SPARTAN STORES INC - 10-Q Quarterly Report

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

	For the quarterly period ended June 22, 2002.

o	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 Jurisdiction of Incorporation or Organization)	38-0593940 (I.R.S. Employer Identification No.)

850 76^th Street, S.W. P.O. Box 8700 Grand 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

As of August 1, 2002, the registrant had 19,855,840 outstanding shares of common stock, no par value.

PART I
FINANCIAL INFORMATION

ITEM 1.

Financial Statements

SPARTAN STORES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
ASSETS		June 22, 2002		March 30, 2002
		(Unaudited)

Current assets:
Cash and cash equivalents	$	7,346	$	13,903
Marketable securities		1,565		10,370
Accounts receivable, net		83,783		84,533
Inventories		195,727		179,319
Prepaid expenses		10,573		8,427
Deferred income taxes		1,118		692
Total current assets		300,112		297,244

Other assets:
Goodwill, net		113,643		155,243
Other, net		25,805		25,738
Total other assets		139,448		180,981

Property and equipment, net		255,531		268,315

Total assets	$	695,091	$	746,540

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	99,961	$	90,327
Accrued payroll and benefits		25,232		26,624
Insurance reserves		16,530		17,263
Other accrued expenses		31,318		23,371
Current maturities of long-term debt		32,658		25,948
Total current liabilities		205,699		183,533

Deferred income taxes		3,564		14,490
Postretirement benefits		12,640		12,133
Other long-term liabilities		21,210		9,707
Long-term debt		265,029		295,185

Shareholders' equity:
Common stock, voting, no par value; 50,000 shares
authorized; 19,810 and 19,766 shares outstanding		115,987		115,722
Preferred stock, non-voting, no par value;
10,000 shares authorized; no shares issued or outstanding		-		-
Accumulated other comprehensive loss		(3,677	)	(2,622	)
Retained earnings		74,639		118,392
Total shareholders' equity		186,949		231,492

Total liabilities and shareholders' equity	$	695,091	$	746,540

SPARTAN STORES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)

		First Quarter (12 Weeks) Ended
		June 22, 2002			June 23, 2001

Net sales	$	765,621		$	832,508
Cost of goods sold		637,212			688,568
Gross margin		128,409			143,940

Operating expenses
Selling, general and administrative		122,822			128,827
Provision for store closings and asset impairments		13,000			-
Total operating expenses		135,822			128,827

Operating (loss) income		(7,413	)		15,113

Other costs and expenses
Interest expense		5,570			6,712
Interest income		(338	)		(412	)
Other gains, net		(8	)		(18	)
Total other costs and expenses		5,224			6,282

(Loss) earnings before income taxes, discontinued operations and cumulative effect of a change in accounting principle		(12,637	)		8,831

Income taxes		(4,257	)		3,230

(Loss) earnings from continuing operations		(8,380	)		5,601

Earnings from discontinued insurance segment (net of taxes)		4			2

(Loss) earnings before cumulative effect of a change in accounting principle		(8,376	)		5,603

Cumulative effect of a change in accounting principle (net of taxes)		(35,377	)		- -

Net (loss) earnings	$	(43,753	)	$	5,603

Basic and diluted earnings (loss) per share:
(Loss) earnings from continuing operations	$	(0.42	)	$	0.29
Earnings from discontinued operations		-			-
Cumulative effect of a change in accounting principle		(1.79	)		-
Net (loss) earnings	$	(2.21	)	$	0.29

Weighted average shares outstanding:
Basic		19,795			19,283
Diluted		19,796			19,471

SPARTAN STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)

	Shares Outstanding			Common Stock Amount			Accumulated Other Comprehensive (Loss) Income			Retained Earnings			Total

Balance -- April 1, 2001	19,262		$	109,868		$	-		$	108,545		$	218,413

Comprehensive income:
Net earnings	-			-			-			9,847			9,847
Other comprehensive loss, net of tax:
Cumulative effect of a change in accounting principle	- -			- -			(1,588	)		- -			(1,588	)
Unrealized loss on securities	-			-			(36	)		-			(36	)
Minimum pension liability adjustment	- -			- -			(137	)		- -			(137	)
Net loss on interest rate swap agreements	- -			- -			(861	)		- -			(861	)
Total other comprehensive loss	-			-			(2,622	)		-			(2,622	)
Total comprehensive income													7,225

Common stock transactions:
Purchases	(4	)		(33	)		-			-			(33	)
Issuances	508			5,887			-			-			5,887

Balance -- March 30, 2002	19,766			115,722			(2,622	)		118,392			231,492

Comprehensive loss:
Net loss	-			-			-			(43,753	)		(43,753	)
Other comprehensive income (loss), net of tax:
Unrealized gain on securities	-			-			43			-			43
Net loss on interest rate swap agreements	- -			- -			(1,098	)		- -			(1,098	)
Total other comprehensive loss	-			-			(1,055	)		-			(1,055	)
Total comprehensive loss													(44,808	)

Common stock transactions:
Issuances	44			265			-			-			265

Balance -- June 22, 2002 (unaudited)	19,810		$	115,987		$	(3,677	)	$	74,639		$	186,949

SPARTAN STORES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
		First Quarter (12 Weeks) Ended
		June 22, 2002			June 23, 2001
Cash flows from operating activities:
Net (loss) earnings	$	(43,753	)	$	5,603
Adjustments to reconcile net (loss) earnings to
net cash provided by operating activities:
Cumulative effect of a change in accounting principle		35,377			-
Provision for store closings and asset impairments		13,000			-
Depreciation and amortization		10,368			11,067
Postretirement benefits		507			480
Deferred taxes on income		(4,560	)		(407	)
Other gains, net		(8	)		(18	)
Change in operating assets and liabilities:
Marketable securities		8,872			7,472
Accounts receivable		750			(8,944	)
Inventories		(16,408	)		(10,623	)
Prepaid expenses and other assets		(2,180	)		(209	)
Accounts payable		9,634			6,559
Accrued payroll and benefits		(1,392	)		(6,086	)
Insurance reserves		(733	)		1,573
Other accrued expenses and other liabilities		10,056			10,859
Net cash provided by operating activities		19,530			17,326

Cash flows from investing activities:
Purchases of property and equipment		(2,351	)		(5,877	)
Net proceeds from the sale of assets		110			11
Acquisition costs		-			(3,066	)
Other		312			(307	)
Net cash used in investing activities		(1,929	)		(9,239	)

Cash flows from financing activities:
Net payments on Revolving Credit Facility		(13,000	)		-
Proceeds from long-term borrowings		-			1,320
Repayment of long-term debt		(10,446	)		(4,419	)
Debt issuance costs		(977	)		(276	)
Proceeds from sale of common stock		265			735
Common stock purchased		-			(33	)
Net cash used in financing activities		(24,158	)		(2,673	)

Net (decrease) increase in cash and cash equivalents		(6,557	)		5,414
Cash and cash equivalents at beginning of period		13,903			21,577
Cash and cash equivalents at end of period	$	7,346		$	26,991

SPARTAN STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1
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.

The interim 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, except as disclosed in Note 2. 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 30, 2002, filed with the Securities and Exchange Commission on June 28, 2002.

Certain reclassifications have been made to the fiscal 2002 financial statements to conform to the fiscal 2003 presentation.

Note 2
Cumulative Effect of a Change in Accounting Principle

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be applied to all business combinations after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. We adopted SFAS No. 141 on March 31, 2002. There was no material impact as a result of the adoption. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subseq uent to initial adoption of SFAS No. 142 will be recorded as a charge to current period earnings. SFAS No. 142 also requires that goodwill be assigned to reporting units based upon the expected benefits to be derived from synergies resulting from the business combination.

We adopted SFAS No. 142 on March 31, 2002. In accordance with the provisions of SFAS No. 142, goodwill of approximately $30.3 million previously included in the retail segment was assigned to the grocery distribution segment based upon the expected benefits to be realized by each segment. Under the transitional provisions of SFAS No. 142, goodwill was tested for impairment as of March 31, 2002. Each of our reporting units were tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study which primarily considered the discounted cash flow method and comparable market values. As a result of the impairment testing, we recorded an impairment loss to reduce the carrying value of goodwill at the retail grocery segment by $41.6 million (prior to provision for tax benefit of $6.2 million) to its implied fair value. Impairment was due to a number of factors including operating performance and the impact of new competiti on. In

accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations for the first quarter of fiscal 2003.

Note 3
Goodwill and Other Intangible Assets

Spartan Stores' adoption of SFAS No. 142 eliminated the amortization of goodwill beginning in the first quarter of fiscal 2003.

The following table adjusts net (loss) earnings and (loss) earnings per share for the adoption of SFAS No. 142:

(in thousands, except per share data)

First Quarter (12 Weeks) Ended

		June 22, 2002			June 23, 2001
Net (loss) earnings:
Reported net (loss) earnings	$	(43,753	)	$	5,603
Add:
Goodwill amortization, net of tax		-			693
Cumulative effect of a change in accounting principle, net of tax		35,377			- -
Adjusted net (loss) earnings	$	(8,376	)	$	6,296

Basic and diluted (loss) earnings per share:
Reported net (loss) earnings	$	(2.21	)	$	0.29
Add:
Goodwill amortization, net of tax		-			0.04
Cumulative effect of a change in accounting principle, net of tax		1.79			- -
Adjusted net (loss) earnings	$	(0.42	)	$	0.33

Changes in the carrying amount of goodwill were as follows:

		Retail Grocery			Grocery Distribution		Total
Balance at March 30, 2002, net of accumulated amortization	$	155,243		$	- -	$	155,243
Allocation of goodwill upon adoption of SFAS No. 142		(30,300	)		30,300		- -
Impairment of goodwill recognized as a cumulative effect of a change in accounting principle		(41,600	)		- -		(41,600	)
Balance at June 22, 2002	$	83,343		$	30,300	$	113,643

The following table reflects the components of amortized intangible assets, included in other, net on the Condensed Consolidated Balance Sheets:

		June 22, 2002				March 30, 2002
		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-compete agreements	$	7,613	$	4,655	$	7,613	$	4,468
Favorable leases		2,954		1,000		2,954		953

Total	$	10,567	$	5,655	$	10,567	$	5,421

These intangible assets are amortized over the terms of the agreements (3 to 15 years) or the length of the leases (3 to 20 years). There are no expected residual values related to these intangible assets.

Amortization expense, excluding goodwill, was $.2 million for the quarters ended June 22, 2002 and June 23, 2001. Estimated amortization expense, excluding any future acquisitions, for each of the five succeeding fiscal years is as follows:

Fiscal Year		Amortization Expense
2003	$	911
2004		878
2005		540
2006		467
2007		375

Total	$	3,171

Note 4
Store Closing and Asset Impairment Charges

During the quarter ended June 22, 2002, the retail grocery segment recognized an impairment loss of $5.3 million on long-lived assets at twelve stores to be closed. The carrying amount of the assets at these stores was approximately $8.0 million at June 22, 2002. Additionally, the retail grocery segment recognized a charge of $7.7 million on store lease exit costs which include the present value of future minimum lease payments, calculated using a risk-free interest rate, and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease recoveries. The stores are expected to be closed during the second and third quarters of fiscal 2003.

Note 5
Notes Payable and Long-Term Debt

On July 29, 2002, an amendment to the senior secured credit facility was approved by Spartan Stores' bank group. The credit facility dated March 18, 1999, as amended and restated July 29, 2002, consists of (1) a revolving credit facility in the amount of $75 million with a maximum term of six years from the date of the original credit facility, (2) a term loan A in the amount of $100 million with a maximum term of six years from the date of the original credit facility, (3) an acquisition facility in the amount of $75 million with a maximum term of seven years from the date of the original credit facility and (4) a term

loan B in the amount of $150 million with a maximum term of eight years from the date of the original credit facility. Interest rates payable on amounts borrowed under the credit facility are based on the prime rate, the federal funds rate or the Eurodollar rate, plus a stipulated margin. Under the amended and restated credit agreement, the interest rates for the revolving credit facility increased by .50% for the revolving credit facility and term loan A and .75% for the acquisition facility and term loan B.

The amendment also resulted in the modification of certain covenants under the credit facility. Based upon current operating conditions, Spartan Stores anticipates that it will continue to be in compliance with its covenants in the current year.

Note 6
Operating Segment Information

The following tables set forth segment information in thousands.

		First Quarter (12 Weeks) Ended
		June 22, 2002 (Unaudited)		June 23, 2001 (Unaudited)
Net sales
Retail grocery	$	308,877	$	336,311
Grocery distribution		247,124		285,138
Convenience distribution		207,991		209,289
Real estate		1,629		1,770
Total	$	765,621	$	832,508

		First Quarter (12 Weeks) Ended
		June 22, 2002 (Unaudited)			June 23, 2001 (Unaudited)
Operating (loss) income
Retail grocery (fiscal 2003 includes $13 million provision for store closings and asset impairments)	$	(15,332	)	$	6,408
Grocery distribution		4,373			5,419
Convenience distribution		2,333			2,485
Real estate		1,213			801
Total	$	(7,413	)	$	15,113

		June 22, 2002 (Unaudited)			March 30, 2002
Total assets
Retail grocery	$	476,533		$	498,783
Grocery distribution		787,448			908,901
Convenience distribution		88,108			82,824
Real estate		73,369			44,187
Discontinued operations - insurance		14,627			23,729
Less -- eliminations		(744,994	)		(811,884	)
Total	$	695,091		$	746,540

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth our Consolidated Statements of Operations as percentages of net sales:

	First Quarter (12 Weeks) Ended
	June 22, 2002 (Unaudited)			June 23, 2001 (Unaudited)