Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number: 000-31127

SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)

DOCUMENTS INCORPORATED BY REFERENCE

Forward-Looking Statements

          The matters discussed in this Annual Report on Form 10-K 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 its management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends" or is "optimistic" or "confident" that a particular occurrence "will," "may," "could," "should" or "will likely" result or that a particular event "will," "may," "could," "should" or "will likely" occur in the future, that the "trend" is toward a particular result or occurrence, or similarly stated expectations. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7 of this Annual Report on Form 10-K, are inherently forward-looking. You should not place undue reliance on these forward-looking sta tements, which speak only as of the date of this Annual Report.

          In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Annual Report and our other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to differ materially. Our ability to strengthen our retail'store performance; improve sales growth; increase gross margin; reduce operating costs; sell assets classified as held for sale on favorable terms; continue to meet the terms of our debt covenants; and implement the other programs, plans, strategies, objectives, goals or expectations described in this Annual 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, among others, those discussed below.

          Anticipated future sales are subject to competitive pressures from many sources. Our Retail and Grocery Distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Future sales will be dependent on the number of retail stores that we own and operate, competitive pressures in the retail industry generally and our geographic markets specifically, and our ability to implement effective new marketing and merchandising programs. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.

          Our operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: difficulties in the operation of our current business segments; future business acquisitions; adverse effects on existing 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 adverse effects on consumer buying behavior, fuel costs, shipping and transportation, product imports and other factors affecting our company and the grocery industry generally.

          Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings; changes in our borrowing arrangements and agreements; changes in the interest rate environment; and the amount of fees received on delinquent accounts. The availability of our senior secured credit facility depends on compliance with the terms of the credit facility.

          As discussed in this Form 10-K, we have recently completed sales of or contracted to sell material assets, including substantially all of the assets of L&L/Jiroch Distributing Company ("L&L/Jiroch") and J.F. Walker Company, Inc. ("J.F. Walker"), and we are in the process of selling or closing additional Food Town stores. We believe that these sales and closings will allow us to better focus our efforts and capital on key strategic markets where we have the strongest growth and value creation opportunities. However, we cannot assure you that these transactions will be beneficial to our company. The agreements relating to many of these transactions require us to indemnify these asset buyers for breaches of our representations and warranties contained in the agreements and certain other matters.

          This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all of the 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 that we obtain after the date of this Annual Report.

PART I

Overview

          Spartan Stores is a leading regional grocery retailer and grocery distributor, operating principally in Michigan and Ohio. We operate two primary business segments: Retail and Grocery Distribution. We are the ninth largest distributor to grocery stores in the United States and have been the largest distributor to grocery stores in Michigan for more than 10 years. Our retail and distribution operations hold a combined #1 or #2 market share in many of the key Michigan markets we serve. For the fiscal year ended March 29, 2003 ("fiscal 2003"), we generated net sales from continuing operations of $2.1 billion, which excludes sales of $1.1 billion from discontinued operations.

          Established in 1917 as a cooperative, Spartan Stores converted to a for-profit business corporation in 1973. In over 85 years as a distributor, we have built a strong infrastructure and have developed extensive knowledge of the merchandising and marketing required for successful retail operations. In January 1999, we began to acquire retail grocery stores in our focused geographic regions. In August 2000, our common stock became listed on The NASDAQ Stock Market under the symbol "SPTN."

          We believe that the vertical integration of distribution and retail operations allows us to achieve improved distribution, transportation, merchandising and marketing expense leverage, and increased purchasing power. In addition, this integration allows us to enhance the services we provide to both our company-owned stores and our independent grocery distribution customers. The large number of independent retail grocers in our markets (many of which are our customers) may offer continued consolidation opportunities, although we are currently focused on our operational performance. We believe that our experience and expertise in grocery distribution and our new merchandising team for our retail operations provide us with the tools for successful operation of our integrated business.

          Since the beginning of our transformation from a wholesale distributor to an integrated distributor and retailer in January 1999, we have made significant enhancements to the infrastructure of our Grocery Distribution and Retail segments in order to better integrate these operations where efficiencies exist,

Discontinued Operations

          As a result of the transactions described below, certain of our retail operations, convenience distribution operations, grocery distribution operations, and real estate operations are recorded as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, for all years presented, the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and all related financial and non-financial disclosures in the notes to the consolidated financial statements and this Annual Report on Form 10-K have been adjusted and the discontinued operations information is excluded, unless otherwise noted.

          Discontinued Retail Operations. In March 2003, we announced our decision to close 13 Food Town stores principally located in Toledo, Ohio and outlying areas and that we were, as part of our strategic evaluation process, considering options for our remaining 26 Food Town stores. We had closed six Food Town, two Family Fare Supermarkets, one Glen's Markets and four The Pharm stores earlier in fiscal 2003.

          Discontinued Convenience Operations. During the fourth quarter of 2003, we began to actively market two of our subsidiaries in our Convenience Distribution segment. On June 9, 2003 we completed the sale of substantially all the assets of L&L/Jiroch and J.F. Walker to The H.T. Hackney Co. for approximately $40.8 million in cash and the assumption of certain liabilities.

          Discontinued Grocery Distribution Operations. We consolidated our Toledo, Ohio distribution operations into our Michigan facilities during the fourth quarter of fiscal 2003. As a result of the decision to exit the Food Town stores, the operating results related to these facilities have been classified as discontinued operations in the consolidated financial statements because the operations and cash flows of these facilities have been substantially eliminated from ongoing operations.

          Discontinued Real Estate Operations. During 2003, we completed the sale of 11 properties within our Real Estate segment for net proceeds of approximately $52.2 million in cash.

          Discontinued Insurance Segment. Discontinued operations also include our discontinued Insurance segment, which continues to be accounted for under Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."

Retail Segment

          Our Retail segment operates 55 retail grocery stores and 21 deep discount drug stores predominantly in small metropolitan and rural areas of Michigan and Ohio. Our retail grocery stores are operated under the banners Family Fare Supermarkets, Glen's Markets, Great Day Food Centers,

          We believe that our strong market share positions result from our distinct "neighborhood market" focus and the favorable name recognition from many of our banner names. Our neighborhood market strategy distinguishes our stores from supercenters and limited assortment stores by emphasizing convenient locations, demographically targeted merchandise selections, strong perishables offerings, customer service, value pricing and community involvement.

          Our 55 retail grocery stores typically offer dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, beverages, tobacco products, health and beauty care products, delicatessen items and bakery goods. Twenty-two of our grocery stores also offer pharmacy facilities. In addition to nationally advertised products, the stores carry our private label items, the "Spartan" brand, and the "HomeHarvest" and "Pharm" brands, which are our value brand labels. These private label items provide above-average retail margins and we believe they help generate increased customer loyalty. See "Merchandising and Marketing-Private Label Brands." Our retail grocery stores range in size from approximately 20,000 to 64,000 square feet and average approximately 38,000 square feet per store.

          Our 21 deep discount drug stores, which operate under the banner The Pharm, offer a unique combination of a full'service pharmacy, general merchandise products and basic food offerings. These stores operate under a deep discount format that emphasizes everyday low prices that are typically less than those of a traditional supermarket or drug store. The Pharm stores range in size from approximately 16,000 to 43,000 square feet and average approximately 29,000 square feet per store.

          We have acquired our stores as a result of several acquisitions since 1999:

          Since the acquisitions, we have closed 31 stores as a result of our continual evaluation of store performance against chain-wide profitability benchmarks. We also relocated one store in Harrison, Michigan and changed that store's retail banner from Ashcraft's Markets to Glen's Markets and changed a Cadillac, Michigan store's retail banner from Prevo's Family Markets to Glen's Markets to benefit from the strong name recognition of Glen's Markets in the region. In fiscal 2003, we opened two new stores under the Family Fare Supermarkets banner and assumed operations of a former Grocery Distribution customer, Madison Family Market.

          The following chart details the changes in the number of our retail stores from fiscal 1999 through fiscal 2003:

          As noted above, in March 2003 we announced that we were considering options for our remaining 26 Food Town stores. As of June 20, 2003, we have entered into asset sale agreements and letters of intent for 20 of these 26 Food Town stores. See "Discontinued Operations" above.

          Capital expenditures, including remodeling, are expected to approximate $10.0 to $15.0 million per year, inclusive of "maintenance" capital. We will evaluate proposed retail projects based on demographics and competition within each market, and prioritize projects based on their expected returns on investment. We require projects to meet a targeted internal rate of return to be approved; however, we may undertake projects that do not meet this standard to the extent they represent required maintenance or necessary infrastructure improvements. We believe that focusing on such measures provides us with an appropriate level of discipline in our capital expenditures process.

Grocery Distribution Segment

          Spartan Stores is the ninth largest distributor to grocery stores in the United States and the largest distributor to grocery stores in Michigan. We have been the largest distributor to grocery stores in Michigan for more than 10 years. Our Grocery Distribution segment provides approximately 400 stores with a selection of approximately 40,000 products, including dry groceries, produce, dairy products, meat, frozen food, seafood, floral products, general merchandise, pharmacy, and health and beauty care items. In addition, we offer our grocery distribution customers approximately 1,800 private label grocery and general merchandise items. We also operate 12 cash and carry outlets in Michigan and Ohio that serve approximately 2,800 additional stores. Total distribution revenues from continuing operations of our Grocery Distribution segment, including shipments to our company-owned stores, were $1.7 billion for fiscal 2003.

          Customers. Our Grocery Distribution segment supplies our company-owned stores and a diverse group of independent grocery store operators that range from single stores to supermarket chains with as many as 20 stores. We offer our customers payment terms on a net six-day basis from the weekly billing statement date. Pricing is generally based upon a "cost plus" model for grocery, frozen, dairy, pharmacy and health and beauty care items and a "variable mark-up" model for meat, deli, bakery, produce, seafood, floral products and general merchandise.

          Our Grocery Distribution customer base is very diverse, with no single customer exceeding 7% of consolidated net sales. Our five largest Grocery Distribution customers (excluding company-owned stores) accounted for approximately 17.5% of our fiscal 2003 consolidated net sales.

          Distribution Functions. Our Grocery Distribution business utilizes approximately 2.2 million square feet of warehouse, distribution and office space. We supply our company-owned stores and our independent grocery distribution customers from our distribution centers located in Grand Rapids and Plymouth, Michigan and our convenience store customers from 12 cash and carry locations in Michigan and Ohio. We believe that our distribution facilities are strategically located to serve our customers. During fiscal 2003, we implemented a network rationalization initiative, which involved shifting stock-keeping units (SKUs) within our distribution centers to create dedicated slow and fast-moving sections as well as the consolidation of both of our Ohio distribution centers. We believe that this realignment will reduce our labor and inventory carrying costs.

          To supply our Grocery Distribution customers, we operate a fleet of approximately 100 tractors, 200 conventional trailers and 170 refrigerated trailers, substantially all of which are leased. We are currently undertaking several initiatives intended to minimize our vehicles' outbound miles and increase inbound freight revenue based on our new logistics programs.

          In October 2001, we signed a five-year labor contract with our Grand Rapids grocery distribution center associates. The contract provides for improved work-rule flexibility that has improved overall distribution center productivity and created a more efficient distribution operation. In addition, these union associates share in rising healthcare and welfare benefit costs. Subsequent to the labor negotiations, we adopted a gain'share compensation program at our Grand Rapids grocery distribution center that provides for incentive-based compensation and has resulted in improved productivity and reduced direct labor costs. During fiscal 2003, through-put (defined as cases shipped per hour) increased in comparison to fiscal 2002 by 4.0% in our grocery warehouse and by 13.1% in our perishables warehouse.

          Additional Services. We also provide our independent grocery distribution customers with many value-added services, including:

          We have agreements with certain Grocery Distribution customers whereby they agree to purchase a minimum percentage of their total purchases from us for the term of the agreement. At March 29, 2003, we had such agreements with 22 customers covering 71 retail grocery stores with terms ranging from one to 13 years. The minimum purchase requirements under these agreements varied from approximately 50% to 55% of the total retail sales of the grocery stores covered by the agreements. For fiscal 2003, these stores had total retail sales of approximately $744 million and total distribution purchases from us of approximately $369 million. When combined with sales to our own stores, these sales approximate 50% of our total Grocery Distribution sales volume.

Operating Segment Financial Data

          More detailed information about our operating segments may be found in Note 14 to the consolidated financial statements included in Item 8 below, which is herein incorporated by reference. All of our sales and virtually all of our assets are in the United States of America.

Marketing and Merchandising

          General. In fiscal 2003, we implemented changes to our organizational structure that are intended to better support our system-wide efforts to improve sales growth and profitability. These changes are also intended to improve the effectiveness of our retail and wholesale marketing and merchandising functions, and to advance our organization's customer orientation.

          In March 2003, we hired an experienced Executive Vice President of Marketing and Merchandising, charged with the expectation to improve the top line sales and gross margin performance of both our Retail and Grocery Distribution segments. This change is expected to improve our category management function by better coordinating our retail and distribution marketing and merchandising efforts. The heads of Marketing and Merchandising for both our Retail and Grocery Distribution segments now report to the Executive Vice President of Marketing and Merchandising. In addition, in May 2003, a new Vice President of Retail Merchandising and Director of Pharm Merchandising were hired.

          We believe these changes are fundamental to restoring retail operations to profitability, improving our competitive market position, driving better incremental sales growth and capturing more of the natural synergies that exist between our retail stores, customer stores and distribution operations.

          Private Label Brands. We currently market and distribute approximately 1,800 highly recognized private label brand items under three exclusive store brands: the "Spartan" brand, and two value brands, "HomeHarvest" and "Pharm."

          We believe that the Spartan brand product line, first introduced in 1954, is one of the most widely accepted and recognized private label brands in Michigan. Michigan consumers have come to expect high quality products from Spartan Stores at below national brand pricing. Our value brands, HomeHarvest and Pharm, are effective in combating limited assortment store competitors. These brands appeal to consumers who are looking for a consistent quality brand at a low price.

Competition

          Our Retail and Grocery Distribution segments compete with, among others, other grocery distributors, independently owned retail grocery stores, large chain stores that have integrated wholesale and retail operations, mass merchandisers, limited assortment stores and wholesale membership clubs, some of whom have greater resources than we do. The principal competitive factors in the retail grocery business include the location and image of the store; the price, quality and variety of the products; and the quality and consistency of service.

          We believe we have developed and implemented strategies and processes to meet competition in our Retail segment. We monitor planned store openings by our competitors and have established strategies for proactively responding to new competition. Our goal is to have a comprehensive plan to address new competition in place six months prior to a competitor's opening. Strategies to combat competition vary based on many factors, such as the competitor's format, strengths, weaknesses, pricing and sales focus.

          Our Retail and Grocery Distribution segments operate in highly competitive markets, which typically result in lower profit margins. Our Grocery Distribution segment competes with a number of national and regional distributors, some of whom have greater resources than we do. The primary competitive factors in the Grocery Distribution segment include price, product quality, variety and service.

Suppliers

          We purchase products from a large number of national, regional and local suppliers of name brand and private label merchandise. We have not encountered any material difficulty in procuring or maintaining an adequate level of products to serve our customers. No single supplier accounts for more than 8% of our purchases. We have enjoyed long'standing relationships with these business partners, based on trust, respect and integrity.

Intellectual Property

          We own valuable intellectual property, including trademarks and other proprietary information, some of which, including "Spartan," "Family Fare," "The Pharm," "HomeHarvest" and other related marks, are of material importance to our business.

Technology

          We invest in technology as a means of improving service to our customers and maximizing the efficiency of our operations. During the last two years, we have consolidated and standardized many of our systems across our businesses as we have consolidated the organization. Our focus during the last year has been to provide incremental functionality in our existing systems and to maximize the utilization of our current systems and information.

          Retail Systems. We completed the consolidation of multiple price management systems to a single system for all company-owned stores, we added enhanced functionality to our electronic payment system and we significantly enhanced our retail reporting system including specific functionality for shrink and margin management. Additionally, we completed the required changes in our pharmacies for compliance with the Health Insurance Portability and Accountability Act ("HIPAA").

          Supply Chain. We continued the upgrading of our warehouse management systems and began upgrading our onboard transportation management system.

          Financial Systems. We streamlined processes and enhanced controls for many aspects of our financial and retail systems.

          Human Resource Systems. We consolidated all associates to one benefits administration system and made other human resources reporting improvements. We completed the required changes in our Human Resource systems for compliance with HIPAA.

          Information Technology. During the last year we significantly improved our business continuity strategy and made many improvements in the security of our internal network and systems.

Subsidiaries

          Our Grocery Distribution segment consists primarily of our wholly owned subsidiaries, Spartan Stores Distribution, LLC and United Wholesale Grocery Company. We operate our Retail segment primarily through two wholly owned subsidiaries, Family Fare, LLC and Seaway Food Town, Inc. and their respective subsidiaries. L&L/Jiroch and J.F. Walker comprised our discontinued Convenience Distribution segment. Substantially all assets of L&L/Jiroch and J.F. Walker were sold in the first quarter of fiscal 2004. See "Discontinued Operations," above.

Associates

          We currently employ approximately 7,400 associates, approximately 4,100 of which are full-time and approximately 3,300 of which are part-time. These numbers do not include those employees that work for a discontinued operation as described above in "Discontinued Operations."

          Unions represent approximately 22% of our associates, with contracts for 927 distribution center and transportation associates expiring between April 2005 and October 2006, contracts for 27 distribution associates at our 12 cash and carry outlets expiring by location from 2004 to 2007 and contracts for 645 retail associates expiring between June 2003 and March 2005.

          We consider our relations with our union and non-union associates to be satisfactory and have not had any material work stoppages in the last five years.

Regulation

          We are subject to federal, state and local laws and regulations covering the purchase, handling, sale and transportation of our products. Several of our products are subject to federal Food and Drug Administration regulation. We believe that we are in substantial compliance with all Food and Drug Administration and other federal, state and local laws and regulations governing our businesses.

Forward-Looking Statements

          The matters discussed in this Item 1 include forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.

          We own real estate totaling approximately 2.6 million square feet under roof, including one shopping center and eight freestanding retail locations. Approximately 67,000 square feet is leased to customers that we supply and to other retailers. We also own certain non-operating real estate assets. Management estimates that the market value of our real estate is approximately $72 million and exceeds its book value by approximately $20 million.

Retail Segment Real Estate

          The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our retail grocery stores.

          In addition to the stores listed above, we own a 65% interest in a joint venture that operates a grocery store of approximately 45,700 square feet located in southeastern Michigan.

          The following table lists the retail banner, number of stores, geographic region, approximate total square footage under the banner, average store size (in square feet) and ownership of our deep discount drug stores.

Grocery Distribution Segment Real Estate

          The following table lists the location, approximate size and ownership of the facilities used in our Grocery Distribution segment.

          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.

          No matters were submitted to a vote of Spartan Stores' shareholders during the fourth quarter of fiscal 2003 through the solicitation of proxies or otherwise.

PART II

          Spartan Stores common stock is traded on the National Market System of The NASDAQ Stock Market under the trading symbol "SPTN."

          Stock sale prices are based on transactions reported on The NASDAQ Stock Market. Information on quarterly high and low sales prices for Spartan Stores' common stock appears in Note 15 to the consolidated financial statements and is incorporated herein by reference. At June 20, 2003, there were approximately 870 shareholders of record of Spartan Stores common stock (excluding participants in security position listings).

          During fiscal 2002 and 2003, we did not pay any dividends. The payment of future dividends will be determined by our board of directors. We anticipate that we will use any net earnings from our operations to repay debt and to acquire additional retail operations, and that we will not pay any dividends for the foreseeable future, even if we are permitted to do so under our senior secured credit facility.

          Our senior secured credit facility contains restrictions that do not allow us to pay future dividends or make a variety of other restricted payments. See the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 below for a more detailed discussion of these restrictions, as well as Note 8 to the consolidated financial statements.

          The information required by Item 201(d) of Securities and Exchange Commission Regulation S-K is incorporated herein by reference from the section entitled "Equity Compensation Plans" in Spartan Stores' definitive proxy statement relating to its annual meeting of shareholders to be held August 6, 2003.

          The following table provides selected historical consolidated financial information of Spartan Stores. The historical information was derived from our audited consolidated financial statements for and as of each of the five fiscal years ended March 27, 1999 through March 29, 2003. Fiscal 2001 was a 53-week year. Certain reclassifications have been made to the fiscal 1999 through fiscal 2002 selected financial data to conform to the fiscal 2003 presentation. As noted elsewhere in this Form 10-K, for all years presented, the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and all related financial and nonfinancial disclosures in the notes to the consolidated financial statements have been adjusted and the discontinued operations information is excluded, unless otherwise noted. See Notes 3 and 5 for additional information on discontinued operations and acquisitions occurring in the periods presented below.

(In thousands, except per share data)

Overview

          Spartan Stores is a leading regional grocery retailer and grocery distributor, operating principally in Michigan and Ohio. Spartan Stores was originally formed as a food distribution cooperative in 1917 but converted to a for-profit business corporation in 1973. We historically focused on the distribution of groceries and related merchandise to independently owned stores. However, since January 1999, we have completed several acquisitions of grocery store chains. We currently operate two business segments: Retail and Grocery Distribution.

          Our Retail segment operates 55 retail grocery stores in Michigan under the banners Family Fare Supermarkets, Glen's Markets, Great Day Food Centers, Prevo's Family Markets, Ashcraft's Markets and Madison Family Market and 21 deep discount drug stores in Ohio and Michigan under the banner The Pharm. Our retail grocery stores average approximately 38,000 square feet and have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores. Our deep discount drug stores average approximately 29,000 square feet and offer a unique combination of full'service pharmacy, general merchandise products and basic food offerings.

          Our Grocery Distribution segment provides approximately 40,000 products and 1,800 private label grocery and general merchandise items to approximately 400 stores, including 330 independently owned grocery stores and 76 company-owned stores. We provide many value-added services to our grocery distribution customers, including advertising, merchandising and other administrative services. We also operate 12 cash and carry outlets in Michigan and Ohio that serve approximately 2,800 convenience and smaller grocery stores.

          Our results of operations from period to period can be significantly impacted by fluctuations in the level of net sales between our business segments. Our Retail segment generally produces significantly higher gross margins as a percent of net sales than our Grocery Distribution segment. However, our Retail segment also generally incurs significantly higher selling, general and administrative ("SG&A") expenses as a percent of sales.

          The matters discussed in this Item 7 include forward-looking statements. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.

Results of Operations

          The following table sets forth items from our Consolidated Statements of Operations as a percentage of net sales: