recorded based upon the present value of remaining lease payments, calculated using a risk-free interest rate, net of estimated sublease recovery. If real estate and leasing markets change in the future, adjustments to those reserves could be required.
Liquidity and Capital Resources
Net cash provided by operating activities was $71.4 million for the year-to-date period ended January 4, 2003 and $10.4 million for the same period in the prior year. The increase in net cash provided by operating activities in fiscal 2003 is a result of a reduction in working capital invested in operations, primarily due to internal initiatives to improve our net inventory position.
Net cash provided by (used in) investing activities was $42.7 million and $(15.9) million for the year-to-date periods ended January 4, 2003 and January 5, 2002, respectively. Cash provided by investing activities increased in fiscal 2003 primarily due to proceeds from the sale of real estate properties and decreased capital expenditures.
Net cash used in financing activities was $109.0 million for the year-to-date period ended January 4, 2003 due primarily to debt repayments and financing fees, partially offset by proceeds from the sale of common stock. Cash from operations, including working capital reductions, and real estate sales provided funding to make debt repayments of $80.2 million in excess of scheduled amortization for the year-to-date period ended January 4, 2003. Cash used in financing activities was $1.7 million for the year-to-date period ended January 5, 2002 due primarily to debt repayments, offset by proceeds from long-term borrowings and proceeds from the sale of common stock.
Our principal sources of liquidity are cash generated from operations and borrowings under a senior secured credit facility dated March 18, 1999, as amended and restated July 29, 2002. The credit facility consists of (1) a revolving credit facility in the amount of $75 million with a maximum term of six years from the date of the original credit facility, (2) a term loan A in the amount of $100 million with a maximum term of six years from the date of the original credit facility, (3) an acquisition facility in the amount of $75 million with a maximum term of seven years from the date of the original credit facility and
The credit agreement which governs our senior secured credit facility also limits our ability to make "restricted payments." Payment of cash dividends and other restricted payments are permitted only under conditions specified and are limited to amounts determined under specific and detailed formulas and allowances provided in the credit agreement. "Restricted payments" include cash dividends, as well as redemption of shares and a variety of other types of payments. As of the date of filing of this Quarterly Report on Form 10-Q, payment of cash dividends in limited amounts would be permitted under the bank credit facility. The credit facility contains covenants that include the maintenance of certain financial ratios. The covenants in the bank credit agreement could prohibit or limit the amount of dividends in the future. At January 4, 2003, we were in compliance with the credit facility covenants. We continue to make significant progress on our debt reduction objectives. However, if our operating trends continue through the fourth quarter, we may not be able to meet the terms of our increasingly restrictive debt covenants. We are reviewing financing options, as well as moving forward with other debt reduction and operating income improvement initiatives that we expect will help temper these trends. We intend to use any cash flows from our operations to repay debt, to make restricted payments other than cash dividends, and on a long-term basis to acquire additional retail operations. We do not anticipate paying any cash dividends for the foreseeable future, regardless of whether they are or are not permitted by the credit agreement.
We have offered non-subordinated variable rate promissory notes to the public. The notes are offered 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 February 1, 2003, approximately $8.3 million of these notes were outstanding.
We also intend to continue selling non-core real estate. The carrying value of real estate expected to be sold within the next twelve months is approximately $3.5 million as of January 4, 2003.
Our current ratio decreased to 1.30:1.00 at January 4, 2003 from 1.62:1.00 at March 30, 2002 and working capital decreased to $63.8 million at January 4, 2003 from $113.7 million at March 30, 2002. These declines are the result of our efforts to better manage the key components of working capital.
Our long-term debt to equity ratio at January 4, 2003 increased to 1.42:1.00 from 1.28:1.00 at March 30, 2002. The increase was primarily due to the provision for asset impairments and exit costs and asset impairment charges of $63.8 million, net of tax, recorded in the first and third quarters and the $35.4 million goodwill impairment charge recorded upon adopting SFAS No. 142. These increases were partially offset by reducing long-term debt by $107.1 million, including $80.2 million in debt payments ahead of scheduled maturities. 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, non-subordinated variable rate promissory notes, various other debt instruments, leases and shareholders' equity.
The table below presents our significant contractual obligations as of January 4, 2003:
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| Total Contractual |
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|
2003 |
| $ | 719 |
| $ | 7,883 |
| $ | 8,602 |
2004 |
|
| 38,572 |
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| 26,166 |
|
| 64,738 |
2005 |
|
| 36,646 |
|
| 24,288 |
|
| 60,934 |
2006 |
|
| 24,176 |
|
| 21,935 |
|
| 46,111 |
2007 |
|
| 107,419 |
|
| 19,296 |
|
| 126,715 |
Thereafter |
|
| 9,001 |
|
| 95,172 |
|
| 104,173 |
Total |
| $ | 216,533 |
| $ | 194,740 |
| $ | 411,273 |
Forward-Looking Statements
The matterscritical accounting policies discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" about our plans, strategies, objectives, goals or expectations. 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" or "will likely" result or that a particular event "will," "may," "could," "should" or "will likely" occur in the future or similarly stated expectations. Accounting estimates, such as those described under the heading "Critical Accounting Policies" above, are inherently forward-looking. You should not place undue reliance on these forward-looking 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'2003 Annual Report on Form 10-K for the year ended March 30, 2002 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; address underperformance in our southern retail division; improve sales growth; increase profit margin; reduce operating cost structures; sell assets that are 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 Quarterly Report will be affected by, among other factors, those discussed below, as well as changes in economic conditions generally or in the markets and geographic areas that we serve and adverse effects of the changing food and distribution industries.
Anticipated future sales are subject to competitive pressures from many sources. Our retail grocery and grocery and convenience distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Additionally, 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 successfully implement effective new marketing and merchandising programs. Sales volumes in our Convenience Distribution segment may continue to be negatively impacted by increased cigarette prices. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.10-K.
Our operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: the integration of the business operations of our retail acquisitions and retail and distribution operations; difficulties in the operation of the current business segments; future business acquisitions, including additional retail stores; difficulties in the assimilation of acquired personnel, operations, systems or procedures; inability to realize synergies in the amounts or within the time frame expected by management; adverse effects on existing business relationships with independent retail grocery store customers; difficulties in the retention or hiring of employees for the acquired businesses; 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 operat ing and administrative expenses could also be adversely affected by changes in our sales mix. Furthermore, our ongoing cost cutting initiatives and changes in our marketing and merchandising programs may not be as successful as we anticipate.
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; cigarette inventory levels; retail property sales; and the amount of fees received on delinquent accounts. The availability of our senior secured credit facility depends on continued compliance with the credit facility.
Furthermore, acts of violence or war create considerable economic and political uncertainties, which 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.
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.
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-4(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"). They have concluded that, as of the Evaluation Date, Spartan Stores' disclosure controls and procedures were adequate and effective. There were no significant changes in Spartan Stores' internal controls or in other factors that could significantly affect Spartan Stores' disclosure controls and procedures subsequent to the Evaluation Date.
PART II
OTHER INFORMATION
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There were no material changes in legal proceedings involving Spartan Stores or its subsidiaries in the period covered by this Quarterly Report on Form 10-Q.
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The Chief Executive Officer and Chief Financial Officer Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 follow the signature page of this Quarterly Report. Also, the Chief Executive Officer and Chief Financial Officer Certifications required by Section 906 of that Act accompany this Quarterly Report.
On October 28, 2002 Joel A. Levine resigned from the Board of Directors for personal reasons.
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. | |
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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. |
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3.2 |
| Amended and Restated Bylaws 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 |
99.1 | Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished, not filed, in accordance with SEC Release Number 33-8212. |
(b) | Reports on Form 8-K:Spartan Stores |
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These Forms 8-K 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. |
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Date: | By /s/ David M. Staples |
| David M. Staples |
CERTIFICATIONS
I, James B. Meyer,Craig C. Sturken, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Spartan Stores, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and | |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
6. |
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Date: | /s/ |
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I, David M. Staples, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Spartan Stores, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and | |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
6. |
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Date: | /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. | |
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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. |
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3.2 |
| Amended and Restated Bylaws 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 |
99.1 | Certification pursuant to 18 U.S.C. § 1350. This exhibit is furnished, not filed, in accordance with SEC Release Number 33-8212. |