UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from ______________ to ______________. |
Commission File Number: 000-31127
SPARTAN STORES, INCINC..
(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 July 16,October 8, 2004 the registrant had 20,468,47920,501,966 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 "outlook" or "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 27, 2004 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; improvesustain 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; 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 other factors including, but not limited to, thos etho se discussed below.
Anticipated future sales are subject to competitive pressures from many sources. Our RetailGrocery Distribution and Grocery DistributionRetail 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, our ability to retain and add to the retail stores to whom we distribute, 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 advers eadver 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 secured loan agreement depends on compliance with the terms of the loan agreement.
In fiscal 2004, we completed the sales of substantially all of the assets of United Wholesale Grocery Company, L&L/Jiroch Distributing Company, J.F. Walker Company, Inc. and most Food Town stores and have closed all Food Town stores that were not sold. We believe that these actions 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. Our asset impairment and exit cost provisions for these transactions are estimates and actual costs may be more or less than these estimates. The agreements relating to some of these transactions require us to indemnify these asset buyers for breaches of our representations and warranties contained in the agreements and certain other matters.
This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this Quarterly Report.
PART I
FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
SPARTAN STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| June 19, | March 27, | September 11, |
| March 27, |
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Current assets |
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Cash and cash equivalents | $ | 12,236 | $ | 12,838 | $ | 13,450 |
| $ | 12,838 |
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Accounts receivable, net | 41,749 | 39,732 |
| 41,956 |
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| 39,732 |
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Inventories | 91,973 | 97,771 |
| 92,265 |
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| 97,771 |
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Prepaid expenses and other current assets | 11,829 | 9,578 |
| 8,948 |
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| 9,578 |
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Deferred taxes on income | 4,977 | 6,353 |
| 4,893 |
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| 6,353 |
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Property and equipment held for sale | | 4,223 | | 4,051 |
| 3,972 |
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| 4,051 |
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Total current assets | 166,987 | 170,323 |
| 165,484 |
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| 170,323 |
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Other assets |
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Goodwill, net | 72,105 | 72,105 |
| 72,105 |
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| 72,105 |
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Deferred taxes on income | 25,673 | 25,147 |
| 21,999 |
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| 25,147 |
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Other, net | | 14,581 | | 16,438 |
| 14,657 |
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| 16,438 |
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Total other assets | 112,359 | 113,690 |
| 108,761 |
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| 113,690 |
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Property and equipment, net | | 107,657 | | 108,437 |
| 105,156 |
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| 108,437 |
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Total assets | $ | 387,003 | $ | 392,450 | $ | 379,401 |
| $ | 392,450 |
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Current liabilities |
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Accounts payable | $ | 90,174 | $ | 75,206 | $ | 81,591 |
| $ | 75,206 |
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Accrued payroll and benefits | 19,878 | 24,374 |
| 21,892 |
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| 24,374 |
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Insurance reserves | 6,993 | 7,009 |
| 6,508 |
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| 7,009 |
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Other accrued expenses | 22,401 | 20,291 |
| 18,294 |
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| 20,291 |
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Current maturities of long-term debt | | 4,117 | | 4,177 |
| 5,227 |
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| 4,177 |
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Total current liabilities | 143,563 | 131,057 |
| 133,512 |
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| 131,057 |
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Other long-term liabilities | 18,178 | 20,084 |
| 17,779 |
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| 20,084 |
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Postretirement benefits | 11,575 | 11,026 |
| 12,071 |
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| 11,026 |
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Long-term debt | 105,980 | 124,616 |
| 101,230 |
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| 124,616 |
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Shareholders' equity |
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Common stock, voting, no par value; 50,000 shares |
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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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Deferred stock-based compensation | (869 | ) | (179 | ) |
| (819 | ) |
| (179 | ) | ||
Accumulated other comprehensive loss | (182 | ) | (182 | ) |
| (182 | ) |
| (182 | ) | ||
Accumulated deficit | | (9,085 | ) | | (10,638 | ) |
| (2,134 | ) |
| (10,638 | ) |
Total shareholders' equity | | 107,707 | | 105,667 |
| 114,809 |
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| 105,667 |
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Total liabilities and shareholders' equity | $ | 387,003 | $ | 392,450 | $ | 379,401 |
| $ | 392,450 |
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See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
12 Weeks Ended | 12 Weeks Ended |
| 24 Weeks Ended | |||||||||||||||||
June 19, | June 21, | September 11, |
| September 13, |
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| September 11, |
| September 13, |
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Net sales | $ | 474,325 | $ | 462,569 | $ | 486,701 |
| $ | 491,371 |
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| $ | 961,026 |
| $ | 953,940 |
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Cost of sales | | 388,425 | | 377,806 |
| 391,610 |
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| 398,504 |
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| 780,035 |
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| 776,310 |
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Gross margin | 85,900 | 84,763 |
| 95,091 |
| 92,867 |
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| 180,991 |
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| 177,630 |
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Selling, general and administrative expenses | | 81,023 | | 85,655 |
| 81,845 |
| 85,595 |
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| 162,868 |
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| 171,250 |
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Operating earnings (loss) | 4,877 | (892 | ) | |||||||||||||||||
Operating earnings |
| 13,246 |
| 7,272 |
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| 18,123 |
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| 6,380 |
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Other income and expenses |
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Interest expense | 2,292 | 3,970 |
| 2,277 |
| 3,138 |
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| 4,569 |
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| 7,108 |
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Interest income | (47 | ) | (135 | ) | ||||||||||||||||
Other, net | | 18 | | 45 |
| 58 |
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| (85 | ) |
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| 29 |
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| (175 | ) | |||
Total other income and expenses | | 2,263 | | 3,880 |
| 2,335 |
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| 3,053 |
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| 4,598 |
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| 6,933 |
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Earnings (loss) before income taxes and discontinued operations | 2,614 | (4,772 | ) |
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Income taxes | | 915 | | (1,682 | ) |
| 3,817 |
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| 1,489 |
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| 4,732 |
|
| (193 | ) | ||
Earnings (loss) from continuing operations | 1,699 | (3,090 | ) |
| 7,094 |
| 2,730 |
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|
| 8,793 |
|
| (360 | ) | |||||
Loss from discontinued operations, net of taxes | | (146 | ) | | (3,027 | ) |
| (143 | ) |
| (958 | ) |
|
| (289 | ) |
| (3,985 | ) | |
Net earnings (loss) | $ | 1,553 | $ | (6,117 | ) | $ | 6,951 |
| $ | 1,772 |
|
| $ | 8,504 |
| $ | (4,345 | ) | ||
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Basic and diluted loss per share: | ||||||||||||||||||||
Basic earnings (loss) per share: |
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Earnings (loss) from continuing operations | $ | 0.08 | $ | (0.16 | ) | $ | 0.35 |
| $ | 0.14 |
|
| $ | 0.43 |
| $ | (0.02 | ) | ||
Loss from discontinued operations | | (0.00 | ) | | (0.15 | ) |
| (0.01 | ) |
| (0.05 | ) |
|
| (0.01 | ) |
| (0.20 | ) | |
Net earnings (loss) | $ | 0.08 | $ | (0.31 | ) | $ | 0.34 |
| $ | 0.09 |
|
| $ | 0.42 |
| $ | (0.22 | ) | ||
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Weighted average shares | ||||||||||||||||||||
Diluted earnings (loss) per share: |
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Earnings (loss) from continuing operations | $ | 0.35 |
| $ | 0.14 |
|
| $ | 0.42 |
| $ | (0.02 | ) | |||||||
Loss from discontinued operations |
| (0.01 | ) |
| (0.05 | ) |
|
| (0.01 | ) |
| (0.20 | ) | |||||||
Net earnings (loss) | $ | 0.34 |
| $ | 0.09 |
|
| $ | 0.41 |
| $ | (0.22 | ) | |||||||
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Weighted average shares outstanding: |
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Basic | 20,253 | 19,977 |
| 20,468 |
| 19,947 |
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| 20,361 |
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| 19,962 |
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Diluted | 20,468 | 19,977 |
| 20,694 |
| 20,077 |
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| 20,572 |
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| 19,962 |
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See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
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Balance - March 30, 2003 | 19,999 | $ | 116,388 | $ | - | $ | (2,816 | ) | $ | (3,940 | ) | $ | 109,632 | 19,999 |
| $ | 116,388 |
| $ | - |
| $ | (2,816 | ) | $ | (3,940 | ) | $ | 109,632 |
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Comprehensive loss, net of tax: |
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Net loss for fiscal 2004 | - | - | - | - | (6,698 | ) | (6,698 | ) | - |
| - |
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| - |
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| - |
| (6,698 | ) |
| (6,698 | ) | |||||||||||
Unrealized gain on interest rate |
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swap agreements | - | - | - | 372 | - | 372 | - |
| - |
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| - |
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| 372 |
| - |
| 372 |
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Minimum pension liability adjustment | - | - | - | 2,383 | - �� | 2,383 | - |
| - |
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| - |
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| 2,383 |
| - |
| 2,383 |
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Unrealized loss on securities | - | - | - | (121 | ) | - | | (121 | ) | - |
| - |
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| - |
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| (121 | ) |
| - |
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| (121 | ) | |||||||||
Total comprehensive loss | - | - | - | - | - | (4,064 | ) | - |
| - |
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| - |
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| - |
| - |
| (4,064 | ) | |||||||||||||
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Purchases of common stock | (56 | ) | (164 | ) | - | - | - | (164 | ) | (56 | ) |
| (164 | ) |
| - |
|
| - |
| - |
| (164 | ) | ||||||||||
Issuances of restricted stock | 149 | 442 | (442 | ) | - | - | - | 149 |
| 442 |
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| (442 | ) |
| - |
| - |
| - |
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Amortization of restricted stock | - | | - | | 263 | | - | | - | | 263 | - |
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| - |
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| 263 |
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| - |
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| - |
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| 263 |
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Balance - March 27, 2004 | 20,092 | 116,666 | (179 | ) | (182 | ) | (10,638 | ) | 105,667 | 20,092 |
| 116,666 |
|
| (179 | ) |
| (182 | ) |
| (10,638 | ) |
| 105,667 |
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Comprehensive loss, net of tax: |
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Net earnings for fiscal 2005 | - | - | - | - | 1,553 | 1,553 | - |
| - |
|
| - |
|
| - |
| 8,504 |
| 8,504 |
| ||||||||||||||
Issuances of common stock | 133 | 460 | - | - | - | 460 | 166 |
| 562 |
|
| - |
|
| - |
| - |
| 562 |
| ||||||||||||||
Issuances of restricted stock | 243 | 792 | (792 | ) | - | - | - | 243 |
| 792 |
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| (792 | ) |
| - |
| - |
| - |
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Cancellations of restricted stock | (23 | ) | (75 | ) | 75 | - | (24 | ) |
| (76 | ) |
| 76 |
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| - |
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Amortization of restricted stock | - | | - | | 27 | | - | | - | | 27 | - |
|
| - |
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| 76 |
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| - |
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| - |
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| 76 |
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Balance - June 19, 2004 | 20,445 | $ | 117,843 | $ | (869 | ) | $ | (182 | ) | $ | (9,085 | ) | $ | 107,707 | ||||||||||||||||||||
Balance - September 11, 2004 | 20,477 |
| $ | 117,944 |
| $ | (819 | ) | $ | (182 | ) | $ | (2,134 | ) | $ | 114,809 |
|
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
12 Weeks Ended | 24 Weeks Ended |
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June 19, | June 21, | September 11, |
| September 13, |
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Cash flows from operating activities |
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Net earnings (loss) | $ | 1,553 | $ | (6,117 | ) | $ | 8,504 |
| $ | (4,345 | ) | |
Loss from discontinued operations | | 146 | | 3,027 |
| 289 |
|
| 3,985 |
| ||
Earnings (loss) from continuing operations | 1,699 | (3,090 | ) |
| 8,793 |
|
| (360 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash |
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provided by operating activities: |
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Depreciation and amortization | 5,679 | 6,707 |
| 10,846 |
|
| 13,408 |
| ||||
Postretirement benefits | 549 | (660 | ) |
| 1,045 |
|
| (867 | ) | |||
Deferred taxes on income | 834 | (1 | ) |
| 4,559 |
|
| (960 | ) | |||
Other | 5 | 53 |
| 154 |
|
| 221 |
| ||||
Change in operating assets and liabilities: | ||||||||||||
Changes in operating assets and liabilities: |
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Accounts receivable | (2,910 | ) | (2,410 | ) |
| (3,130 | ) |
| (1,161 | ) | ||
Inventories | 5,377 | 6,970 |
| 5,085 |
|
| 5,440 |
| ||||
Prepaid expenses and other assets | (1,172 | ) | 2,864 |
| 2,601 |
|
| 2,661 |
| |||
Refundable income taxes | - | 9,349 |
| - |
|
| 9,349 |
| ||||
Accounts payable | 15,017 | (10,275 | ) |
| 6,656 |
|
| (12,020 | ) | |||
Accrued payroll and benefits | (3,696 | ) | (619 | ) |
| (1,575 | ) |
| (1,367 | ) | ||
Insurance reserves | (155 | ) | 212 |
| (1,076 | ) |
| 1,118 |
| |||
Other accrued expenses and other liabilities | | 1,786 | | (5,909 | ) |
| (1,180 | ) |
| (8,285 | ) | |
Net cash provided by operating activities | 23,013 | 3,191 |
| 32,778 |
|
| 7,177 |
| ||||
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Cash flows from investing activities |
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Purchases of property and equipment | (4,517 | ) | (1,783 | ) |
| (8,210 | ) |
| (4,173 | ) | ||
Net proceeds from the sale of assets | 67 | 16 |
| 89 |
|
| 52 |
| ||||
Other | | 104 | | 125 |
| 288 |
|
| 360 |
| ||
Net cash used in investing activities | (4,346 | ) | (1,642 | ) |
| (7,833 | ) |
| (3,761 | ) | ||
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Cash flows from financing activities |
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Net (payments) proceeds from revolver | (17,871 | ) | 3,000 |
| (20,733 | ) |
| 19,700 |
| |||
Repayment of long-term debt | (825 | ) | (14,384 | ) |
| (1,607 | ) |
| (25,974 | ) | ||
Financing fees paid | - | (1,782 | ) |
| - |
|
| (2,535 | ) | |||
Proceeds from sale of common stock | | 460 | | - |
| 562 |
|
| - |
| ||
Net cash used in financing activities | (18,236 | ) | (13,166 | ) |
| (21,778 | ) |
| (8,809 | ) | ||
|
|
|
|
|
| |||||||
Discontinued operations: |
|
|
|
|
|
| ||||||
Net cash (used in) provided by discontinued operations | | (1,033 | ) | | 6,982 | |||||||
Net cash used in discontinued operations |
| (2,555 | ) |
| (1,455 | ) | ||||||
|
|
|
|
|
| |||||||
Net decrease in cash and cash equivalents | (602 | ) | (4,635 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
| 612 |
|
| (6,848 | ) | ||||||
Cash and cash equivalents at beginning of period | | 12,838 | | 23,306 |
| 12,838 |
|
| 23,306 |
| ||
Cash and cash equivalents at end of period | $ | 12,236 | $ | 18,671 | $ | 13,450 |
| $ | 16,458 |
|
See accompanying notes to consolidated financial statements.
SPARTAN STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Basis of Presentation and Significant Accounting Policies
The Consolidated Financial Statements include the accounts of Spartan Stores, Inc. and its subsidiaries ("Spartan Stores"). All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying consolidated financial statements, taken as a whole, contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position of Spartan Stores as of June 19,September 11, 2004 and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
Stock-Based Compensation
Spartan Stores has a stock incentive plan, which is more fully described in Note 10 of the 2004 Annual Report on Form 10-K. Spartan Stores accounts for the plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based compensation cost is reflected in the Statements of Operations, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share as if Spartan Stores had applied the fair value recognition principles of Statement of Financial Accounting Standards Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
(In thousands, except per share data)
12 Weeks Ended | ||||||
June 19, | June 21, | |||||
Net earnings (loss), as reported | $ | 1,553 | $ | (6,117 | ) | |
Deduct: Total stock-based employee compensation expense |
|
|
|
| ||
Pro forma net earnings (loss) | $ | 1,461 | $ | (6,270 | ) | |
Basic and diluted earnings (loss) per share - as reported | $ | 0.08 | $ | (0.31 | ) | |
Basic and diluted earnings (loss) per share - pro forma | $ | 0.07 | $ | (0.31 | ) |
| 12 Weeks Ended |
| ||||
| September 11, |
| September 13, |
| ||
|
|
|
|
|
|
|
Net earnings, as reported | $ | 6,951 |
| $ | 1,772 |
|
Deduct: Total stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings | $ | 6,880 |
| $ | 1,627 |
|
|
|
|
|
|
|
|
Basic and diluted earnings per share - as reported | $ | 0.34 |
| $ | 0.09 |
|
Basic earnings per share - pro forma |
| 0.34 |
|
| 0.08 |
|
Diluted earnings per share - pro forma | $ | 0.33 |
| $ | 0.08 |
|
| 24 Weeks Ended |
| ||||
| September 11, |
| September 13, |
| ||
|
|
|
|
|
|
|
Net earnings (loss), as reported | $ | 8,504 |
| $ | (4,345 | ) |
Deduct: Total stock-based employee compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) | $ | 8,341 |
| $ | (4,643 | ) |
|
|
|
|
|
|
|
Basic earnings (loss) per share - as reported | $ | 0.42 |
| $ | (0.22 | ) |
Diluted earnings (loss) per share - as reported |
| 0.41 |
|
| (0.22 | ) |
Basic and diluted earnings (loss) per share - pro forma | $ | 0.41 |
| $ | (0.23 | ) |
Reclassifications
Certain reclassifications have been made to the fiscal 2004 consolidated financial statements to conform to the fiscal 2005 presentation.
Note 2
New Accounting Standards
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP FAS 106-2 supercedes FSP FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," and provides guidance on the accounting, disclosure, effective date and transition rules related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP FAS 106-2 will be effectivewas adopted in the second quarter of fiscal 2005 and isdid not expected to have a significant impact on the financial statements.
Note 3
Discontinued Operations
Spartan Stores' former convenience distribution operations, insurance operations and certain of its retail, grocery distribution and real estate operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.
Discontinued operations had no sales during the second quarter and year-to-date period ended June 19,September 11, 2004 and generated sales of $216.3$47.6 million and $263.4 million during the second quarter and year-to-date period ended June 21, 2003.September 13, 2003, respectively. The operating losslosses in discontinued operations for the second quarter and year-to-date period ended June 19,September 11, 2004 of $0.2 million wasand $0.4 million were partially offset by an income tax benefitbenefits of $0.1 million and $0.2 million. The net losslosses from discontinued operations had no impact on earningscontributed a loss of $0.01 per share. share for the second quarter and year-to-date period ended September 11, 2004.
The $3.0$1.0 million net loss from discontinued operations for the second quarter ended June 21,September 11, 2003 consisted of a loss from operations of $2.3$0.6 million, provision for asset impairments and exit costs of $3.6$3.0 million, gain on disposal of $1.8assets of $1.6 million and an income tax benefit of $1.1$1.0 million. The net loss from discontinued operations contributed a loss of $0.15$0.05 per share in fiscal 2004.share. The $4.0 million net loss from discontinued operations for the year-to-date period ended September 13, 2003 consisted of a loss from operations of $1.3 million, provision for asset impairments and exit costs of $6.6 million, gain on disposal of assets of $1.8 million and an income tax benefit of $2.1 million. The net loss from discontinued operations contributed a loss of $0.20 per share.
Total assets of discontinued operations decreased from $8.3 million at March 27, 2004 to $7.2$7.1 million at June 19,September 11, 2004. Total liabilities of discontinued operations decreased from $16.9 million at March 27, 2004 to $15.6$14.8 million at June 19,September 11, 2004.
In accordance with Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the interest on debt that was required to be repaid as a result of disposal transactions.the asset dispositions. Interest expense of $1.3$0.3 million and $1.6 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the second quarter and year-to-date period ended June 21,September 13, 2003. Interest expense is no longer allocated to discontinued operations as all debt has been repaid as a result of the disposal of these operations.
Note 4
Asset Impairments and Exit Costs
The discontinued retailDiscontinued operations recognized pre-tax charges of $3.6$3.0 million and $6.6 million during the firstsecond quarter of fiscal 2004and year-to-date period ended September 13, 2003 for asset impairments and exit costs related to transaction costs and severance.
The following table provides the activity of exit costs for fiscal year 2004 and the first quarter of fiscal 2005.twenty-four weeks ended September 11, 2004. Exit costs recorded in the Consolidated Balance Sheets are included in Other accrued expenses in current liabilities and Other long-term liabilities based on when the obligations are expected to be paid.
(In thousands)
Lease and |
| Lease and |
|
|
|
| ||||||||
|
|
|
|
|
| |||||||||
Balance at March 30, 2003 | $ | 18,973 | $ | 3,866 | $ | 18,973 |
|
| $ | 3,866 |
| |||
Provision for lease and related ancillary costs, net of estimated |
|
|
|
|
|
|
|
|
| |||||
Assumption of leases | 3,347 |
| 3,347 |
|
|
|
| |||||||
Provision for severance | - | 3,299 | (b) |
| - |
|
| 3,299 | (b) | |||||
Payments, net of interest accretion | | (6,560 | ) | | (6,542 | ) |
| (6,560 | ) |
|
| (6,542 | ) | |
Balance at March 27, 2004 | $ | 18,338 | $ | 623 | $ | 18,338 |
|
| $ | 623 |
| |||
Payments, net of interest accretion | | (1,366 | ) | | (200 | ) |
| (2,405 | ) |
|
| (307 | ) | |
Balance at June 19, 2004 | $ | 16,972 | $ | 423 | ||||||||||
Balance at September 11, 2004 | $ | 15,933 |
|
| $ | 316 |
|
(a) Includes $2.0 million of charges recorded in discontinued Retail operations and $0.6 million recorded in discontinued Grocery Distribution operations.
(b) Includes $3.1 million of charges recorded in discontinued Retail operations and $0.2 million recorded in discontinued GroceryConvenience Distribution operations.
Note 5
Associate Retirement Plans
The following table provides the components of net periodic pension and postretirement benefit costs for the firstsecond quarter of fiscal 2005 and 2004:year-to-date periods ended September 11, 2004 and September 13, 2003:
(In thousands)
Pension Benefits | SERP Benefits | Postretirement Benefits | ||||||||||||||||||||||||||||||||||
12 Weeks Ended |
| Pension Benefits |
| SERP Benefits |
|
| Postretirement Benefits |
| ||||||||||||||||||||||||||||
June 19, | June 21, | June 19, | June 21, | June 19, | June 21, |
| Sept. 11, |
| Sept. 13, |
| Sept. 11, |
| Sept. 13, |
|
| Sept. 11, |
| Sept. 13, |
| |||||||||||||||||
Service cost | $ | 797 | $ | - | $ | 5 | $ | - | $ | 57 | $ | 58 | $ | 1,047 |
| $ | - |
| $ | 5 |
| $ | - |
| $ | 57 |
| $ | 58 |
| ||||||
Interest cost | 651 | 854 | 8 | 11 | 97 | 100 |
| 651 |
| 854 |
| 9 |
| 11 |
|
| 97 |
| 100 |
| ||||||||||||||||
Expected return on plan assets | (859 | ) | (965 | ) | - | - | - | - |
| (859 | ) |
| (965 | ) |
| - |
| - |
|
| - |
| - |
| ||||||||||||
Net amortization and deferral | (137 | ) | (89 | ) | 3 | 5 | (7 | ) | (4 | ) |
| (137 | ) |
| (89 | ) |
| 3 |
| 5 |
|
| (7 | ) |
| (4 | ) | |||||||||
Settlement expense | | - | | - | | - | | 1,444 | | - | | - |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
| ||||||
Net periodic benefit cost | $ | 452 | $ | (200 | ) | $ | 16 | $ | 1,460 | $ | 147 | $ | 154 | $ | 702 |
| $ | (200 | ) | $ | 17 |
| $ | 16 |
| $ | 147 |
| $ | 154 |
|
24 Weeks Ended |
| Pension Benefits |
|
| SERP Benefits |
|
| Postretirement Benefits |
| |||||||||
|
| Sept. 11, |
|
| Sept. 13, |
|
| Sept. 11, |
|
| Sept. 13, |
|
| Sept. 11, |
|
| Sept. 13, |
|
Service cost | $ | 1,844 |
| $ | - |
| $ | 10 |
| $ | - |
| $ | 114 |
| $ | 116 |
|
Interest cost |
| 1,302 |
|
| 1,708 |
|
| 17 |
|
| 22 |
|
| 194 |
|
| 200 |
|
Expected return on plan assets |
| (1,718 | ) |
| (1,930 | ) |
| - |
|
| - |
|
| - |
|
| - |
|
Net amortization and deferral |
| (274 | ) |
| (178 | ) |
| 6 |
|
| 10 |
|
| (14 | ) |
| (8 | ) |
Settlement expense |
| - |
|
| - |
|
| - |
|
| 1,444 |
|
| - |
|
| - |
|
Net periodic benefit cost | $ | 1,154 |
| $ | (400 | ) | $ | 33 |
| $ | 1,476 |
| $ | 294 |
| $ | 308 |
|
Spartan Stores expects to contribute $0.8$1.0 million to its defined benefit plans in fiscal 2005 to meet the minimum funding requirements. No amounts have been contributed as of June 19,September 11, 2004.
Note 6
Operating Segment Information
The following tables set forth information about Spartan Stores by operating segment:
(In thousands)
Grocery |
|
|
|
| Grocery |
|
|
| ||||||||||
12 Weeks Ended June 19, 2004 | ||||||||||||||||||
12 Weeks Ended September 11, 2004 |
|
|
|
|
|
|
|
|
| |||||||||
Net sales | $ | 260,814 | $ | 213,511 | $ | 474,325 | $ | 232,189 |
| $ | 254,512 |
| $ | 486,701 |
| |||
Depreciation and amortization | 1,944 | 3,278 | 5,222 |
| 2,779 |
|
| 1,938 |
|
| 4,717 |
| ||||||
Operating earnings | 4,739 | 138 | 4,877 |
| 6,802 |
|
| 6,444 |
|
| 13,246 |
| ||||||
Capital expenditures | 2,133 | 2,384 | 4,517 |
| 2,542 |
|
| 1,151 |
|
| 3,693 |
| ||||||
12 Weeks Ended June 21, 2003 | ||||||||||||||||||
12 Weeks Ended September 13, 2003 |
|
|
|
|
|
|
|
|
| |||||||||
Net sales | $ | 250,296 | $ | 212,273 | $ | 462,569 | $ | 230,502 |
| $ | 260,869 |
| $ | 491,371 |
| |||
Depreciation and amortization | 2,162 | 3,919 | 6,081 |
| 4,035 |
|
| 2,079 |
|
| 6,114 |
| ||||||
Operating earnings (loss) | 2,095 | (2,987 | ) | (892 | ) | |||||||||||||
Operating earnings |
| 4,247 |
|
| 3,025 |
|
| 7,272 |
| |||||||||
Capital expenditures | 1,004 | 779 | 1,783 |
| 1,813 |
|
| 577 |
|
| 2,390 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||
24 Weeks Ended September 11, 2004 |
|
|
|
|
|
|
|
|
| |||||||||
Net sales | $ | 445,700 |
| $ | 515,326 |
| $ | 961,026 |
| |||||||||
Depreciation and amortization |
| 6,057 |
|
| 3,876 |
|
| 9,933 |
| |||||||||
Operating earnings |
| 6,940 |
|
| 11,183 |
|
| 18,123 |
| |||||||||
Capital expenditures |
| 4,926 |
|
| 3,284 |
|
| 8,210 |
| |||||||||
24 Weeks Ended September 13, 2003 |
|
|
|
|
|
|
|
|
| |||||||||
Net sales | $ | 442,775 |
| $ | 511,165 |
| $ | 953,940 |
| |||||||||
Depreciation and amortization |
| 7,954 |
|
| 4,241 |
|
| 12,195 |
| |||||||||
Operating earnings |
| 1,260 |
|
| 5,120 |
|
| 6,380 |
| |||||||||
Capital expenditures |
| 2,592 |
|
| 1,581 |
|
| 4,173 |
|
June 19, | March 27, | September 11, |
| March 27, |
| |||||||
Total assets |
|
|
|
|
|
| ||||||
Grocery Distribution | $ | 197,597 | $ | 202,984 | $ | 189,591 |
| $ | 202,984 |
| ||
Retail | 182,251 | 181,125 |
| 182,746 |
|
| 181,125 |
| ||||
Discontinued operations | | 7,155 | | 8,341 |
| 7,064 |
|
| 8,341 |
| ||
Total | $ | 387,003 | $ | 392,450 | $ | 379,401 |
| $ | 392,450 |
|
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview
Spartan Stores is a leading regional grocery distributor and grocery retailer, operating principally in Michigan and Ohio.
We currently operate two reportable business segments: Grocery Distribution and Retail. Our Grocery Distribution segment provides a full line of grocery, general merchandise, frozen and perishable items to more than 400 stores, including 330300 independently owned grocery stores and our 75 corporate owned stores. Our Retail segment operates 54 retail supermarkets in Michigan under the bannersFamily Fare Supermarkets andGlen's Markets and 21 deep-discount food and drug stores in Ohio and Michigan under the bannerThe Pharm. Our retail supermarkets have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores. Our deep-discount food and drug stores offer a unique combination of full-service pharmacy, general merchandise products and basic food offerings.
Our Grocery Distribution and Retail segments' sales and operating performance vary with seasonality. Our first and fourth quarters are typically our slowest sales quarters and therefore operating results are generally lower during these two quarters. Additionally, these two quarters can be affected based on the timing of the Easter holiday, which is a strong sales week. All quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays. Most of our northern Michigan stores are dependent on tourism and, therefore, most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months.
Results of Operations
The following table sets forth items from our Consolidated Statements of Operations as a percentage of net sales and the year-to-year percentage change in dollar amounts:
(Unaudited)
| Percentage of Net Sales |
| Percentage Change |
| ||||||||||||||
Percentage of Net Sales | Percentage Change |
|
|
|
| 12 Weeks |
| 24 Weeks |
| |||||||||
June 19, | June 21, | Fiscal 2005 / | Sept. 11, |
| Sept. 13, |
| Sept. 11, |
| Sept. 13, |
| Sept. 11, |
| Sept. 11, |
| ||||
|
|
|
|
|
|
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| (1.0 | ) | 0.7 |
|
Gross margin | 18.1 | 18.3 | 1.3 | 19.5 |
| 18.9 |
| 18.8 |
| 18.6 |
| 2.4 |
| 1.9 |
| |||
Selling, general and administrative | 17.1 | 18.5 | (5.4 | ) | 16.8 |
| 17.4 |
| 16.9 |
| 18.0 |
| (4.4 | ) | (4.9 | ) | ||
Operating earnings (loss) | 1.0 | (0.2 | ) | * | ||||||||||||||
Operating earnings | 2.7 |
| 1.5 |
| 1.9 |
| 0.6 |
| 82.2 |
| 184.1 |
| ||||||
Other income and expenses | 0.5 | 0.8 | (41.7 | ) | 0.5 |
| 0.6 |
| 0.5 |
| 0.7 |
| (23.5 | ) | (33.7 | ) | ||
Earnings (loss) before income taxes and discontinued operations | 0.5 | (1.0 | ) | * |
|
|
|
|
|
|
|
|
|
|
|
| ||
Income taxes | 0.2 | (0.4 | ) | * | 0.8 |
| 0.3 |
| 0.5 |
| (0.0 | ) | * |
| * |
| ||
Earnings (loss) from continuing operations | 0.3 | (0.6 | ) | * |
|
|
|
|
|
|
|
|
|
|
|
| ||
Loss from discontinued operations | (0.0 | ) | (0.7 | ) | * | (0.0 | ) | (0.2 | ) | (0.0 | ) | (0.4 | ) | (85.1 | ) | (92.7 | ) | |
Net earnings (loss) | 0.3 | (1.3 | ) | * | 1.4 |
| 0.4 |
| 0.9 |
| (0.5 | ) | * |
| * |
|
* Percentage change is not meaningful
Net Sales - - Net sales for the quarter ended June 19,September 11, 2004 ("firstsecond quarter") increased $11.7decreased $4.7 million, or 2.51.0 percent, from $462.6$491.4 million in the quarter ended June 21,September 13, 2003 ("prior year firstsecond quarter") to $474.3$486.7 million. Net sales for the year-to-date period ended September 11, 2004 ("current year-to-date") increased $7.1 million, or 0.7 percent, from $953.9 million in the prior year-to-date period ended September 13, 2003 ("prior year-to-date") to $961.0 million.
Net sales for the firstsecond quarter in our Grocery Distribution segment increased $10.5decreased $6.4 million, or 4.22.4 percent, from $250.3$260.9 million in the prior year firstsecond quarter to $260.8$254.5 million. These increases wereNet sales for the current year-to-date period increased $4.2 million, or 0.8 percent, from $511.1 million in the prior year-to-date period to $515.3 million. The sales decrease in the second quarter was primarily due to a shift of our fall private label promotion to the third quarter, which is estimated to have impacted sales by approximately $4.0 to $5.0 million, the loss of two distribution customers of approximately $4.0 million and the cycling of incremental sales to customers in the prior year second quarter due to the power outage that affected the Detroit area. The sales increase for the year-to-date period was due primarily to sales to new customers, of $15.6 million which were partially offset by sales decreases to certain existing customers.the factors mentioned above.
Net sales for the firstsecond quarter in our Retail segment increased $1.2$1.7 million, or 0.60.7 percent, from $212.3$230.5 million in the prior year firstsecond quarter to $213.5$232.2 million. FirstNet sales for the year-to-date period increased $2.9 million, or 0.7 percent, from $442.8 million in the prior year-to-date period to $445.7 million. Comparable store sales increased 1.4 percent in the second quarter, representing the sixth consecutive quarter of comparable store sales increased 1.0 percent.growth, and 1.2 percent year-to-date. Comparable store sales increases include 0.40.7 percent and 0.6 percent during the second quarter and year-to-date periods, respectively, due to the recording of bottle deposits as a liability when sold and an asset when returned, rather than a net reduction in sales as was done in previous fiscal 2004,years, as supermarkets typically receive more returns of bottles than originally sold. This change has no impact on reported gross margin dollars. We believe this revised reporting method better reflects the true sales performance of our stores. The remaining sales increase wasincreases were due primarily to more effective marketing and merchandising programs, store refurbishing, product merchandising and product reset initiatives and continued improvements in store level execution at our supermarkets. Also contributing to the sales increase was higher customer traffic in certain superm arketssupermarkets due to the closure of competing stores in northern Michigan. These increases were partially offset by sales decreases at our deep-discount food and drug stores as we begandue to lower prescription sales resulting from a United Auto Workers mandate that requires members to switch to mail order prescription refills for maintenance medication, which also resulted in lower than expected prescription sales at our supermarket pharmacies, and due to the cycling the significantof promotional activity that accompanied the closure of selectFood Townstores and due to lower prescription sales resulting from an increase in direct mail order prescription fulfillment resulting from a United Auto Workers union cost containment initiative.stores.
The sales increases represent the fifth consecutive quarter of year-over-year sales improvement in both operating segments. During the fourth quarter of fiscal 2004, two supercenters opened in markets where we operate corporate owned stores. AnTwo additional two supercenters are expected to openopened in either ourthe second or third quarter of fiscal 2005 that affected certain supermarkets and deep-discount food and drug stores, and we are anticipating another opening in similar markets.the third quarter. We believeexpect our improved marketing and merchandising practices and the continued weakening of conventional food competitors will allow us to sustain our growth, but at rates closer to industry averages. We continue to believe that fiscal 2005 consolidated net sales will improve between 1.0 percent and 3.0 percent, with comparable store sales ranging from flatgrowth to an increase of 1.5 percent.moderate further as we compare results against the strong sales growth reported in the previous year, we cycle competitive store closings and as new supercenters open in our markets. We are improving our offering to our customers by continuing to implement more effective category management practices, adding more convenient services such as fuel centers and in-store pharmacies and improving physical facilities with our remodel and new store programs. We expect to open two fuel centers and three in-store pharmacies during the third quarter.
Gross Margin- Gross margin represents sales less cost of sales, which include purchase costs and promotional allowances. Vendor allowances that relate to our buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for our merchandising costs, such as setting up warehouse infrastructure. Vendor allowances are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.
Gross margin for the firstsecond quarter increased $1.1$2.2 million, or 1.32.4 percent, from $84.8$92.9 million in the prior year firstsecond quarter to $85.9$95.1 million. As a percent of net sales, gross margin for the firstsecond quarter decreasedincreased to 18.119.5 percent from 18.318.9 percent. Gross margin for the year-to-date period increased $3.4 million, or 1.9 percent, from $177.6 million in the prior year-to-date period to $181.0 million. As a percent of net sales, gross margin for the year-to-date period increased to 18.8 percent from 18.6 percent. The gross margin dollarsrate improvement was primarily due to increased sales in both segments. The decrease in gross margin rate was due primarily to the timing of new product launchesinitiatives at the Grocery Distribution segment and a higher percentage of consolidated net sales being generated from the lower margin Grocery Distribution segment. The decrease in rate was partially offset by improvements in the Retail segment's gross margin due to more refined promotional and merchandising strategies, primarily impacting our deep-discount food and drug stores.
Selling, General and Administrative Expenses - Selling, general and administrative ("SG&A") expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, utilities, equipment rental, depreciation and other administrative costs.
SG&A expenses for the firstsecond quarter decreased $4.7$3.8 million, or 5.44.4 percent, from $85.7$85.6 million in the prior year firstsecond quarter to $81.0$81.8 million. As a percent of net sales, SG&A expenses for the firstsecond quarter improved to 17.116.8 percent from 18.517.4 percent. SG&A expenses for the year-to-date period decreased $8.4 million, or 4.9 percent, from $171.3 million in the prior year-to-date period to $162.9 million. As a percent of net sales, SG&A expenses year-to-date improved to 16.9 percent from 18.0 percent. The decreasedecreases in SG&A isare primarily due to the following:
• | Reduced depreciation and amortization of $1.4 million and $2.3 million for the second quarter and year-to-date period, respectively, primarily at the Retail segment | |
• | Reduced labor costs of $1.3 million and $2.1 million for the second quarter and year-to-date period, respectively, at the Retail segment driven primarily by operating efficiencies | |
• | Receipt of termination and penalty payments from a former Grocery Distribution customer of $1.0 million and $1.3 million in the second quarter and year-to-date periods, respectively | |
• | Salaries and benefits savings associated with corporate staff reductions during fiscal 2004, partially offset by increased benefit costs in the current year | |
• | Reduced | |
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| |
• | A non-recurring $1.4 million charge related to the retirement distribution to the former Chief Executive Officer in the prior year first quarter | |
• | Severance costs of $0.6 million associated with corporate staff reductions in the prior year first quarter |
Interest Expense - Interest expense for the firstsecond quarter decreased $1.7$0.9 million, or 42.227.4 percent, from $4.0$3.1 million in the prior year firstsecond quarter to $2.3 million. Interest expense for the year-to-date period decreased $2.5 million, or 35.7 percent, from $7.1 million in the prior year second quarter to $4.6 million. The decrease in interest expense is primarily due to bank waiver fees recordedincurred in the prior year firstsecond quarter of $1.7$0.2 million that were not incurredand $1.9 million in the current yearprior year-to-date period and lower total average borrowings. Total average borrowings for the first quarter decreased $74.5$63.3 million from $194.0$180.9 million in the prior year first quarter to $119.4$117.6 million as a result of debt repayments resulting primarily from the sale of our discontinued operations and cash generated from operations.
In accordance with Emerging Issues Task Force Issue No. 87-24, "Allocation of Interest to Discontinued Operations," interest was allocated to discontinued operations based on the interest on debt that was required to be repaid as a result of disposal transactions.the assets dispositions. Interest expense of $1.3$0.3 million and $1.6 million was allocated to, and is included in, loss on discontinued operations in the Consolidated Statements of Operations for the prior year first quarter.second quarter and year-to-date period. Interest expense is no longer allocated to discontinued operations as all debt has been repaid as a result of the disposal of these operations.
Discontinued Operations
Our former convenience distribution operations, insurance operations and certain of our retail, grocery distribution and real estate operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.
Discontinued operations had no sales during the firstsecond quarter and year-to-date period ended September 11, 2004 and generated sales of $216.3$47.6 million and $263.4 million during the prior year first quarter.second quarter and year-to-date period ended September 13, 2003, respectively. The first quarter operating losslosses in discontinued operations for the second quarter and year-to-date period ended September 11, 2004 of $0.2 million wasand $0.4 million were partially offset by an income tax benefitbenefits of $0.1 million and $0.2 million. The net losslosses from discontinued operations had no impact on earningscontributed a loss of $0.01 per share.share for the second quarter and year-to-date period ended September 11, 2004.
The $3.0$1.0 million loss from discontinued operations for the prior year firstsecond quarter ended September 11, 2003 consisted of a loss from operations of $2.3$0.6 million, provision for asset impairments and exit costs of $3.6$3.0 million, gain on disposal of $1.8assets of $1.6 million and an income tax benefit of $1.1$1.0 million. The net loss from discontinued operations contributed a loss of $0.15$0.05 per share in fiscal 2004.share. The $4.0 million loss from discontinued operations for the year-to-date period ended September 13, 2003 consisted of a loss from operations of $1.3 million, provision for asset impairments and exit costs of $6.6 million, gain on disposal of assets of $1.8 million and an income tax benefit of $2.1 million. The net loss from discontinued operations contributed a loss of $0.20 per share.
Total assets of discontinued operations decreased from $8.3 million at March 27, 2004 to $7.2$7.1 million at June 19,September 11, 2004. Total liabilities of discontinued operations decreased from $16.9 million at March 27, 2004 to $15.6$14.8 million at June 19,September 11, 2004.
Liquidity and Capital Resources
The following table summarizes our consolidated statements of cash flows for the first quarteryear-to-date and prior year first quarter:year-to-date periods:
(In thousands)
June 19, | June 21, | September 11, |
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| September 13, |
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Net cash provided by operating activities | $ | 23,013 | $ | 3,191 | $ | 32,778 |
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| $ | 7,177 |
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Net cash used in investing activities | (4,346 | ) | (1,642 | ) |
| (7,833 | ) |
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| (3,761 | ) |
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Net cash used in financing activities | (18,236 | ) | (13,166 | ) |
| (21,778 | ) |
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| (8,809 | ) |
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Net cash (used in) provided by discontinued operations | | (1,033 | ) | | 6,982 | |||||||||||
Net cash used in discontinued operations |
| (2,555 | ) |
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| (1,455 | ) |
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Net (decrease) increase in cash and cash equivalents | (602 | ) | (4,635 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
| 612 |
|
|
| (6,848 | ) |
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Cash and cash equivalents at beginning of year | | 12,838 | | 23,306 |
| 12,838 |
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| 23,306 |
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Cash and cash equivalents at end of year | $ | 12,236 | $ | 18,671 | ||||||||||||
Cash and cash equivalents at end of period | $ | 13,450 |
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| $ | 16,458 |
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Net cash provided by operating activities increased during the first quarteryear-to-date period primarily due to the net changeimprovement in our investment in working capital, resulting from better inventory management practices and an improvement in first quarter net earnings. This effect was partially offset by the receipt of a tax refund associated with net operating loss carrybacks of $9.3 million in the prior year first quarteryear-to-date period and changes in other operating assets and liabilities.
Net cash used in investing activities increased during the first quartercurrent fiscal year primarily due to increased capital expenditure activity. Capital expenditure dollars were split relatively equally between60 percent in our two segmentsRetail segment and 40 percent in our Grocery Distribution segment and were used primarily for store refurbishments, and new equipment and software. Underinformation technology enhancements. We have completed store remodels and/or merchandise resets at eight stores during the current year. We expect to complete similar remodels on 2 to 5 additional stores by the end of the year. Although we are not currently governed by the following restrictions, under the terms of our senior secured revolving credit facility and our supplemental secured credit facility ("credit facilities"), should our available borrowings fall below certain levels, our capital expenditures would be restricted each fiscal year. We expect capital expenditures to approximate $23.0be approximately $20.0 million to $25.0 million for fiscal 2005, which wouldw ould be within these restrictions.
Net cash used in financing activities includes cash paid and received from our long-term borrowings and in the prior fiscal year, first quarter, the payment of financing fees associated with our credit facilities. Our current maturities of long-term debt at June 19,September 11, 2004 are $4.1$5.2 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.
Net cash (used in) provided byused in discontinued operations contains the net cash flows of our discontinued operations and consists primarily of net proceeds received on the sale of assets, net of identifiable debt repayments, the payment of store exit cost reserves, partial year operating results, and the payment of severance and related benefit accruals of employees that previously worked for discontinued operations. We expect the cash usage of our discontinued operations will be approximately $7.0$6.5 million in fiscal 2005 for the payment of store exit costs and other liabilities.
Our principal sources of liquidity are cash flows generated from operations and our $185.0 million credit facilities. The credit facilities terminate December 2007, and are secured by substantially all of our assets. We had available borrowings of $43.0$46.6 million at June 19,September 11, 2004 and maximum availability of $53.0$56.6 million, which exceeds the minimum excess availability levels, as defined in the credit agreements. We believe that cash generated from operating activities and available borrowings under the credit facilities are sufficient to support current operations.
Our current ratio was 1.16:1.24:1.00 at June 19,September 11, 2004 versus 1.30:1.00 at March 27, 2004 and our investment in working capital decreased to $23.4$32.0 million at June 19,September 11, 2004 from $39.3 million at March 27, 2004. The improvement in our overall working capital requirements is primarily the result of improved inventory management and the shift in timing and mix of accounts payable balances and more efficient management of operating assets.our fall private label promotion.
Our long-term debt to equitytotal capital ratio at June 19,September 11, 2004 was 0.98:0.48:1.00 versus 1.18:0.55:1.00 at March 27, 2004. This improvement was primarily due to reducing long-term debt by $18.6$23.4 million and the first quarter net earnings of $1.6$8.5 million.
For information on contractual obligations, see our 2004 Annual Report on Form 10-K. At June 19,September 11, 2004, there have been no material changes to our significant contractual obligations outside the ordinary course of business.
New Accounting Standards
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP FAS 106-2 supercedes FSP FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," and provides guidance on the accounting, disclosure, effective date and transition rules related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FAS FSP 106-2 will be effectivewas adopted in the second quarter of fiscal 2005 and is not expected to have ahad no significant impact on our financial statements.
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 have discussed the development, selection and disclosure of these estimates with the Audit Committee. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our 2004 Annual Report on Form 10-K.
ITEM 3. | Quantitative and Qualitative Disclosure About Market Risk |
There were no material changes in market risk of Spartan Stores from the end of the latest fiscal year to the date of the balance sheet in the period covered by this Quarterly Report on Form 10-Q.report.
ITEM 4. | Controls and Procedures |
Spartan Stores' Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Spartan Stores' disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on the evaluation of those controls and procedures required by Rule 13a-15(b), they have concluded that Spartan Stores' disclosure controls and procedures were adequate and effective as of the Evaluation Date. During the last fiscal quarter there was no change in Spartan Stores' internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Spartan Stores' internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. | Legal Proceedings |
Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against Spartan Stores and its subsidiaries. While the ultimate effect of such lawsuits and claims cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of Spartan Stores.
ITEM 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
Not applicable.
ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
ITEM 4. | Submission of Matters to a Vote of Security Holders |
On August 11, 2004 at the 2004 annual meeting of shareholders of Spartan Stores, the shareholders voted to elect two persons to the board of directors. The following persons were duly elected:
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| Term Expiring |
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| Votes For |
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| Votes Withheld |
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Gregory P. Josefowicz |
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| 2007 |
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| 16,157,718 |
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| 271,006 |
Craig C. Sturken |
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| 2007 |
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| 16,132,297 |
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| 296,427 |
The following six persons continue to serve as directors of Spartan Stores: Elizabeth A. Nickels, Kenneth T. Stevens and James F. Wright are currently serving terms that will expire at Spartan Stores' 2005 annual meeting of shareholders and M. Shân Atkins, Dr. Frank M. Gambino and Timothy J. O'Donovan, are currently serving terms that will expire at Spartan Stores' 2006 annual meeting of shareholders.
In addition, the shareholders voted on a proposal to ratify the selection of Deloitte & Touche LLP as Spartan Stores' independent auditors for fiscal year 2005. With respect to this proposal, shares were voted as follows:
Proposal | For | Against | Abstain |
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Proposal to ratify the selection of Deloitte & |
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There were no broker non-votes with respect to matters voted on by Spartan Stores' shareholders at the meeting.
ITEM 5. | Other Information |
None.
ITEM 6. | Exhibits |
(a) | Exhibits: The following documents are filed as exhibits to this Quarterly Report on Form 10-Q: |
Exhibit Number | Document | |
2.1 |
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| Asset Purchase Agreement dated October 2, 2003, as amended by Amendments One, Two, Three and Four, by and among United Wholesale Grocery Company, United Distribution Group, L.L.C. and United Properties Group, L.L.C. Previously filed as an exhibit to Spartan Stores' Quarterly Report on Form 10-Q for the quarter ended January 3, 2004, filed on February 5, 2004. Here incorporated by reference. | |
3.1 | Amended and Restated Articles of Incorporation of Spartan Stores, Inc. Previously filed as Annex B to the prospectus and joint proxy statement contained in Spartan Stores' Pre-Effective Amendment No. 1 to Registration Statement on Form S-4, filed on June 5, 2000. Here incorporated by reference. | |
3.2 | Amended and Restated Bylaws of Spartan Stores, Inc. Previously filed as an exhibit to Spartan Stores' Quarterly Report on Form 10-Q for the quarter ended September 13, 2003. Here incorporated by reference. | |
10.1 | Form of Employment Agreement between Spartan Stores, Inc. and certain executive officers. | |
10.2 | Form of Executive Severance Agreement between Spartan Stores, Inc. and certain executive officers. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Each of the above-listed Forms 8-K are considered to have been "furnished" but not "filed" with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SPARTAN STORES, INC. | ||
Date: | By |
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David M. Staples |
EXHIBIT INDEX
Exhibit Number | Document | |
2.1 |
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| |
| Asset Purchase Agreement dated October 2, 2003, as amended by Amendments One, Two, Three and Four, by and among United Wholesale Grocery Company, United Distribution Group, L.L.C. and United Properties Group, L.L.C. Previously filed as an exhibit to Spartan Stores' Quarterly Report on Form 10-Q for the quarter ended January 3, 2004, filed on February 5, 2004. Here incorporated by reference. | |
3.1 | Amended and Restated Articles of Incorporation of Spartan Stores, Inc. Previously filed as Annex B to the prospectus and joint proxy statement contained in Spartan Stores' Pre-Effective Amendment No. 1 to Registration Statement on Form S-4, filed on June 5, 2000. Here incorporated by reference. | |
3.2 | Amended and Restated Bylaws of Spartan Stores, Inc. Previously filed as an exhibit to Spartan Stores' Quarterly Report on Form 10-Q for the quarter ended September 13, 2003. Here incorporated by reference. | |
10.1 | Form of Employment Agreement between Spartan Stores, Inc. and certain executive officers. | |
10.2 | Form of Executive Severance Agreement between Spartan Stores, Inc. and certain executive officers. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |