UNITED STATESSECURITIES 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
For the quarterly period ended June 23, 2001.
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number: 000-31127
SPARTAN STORES, INC.(Exact Name of Registrant as Specified in Its Charter)
Michigan(State or Other Jurisdictionof Incorporation or Organization)
38-0593940(I.R.S. EmployerIdentification No.)
850 76th Street, SWP.O. Box 8700Grand Rapids, Michigan(Address of Principal Executive Offices)
49518(Zip Code)
(616) 878-2000(Registrant's Telephone Number, Including Area Code)
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
As of July 14, 2001, the registrant had 19,315,911 outstanding shares of common stock, no par value.
PART IFINANCIAL INFORMATION
ITEM 1.
Financial Statements
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Balance Sheets(In thousands)
ASSETS
June 23,2001
March 31,2001
(Unaudited)
Current assets:
Cash and cash equivalents
$
24,499
27,834
Marketable securities
14,473
21,978
Accounts receivable, net
96,509
86,607
Inventories
190,242
179,589
Prepaid expenses
9,324
9,092
Deferred income taxes
3,911
3,894
Total current assets
338,958
328,994
Other assets:
Goodwill, net
157,828
155,737
Other, net
36,110
36,139
Total other assets
193,938
191,876
Property and equipment, net
282,473
285,988
Total assets
815,369
806,858
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
123,129
121,406
Accrued payroll and benefits
28,497
36,458
Insurance reserves
22,194
21,301
Other accrued expenses
42,109
31,730
Current maturities of long-term debt
34,911
38,478
Total current liabilities
250,840
249,373
12,240
13,840
Postretirement benefits
13,547
12,853
Other long-term liabilities
9,215
5,747
Long-term debt
307,099
306,632
Shareholders' equity:
Common stock, voting, no par value; 50,000 shares
authorized; 19,316 and 19,262 shares outstanding
110,570
109,868
Preferred stock, non-voting, no par value;
10,000 shares authorized; no shares issued or outstanding
-
Accumulated other comprehensive loss
(2,290
)
Retained earnings
114,148
108,545
Total shareholders' equity
222,428
218,413
Total liabilities and shareholders' equity
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Earnings(In thousands, except per share data)(Unaudited)
First Quarter (12 Weeks) Ended
June 17,2000
Net sales
832,508
722,143
Cost of goods sold
688,568
630,796
Gross margin
143,940
91,347
Other costs and expenses
Selling, general and administrative
128,827
80,054
Interest expense
6,712
6,659
Interest income
(412
(1,050
Other gains
(18
(5
Total other costs and expenses
135,109
85,658
Earnings before income taxes and discontinued operations
8,831
5,689
Income taxes
3,230
2,018
Earnings before discontinued operations
5,601
3,671
Earnings from discontinued insurance segment (net of taxes)
2
74
Net earnings
5,603
3,745
Basic and diluted earnings per share:
Earnings from continuing operations
0.29
0.28
Weighted average shares outstanding:
Basic
19,283
13,304
Diluted
19,471
13,311
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Shareholders' Equity(In thousands)
CommonStock
Class ACommonStock
AdditionalPaid-InCapital
AccumulatedOtherComprehensiveIncome andLoss
RetainedEarnings
Total
Balance -- March 26, 2000
19,838
14,240
91,929
126,007
Class A common stock transactions:
53 shares issued
105
596
701
1 shares purchased
(2
(11
(13
Cash dividends - $0.0125 per share
(125
Stock dividend -- 0.336 per share
6,701
(6,701
Conversion to no par common stock
41,467
(26,642
(14,825
Common stock transactions:
6,270 shares issued
70,957
330 shares purchased
(2,556
23,442
Balance -- March 31, 2001
56 shares issued
735
4 shares purchased
(33
Comprehensive income:
Other comprehensive income and loss, net of tax:
Cumulative effect of change in accounting
- -
(1,588
Unrealized gain on securities
135
Minimum pension liability adjustment
Net loss on interest rate swap agreement
(712
Total other comprehensive loss
Total comprehensive income
3,313
Balance -- June 23, 2001 (unaudited)
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(In thousands)(Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization
10,988
7,339
480
511
Deferred taxes on income
(407
(307
(6
Change in operating assets and liabilities:
7,472
(356
Accounts receivable
(9,902
(612
(10,653
(200
(232
(1,074
1,723
1,526
(7,961
(3,030
893
294
7,974
7,041
Net cash provided by operating activities
5,960
14,871
Cash flows from investing activities:
Purchases of property and equipment
(5,877
(2,666
Proceeds from the sale of property and equipment
11
6
Other
(1,032
(790
Net cash used in investing activities
(6,898
(3,450
Cash flows from financing activities:
Proceeds from long-term borrowings
1,320
332
Repayment of long-term debt
(4,419
(667
Proceeds from sale of common stock
Common stock purchased
Dividends paid
Net cash (used in) provided by financing activities
(2,397
228
Net (decrease) increase in cash and cash equivalents
(3,335
11,649
Cash and cash equivalents at beginning of period
36,422
Cash and cash equivalents at end of period
48,071
SPARTAN STORES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Note 1Accounting 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.
The information contained in the consolidated financial statements is unaudited. The statements reflect all adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods presented. All such adjustments are of a normal, recurring nature.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented in Note 1 to the Consolidated Financial Statements included in Spartan Stores' Annual Report on Form 10-K for the fiscal year ended March 31, 2001, filed with the Securities and Exchange Commission on June 20, 2001.
Comprehensive income is net income adjusted for the net loss on interest rate swap agreements, unrealized gain on securities and minimum pension liability.
Certain prior year amounts have been reclassified to conform to current year classifications.
Note 2Cumulative Effect of Change in Accounting Principle
Spartan Stores uses interest rate swap agreements that effectively convert a portion of variable rate debt to a fixed rate basis. These agreements are considered to be a hedge against changes in future cash flow. Accordingly, the interest rate swap agreements are reflected in the consolidated balance sheet and the related gain or loss on these contracts are deferred in shareholders' equity as another component of comprehensive income. There was no impact on earnings as all existing cash flow hedges are highly effective and the Company expects no material impact on earnings in the next twelve months.
On April 1, 2001, Spartan Stores recorded a cumulative transition adjustment loss of $1.6 million (net of related income tax of $.8 million) and a current year loss of $.7 million (net of related incomes taxes of $.4 million) pertaining to its interest rate swap agreements upon adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be reported on the balance sheet at fair value. If the derivative is designated in a cash-flow hedge, changes in fair value of the derivative will be recorded in accumulated other comprehensive income (AOCI) and will be recognized in the statement of earnings as realized. SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, change in fair value will be recognized in earnings.
Note 3Operating Segment Information
The following tables set forth segment information in thousands.
June 23, 2001(Unaudited)
June 17, 2000(Unaudited)
Retail grocery
336,311
148,037
Grocery store distribution
285,138
360,044
Convenience store distribution
209,289
211,476
Real estate
1,770
2,586
Earnings before income taxes and discontinuedoperations
1,288
4,551
3,526
2,363
1,791
629
374
March 31, 2001
492,573
488,237
579,253
560,229
85,797
83,312
57,385
56,951
Discontinued operations -- insurance segment
33,882
31,068
Less -- eliminations
(433,521
(412,939
Note 4Contingencies
On June 20, 2000, an amended complaint was refiled in a Tennessee state court by individual plaintiffs on behalf of the state of Tennessee and its taxpayers against the leading cigarette manufacturers operating in the United States and certain wholesalers and distributors, including J.F. Walker Company, Inc., a subsidiary of Spartan Stores. This case was initially filed in May 1997 and was removed to the United States District Court for the Eastern District of Tennessee. On June 16, 1998, J.F. Walker was voluntarily dismissed as a defendant. The federal district court then dismissed the case for lack of standing. The United States Court of Appeals for the Sixth Circuit affirmed the district court decision with instructions to remand the case back to state court. The plaintiffs then filed an amended complaint including J.F. Walker as a defendant. In this case, the plaintiffs are seeking compensatory, punitive and other damages, reimbursement of medical and other expenditures and equitable relief. Spartan S tores believes that J.F. Walker has valid defenses to this legal action, which is being vigorously defended. One of the cigarette manufacturers named as a defendant in this action has agreed to indemnify J.F. Walker from damages arising out of this action. Management believes that the ultimate outcome of this action should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Spartan Stores.
On August 1, 2000, Spartan Stores consummated a merger with Seaway Food Town, Inc. ("Food Town"). At the date of the merger, approximately 6.7 million shares of outstanding Food Town common stock were converted into the right to receive one share of Spartan Stores common stock and $5.00 in cash for each Food Town share. The holders of 448,835 shares of Food Town common stock provided notice of dissent from the merger. If dissenting shareholders exercise their dissenters' rights in accordance with the requirements of Ohio law, Spartan Stores will pay the fair cash value of their dissenting shares as determined by agreement or, in the absence of agreement, by a court of law.
Various other lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against Spartan Stores. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, results of operations or liquidity of Spartan Stores.
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth Spartan Stores' Consolidated Statements of Earnings as percentages of net sales:
100.0
%
17.3
12.7
Less:
15.4
11.1
0.8
0.9
(.1
16.2
11.9
1.1
0.4
0.3
0.7
0.5
Net Sales
Net sales for the quarter ended June 23, 2001 increased 15.3 percent to $832.5 million, a $110.4 million increase from $722.1 million for the quarter ended June 17, 2000.
Net sales for the quarter ended June 23, 2001 in the retail grocery segment increased 127.2 percent or $188.3 million compared to the quarter ended June 17, 2000. The increase reflects additional sales from the merger with Food Town in the second quarter of fiscal year 2001, the acquisition of Prevo's Family Market, Inc. ("Prevo's") during the fourth quarter of fiscal year 2001 and a 1.1 percent increase in same store sales. Same store sales increases are the result of improved promotional programs and expanded hours of operations at some sites, partially offset by increased competition in our Toledo market area. Management continues to evaluate other acquisition opportunities in the retail grocery industry and expects acquisitions to contribute to future sales growth.
Net sales for the quarter ended June 23, 2001 in the grocery store distribution segment declined 20.8 percent or $74.9 million compared to the quarter ended June 17, 2000. The decrease primarily resulted from Spartan Stores' acquisition of grocery distribution segment customers during fiscal 2001 (requiring the elimination of sales to these customers), the loss of D&W Food Centers' business, the sale of three customer stores in the second quarter of fiscal year 2001 and declines in sales of grocery products due to continued competitive market conditions, partially offset by increased sales of perishables.
Net sales for the quarter ended June 23, 2001 in the convenience store distribution segment decreased 1.0 percent or $2.2 million compared to the quarter ended June 17, 2000. The decline was primarily due to decreases in cigarette sales volume to grocery stores as a result of higher cigarette prices and the impact of customers lost in fiscal year 2001, partially offset by the increase in cigarette prices and new business obtained in fiscal year 2002.
Gross Margin
Gross margin, as a percentage of net sales, for the quarter ended June 23, 2001 was 17.3 percent compared to 12.7 percent for the same quarter last year. The increase primarily reflects the increased percentage of retail sales in the business mix, improvements in the gross margin of our existing retail and grocery distribution operations and gains realized on cigarette price increases in the convenience store distribution segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended June 23, 2001 were 15.4 percent of net sales compared to 11.1 percent for the same quarter last year. The increase for the quarter was primarily due to the growth of Spartan Stores' retail grocery segment, which generates a higher selling, general and administrative expense percentage than the distribution segments.
Interest Expense
Interest expense was .8 percent of net sales for the quarter ended June 23, 2001 compared to .9 percent for the same quarter last year. The decrease is primarily the result of lower interest rates in 2001, partially offset by an increase in average borrowings.
Net Earnings
Net earnings for the quarter ended June 23, 2001 were $5.6 million compared with net earnings of $3.7 million for the quarter ended June 17, 2000, an increase of 49.6 percent. Current year net earnings were positively impacted by the sales increases in the retail grocery segment discussed above and margin improvements in all segments.
Liquidity and Capital Resources
Net cash from operating activities was $6.0 million for the quarter ended June 23, 2001 compared to $14.9 million for the quarter ended June 17, 2000. The decrease in net cash provided by operating activities is primarily the result of changes in working capital related to the timing of payment for point of sale systems acquired in the prior year, the timing of receivable collections for the Company's insurance segment and coupon reimbursements from vendors, partially offset by improved earnings.
Net cash used in investing activities was $6.9 million for the quarter ended June 23, 2001 compared to $3.5 million for the quarter ended June 17, 2000. Cash used in investing activities increased primarily due to capital expenditures for the Company's retail store remodeling campaign during the current year.
Net cash used in financing activities was $2.4 million for the quarter ended June 23, 2001 due primarily to debt repayments, partially offset by proceeds from the sale of common stock and long-term debt borrowings.
Spartan Stores' principal sources of liquidity are cash flows generated from operations and borrowings under a senior secured credit facility. The credit facility dated March 18, 1999, as amended, consists of (1) a $100 million six year Revolving Credit Facility, (2) a $100 million six year Term Loan A, (3) a $75 million seven year Acquisition Facility and (4) a $150 million eight year Term Loan B. At June 23,
Spartan Stores is also permitted to sell variable rate promissory notes 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. Spartan Stores is currently offering its non-subordinated variable rate promissory notes, which are due March 31, 2003. These notes are offered in minimum denominations of $1,000 and may be issued by Spartan Stores at any time, although Spartan Stores' credit facility restricts the total amount of these notes outstanding to approximately $15.3 million. At June 23, 2001, approximately $11.1 million of these notes were outstanding.
Spartan Stores' current ratio at June 23, 2001 increased to 1.35 to 1.00 compared with 1.32 to 1.00 at March 31, 2001. Working capital increased 10.7 percent or $8.5 million.
Spartan Stores' long-term debt to equity ratio at June 23, 2001 decreased to 1.38 to 1.00 compared with 1.40 to 1.00 at March 31, 2001. The decrease was due to scheduled principal payments on outstanding debt and net income generated during the period.
Spartan Stores' total capital structure includes borrowings under the senior secured credit facility, variable rate promissory notes, various other debt instruments, leases, and shareholders' equity. Management continues to evaluate other acquisition opportunities, which could result in additional borrowings and additional leases being entered into if consummated.
Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The matters discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" about Spartan Stores' plans, strategies, objectives, goals, expectations or projections. These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or management "expects," "anticipates," "projects," "plans" or "believes" that a particular occurrence "may result" or "will likely result" or that a particular event "may occur" or "will likely occur" in the future, or similarly stated expectations. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this 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 31, 2001 and other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause ac tual results to be materially different from Spartan Stores' current expectations.
Anticipated future sales are subject to competitive pressures from many sources. Spartan Stores' grocery store and convenience store retail and 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 owned and operated by Spartan Stores and competitive pressures in the retail industry. Sales volumes in Spartan Stores' convenience store 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.
Spartan Stores' operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: the integration of the business operations of the retail stores and other businesses acquired by Spartan Stores; future business acquisitions, including additional retail stores; unanticipated difficulties in the operation of the current business segments; difficulties in 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; unexpected difficulties in the retention or hiring of employees for the acquired businesses; unanticipated labor shortages, stoppages or disputes; business divestitures; increased transportation or fuel costs; and current or future lawsuits and administrative proceedings.
Spartan Stores' future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings necessary for retail store acquisitions; interest rate changes; cigarette inventory levels; retail property sales; the volume of notes receivable; and the amount of fees received on delinquent accounts.
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 Spartan Stores' expected consolidated financial position, results of operations or liquidity. Spartan Stores disclaims any obligation or intention to update its forward-looking statements to reflect events or circumstances that occur after the date of this Report.
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk
There were no material changes in market risk of the Company in the period covered by this Report.
PART IIOTHER INFORMATION
Legal Proceedings
For a discussion of certain litigation, see Note 4 ("Contingencies") to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 4.
Submission of Matters to a Vote of Security Holders
On July 11, 2001, at the 2001 annual meeting of shareholders of Spartan Stores, the shareholders voted to elect three persons to the board of directors. The following directors were duly elected:
Term Expiring
Votes For
Votes Withheld
Alex J. DeYonker
2004
14,348,921
605,970
Joel A. Levine
14,566,500
388,391
Gregory P. Josefowicz
14,673,593
281,298
In addition, the following five persons continue to serve as directors of Spartan Stores: Elizabeth A. Nickels and Russell H. VanGilder, Jr. are currently serving terms that will expire at Spartan Stores' 2002 annual meeting of shareholders, and Elson S. Floyd, Ph.D., Richard B. Iott and James B. Meyer are currently serving terms that will expire at Spartan Stores' 2003 annual meeting of shareholders.
At the same meeting, the shareholders also approved the 2001 Stock Incentive Plan, 2001 Stock Bonus Plan, 2001 Associate Stock Purchase Plan, and Directors' Stock Purchase Plan. The voting results were as follows:
Votes Against
2001 Stock Incentive Plan
8,031,650
1,601,840
1,147,888
2001 Stock Bonus Plan
9,159,852
1,479,362
142,164
2001 Associate Stock Purchase Plan
9,807,791
839,197
134,390
Directors Stock Purchase Plan
9,954,571
688,907
137,900
There were 4,173,513 broker non-votes on each of the stock plans.
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
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 Annex B to the prospectus and joint proxy statement contained in Spartan Stores' Pre-Effective Amendment No. 1 to Registration Statement of Form S-4, filed on June 5, 2000. Here incorporated by reference.
10.1
Spartan Stores, Inc. 2001 Stock Incentive Plan. Previously filed as Appendix B to Spartan Stores' Definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, filed on June 8, 2001. Here incorporated by reference.
10.2
Spartan Stores, Inc. 2001 Stock Bonus Plan. Previously filed as Appendix C to Spartan Stores' Definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, filed on June 8, 2001. Here incorporated by reference.
10.3
Spartan Stores, Inc. 2001 Associate Stock Purchase Plan. Previously filed as Appendix D to Spartan Stores' Definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, filed on June 8, 2001. Here incorporated by reference.
(b)
Reports on Form 8-K: Spartan Stores filed the following Current Reports on Form 8-K during the 12 weeks ended June 23, 2001.
Date of Report
Filing Date
Item(s) Reported
May 4, 2001
This Form 8-K included a statement that Spartan Stores will publicly webcast its quarterly analyst conference call regarding its 2001 fourth quarter financial results on May 10, 2001. It noted that a live webcast would be available on the company's website.
May 10, 2001
This Form 8-K included a press release announcing Spartan Stores' 2001 fourth quarter financial results. It included a summary statement of earnings for that period and a summary balance sheet as of the end of that period.
May 24, 2001
This Form 8-K included the Spartan Stores, Inc. investors presentation and fact sheet entitled "Building a New Spartan."
All of the foregoing 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.
Date: August 6, 2001
SPARTAN STORES, INC.(Registrant)By /s/David M. Staples
David M. Staples Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized signatory for Registrant)
EXHIBIT INDEX