=========================================================================== 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 21, 1997 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: 33-41791 SPARTAN STORES, INC. (Exact Name of Registrant as Specified in Its Charter) MICHIGAN 38-0593940 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 850 76TH STREET, S.W. P.O. BOX 8700 GRAND RAPIDS, MICHIGAN 49518 (Address of Principal Executive Offices) (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 19, 1997, the issuer had 11,934,310 outstanding shares of Class A Common Stock, $2 par value. _____________________ ===========================================================================
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> SPARTAN STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <CAPTION> FIRST QUARTER (12 WEEKS) ENDED ---------------------------------- JUNE 21, JUNE 22, 1997 1996 (UNAUDITED) (UNAUDITED) ------------ ------------ <S> <C> <C> NET SALES $565,738,939 $573,946,598 COSTS AND EXPENSES Cost of sales 509,132,523 518,315,281 Operating and administrative 51,695,060 51,311,062 Interest expense 2,306,499 2,264,839 Interest income (746,842) (924,774) Gain on sale of property and equipment (941,690) (1,175,071) ------------ ------------ TOTAL COSTS AND EXPENSES 561,445,550 569,791,337 ------------ ------------ EARNINGS BEFORE TAXES ON INCOME 4,293,389 4,155,261 TAXES ON INCOME 1,487,000 1,397,000 ------------ ------------ NET EARNINGS $ 2,806,389 $ 2,758,261 ============ ============ NET EARNINGS PER CLASS A SHARE $ .23 $ .22 WEIGHTED AVERAGE NUMBER OF CLASS A SHARES OUTSTANDING 12,049,080 12,361,470 DIVIDENDS DECLARED PER CLASS A SHARE $ .0125 $ .0125 </TABLE> -2-
<TABLE> SPARTAN STORES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS <CAPTION> JUNE 21, 1997 MARCH 29, (UNAUDITED) 1997 ------------ ------------ <S> <C> <C> ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 31,034,830 $ 34,198,752 Marketable securities 16,665,786 17,605,880 Accounts receivable 66,315,862 67,045,013 Refundable taxes on income 4,573,014 6,026,221 Inventories 76,179,759 85,209,192 Prepaid expenses 9,234,403 7,867,173 Deferred taxes on income 5,658,000 5,751,000 ------------ ------------ TOTAL CURRENT ASSETS 209,661,654 223,703,231 OTHER ASSETS 7,305,792 6,918,350 PROPERTY AND EQUIPMENT 311,300,493 308,996,573 Less accumulated depreciation and amortization 138,292,807 135,988,572 ------------ ------------ NET PROPERTY AND EQUIPMENT 173,007,686 173,008,001 ------------ ------------ TOTAL ASSETS $389,975,132 $403,629,582 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Notes payable $ 25,000,000 $ 33,500,000 Accounts payable 89,885,998 78,130,484 Insurance reserves 17,489,168 17,172,342 Current maturities of long-term debt 5,844,652 6,598,927 Current obligations under capital leases 607,275 593,078 Other current liabilities 19,639,371 27,035,106 ------------ ------------ TOTAL CURRENT LIABILITIES 158,466,464 163,029,937 -3-
DEFERRED GAIN ON SALE OF PROPERTY AND EQUIPMENT 418,017 213,198 DEFERRED TAXES ON INCOME 2,807,000 2,807,000 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,545,483 4,545,483 LONG-TERM DEBT 111,946,756 124,010,394 LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 1,614,935 1,765,996 SHAREHOLDERS' EQUITY Class A common stock, voting, par value $2 per share 24,115,840 24,065,700 Additional paid-in capital 18,767,927 18,406,969 Retained earnings 67,292,710 64,784,905 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 110,176,477 107,257,574 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $389,975,132 $403,629,582 ============ ============ </TABLE> -4-
<TABLE> SPARTAN STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> FIRST QUARTER (12 WEEKS) ENDED --------------------------------------- JUNE 21, JUNE 22, 1997 1996 (UNAUDITED) (UNAUDITED) ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,806,389 $ 2,758,261 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 4,814,904 4,421,245 Deferred taxes on income 93,000 (1,000) Gain on sale of property and equipment (941,690) (1,175,071) Change in assets and liabilities: Marketable securities 940,094 (10,896) Accounts receivable 729,151 (5,746,614) Refundable taxes on income 1,453,207 4,097,299 Inventories 9,029,433 4,144,995 Prepaid expenses (1,367,230) (370,736) Accounts payable 11,755,514 12,366,509 Rebates due to customers (2,234,280) 29,393 Accrued payroll and benefits (1,834,732) (762,308) Insurance reserves 316,826 (198,977) Other accrued expenses (3,326,723) (6,899,554) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 22,233,863 12,652,546 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (7,169,534) (14,244,828) Proceeds from the sale of property and equipment 3,377,589 4,482,437 Other (263,578) (3,653) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (4,055,523) (9,766,044) -5-
CASH FLOWS FROM FINANCING ACTIVITIES Changes in notes payable (8,500,000) (3,671,006) Proceeds from long-term borrowings 3,625,000 11,551,200 Repayment of long-term debt (16,442,912) (22,547,426) Reduction of obligations under capital leases (136,864) (137,441) Proceeds from sale of common stock 721,665 511,600 Common stock purchased (458,430) (1,795,400) Dividends paid (150,721) (154,147) ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (21,342,262) (16,242,620) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (3,163,922) (13,356,118) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,198,752 39,796,018 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF FIRST QUARTER $ 31,034,830 $ 26,439,900 ============ ============ </TABLE> -6-
<TABLE> SPARTAN STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <CAPTION> CLASS A ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS ----------- ----------- ----------- <S> <C> <C> <C> BALANCE - MARCH 30, 1996 $24,920,960 $19,622,472 $58,043,279 CLASS A COMMON STOCK TRANSACTIONS 801,410 shares purchased (1,602,820) (4,367,053) (2,355,162) 373,780 shares issued 747,560 3,151,550 NET EARNINGS 9,702,725 CASH DIVIDENDS - $.05 PER SHARE (605,937) ----------- ----------- ----------- BALANCE - MARCH 29, 1997 24,065,700 18,406,969 64,784,905 CLASS A COMMON STOCK TRANSACTIONS 43,660 shares purchased (87,320) (223,247) (147,863) 68,730 shares issued 137,460 584,205 NET EARNINGS 2,806,389 CASH DIVIDENDS - $.0125 PER SHARE (150,721) ----------- ----------- ----------- BALANCE - JUNE 21, 1997 $24,115,840 $18,767,927 $67,292,710 =========== =========== =========== </TABLE> -7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES The 1997 annual report contains a summary of significant accounting policies in the notes to consolidated financial statements. The Company follows the same accounting policies in the preparation of interim financial statements. ACCOUNTS RECEIVABLE Accounts receivable include the current portion of notes receivable and are shown net of allowances for credit losses of $2,730,000 and $3,160,000 at June 21, 1997 and March 29, 1997, respectively. INVENTORIES Inventories are stated at the lower of cost or market using the LIFO (last- in, first-out) method. If replacement cost had been used, inventories would have been $45,200,000 and $45,000,000 higher at June 21, 1997 and March 29, 1997, respectively. ACCOUNTS PAYABLE Accounts payable include $17,042,000 and $15,523,000 at June 21, 1997 and March 29, 1997, respectively, representing checks which have been issued and have not cleared the Company's controlled disbursing bank accounts. SHAREHOLDERS' EQUITY On May 28, 1997, the Board of Directors approved an amendment to the Restated Articles of Incorporation to increase the authorized capital stock to 20,000,000 shares of Class A common stock and 5,000,000 shares of Class B common stock and authorized a ten-for-one stock split for shareholders of record on May 31, 1997. The stock split was subject to approval of the amendment by the Company's shareholders. The amendment was approved by the shareholders and became effective on July 15, 1997. Accordingly, share and per share amounts have been restated throughout the consolidated financial statements. RECLASSIFICATIONS Certain reclassifications relating to service revenues and pass-through billings have been made to the prior year's financial statements to conform to the first quarter of fiscal 1998 presentation. Previously, service revenues were netted against the related costs and pass-through billings were recorded as sales and cost of sales. These reclassifications did not affect net earnings as previously reported. -8-
STATEMENT OF REGISTRANT The data presented herein is unaudited, but in the opinion of management includes all adjustments (which consist solely of normal recurring accruals) necessary for a fair presentation of the consolidated financial position of the Company and its subsidiaries at June 21, 1997 and the results of their operations and the changes in cash flows for the periods ended June 21, 1997 and June 22, 1996. These interim results are not necessarily indicative of the results of the fiscal years as a whole. CONTINGENCIES On August 21, 1996, the Attorney General for the State of Michigan filed an action in Michigan circuit court against the leading cigarette manufacturers operating in the United States, twelve wholesalers and distributors of tobacco products in Michigan (including three Company subsidiaries) and others seeking certain injunctive relief, the reimbursement of $4 billion in Medicaid and other expenditures incurred or to be incurred by the State of Michigan to treat diseases allegedly caused by cigarette smoking and punitive damages of $10 billion. Subsequently to the end of fiscal year 1997, two separate actions have been filed in the state courts in Tennessee on behalf of the individual plaintiffs and as a class action in one case and on behalf of the State of Tennessee and its taxpayers in the other case, and ten separate actions have been filed by individual plaintiffs in state courts in Pennsylvania, against the leading cigarette manufacturers operating in the United States and certain wholesalers and distributors, including a subsidiary of the Company. In these separate cases, the plaintiffs are seeking compensatory, punitive and other damages, reimbursement of medical and other expenditures and equitable relief. The Company believes that its subsidiaries have valid defenses to these legal actions. These actions will be vigorously defended. One of the cigarette manufacturers named as a defendant in each action has agreed to indemnify the Company's subsidiaries from damages arising out of these actions. Management believes that the ultimate outcome of these actions should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. Various other lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against the Company. 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, operating results or liquidity of the Company. -9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth items from the Company's Consolidated Statements of Earnings as percentages of net sales: <TABLE> <CAPTION> FIRST QUARTER (12 WEEKS) ENDED ------------------------------ JUNE 21, JUNE 22, 1997 1996 (UNAUDITED) (UNAUDITED) ------------- -------------- <S> <C> <C> Net sales 100.0% 100.0% Gross profit 10.0 9.7 Less: Operating and administrative expenses 9.1 8.9 Interest expense .4 .4 Interest income (.1) (.1) Gain on sale of property and equipment (.2) (.2) ----- ----- Total 9.2 9.0 ----- ----- Earnings before income taxes .8 .7 Taxes on income .3 .2 ----- ----- Net earnings .5% .5% ===== ===== </TABLE> NET SALES Net sales decreased $8.2 million or 1.4% for the first quarter of fiscal 1998 compared to the same period last year. The sales decrease occurred primarily in the Distribution segment as a result of the loss of a major customer of J.F. Walker Company, Inc. and continued competitive pressures, principally relating to prices of cigarette products. Insurance segment sales for the first quarter of fiscal 1998 were approximately the same as the comparable quarter last year. Real Estate and Finance segment revenues increased 17% to $3.0 million, due primarily to an increase in property rentals. -10-
GROSS PROFIT Gross profit as a percentage of net sales increased to 10.0% for the first quarter of fiscal 1998 compared to 9.7% for the same period last year. The improvement in gross profit during the first quarter of fiscal 1998 was due primarily to an increase in service fee income for certain services performed in the Company's Distribution segment. OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses as a percentage of net sales were 9.1% in the first quarter of fiscal 1998 compared to 8.9% in the first quarter of fiscal 1997. The increase in operating and administrative expenses in the first quarter of fiscal 1998 was due primarily to costs incurred by the Company to upgrade its software to be compliant with the year 2000. The Company has budgeted approximately $6.0 million over the next two fiscal years to upgrade its software to accommodate the years beginning with 2000. INTEREST EXPENSE AND INCOME Interest expense for both the first quarter of fiscal 1998 and 1997 was $2.3 million. Interest income decreased approximately $.2 million during the first quarter of fiscal 1998 compared to the same period last year. The reduction in interest income was due primarily to a $2.0 million decrease in notes receivable. In addition, accounts receivable decreased approximately $7.9 million due to a more aggressive enforcement of the Company's credit policy, which resulted in a decrease in finance fees earned on past due accounts. GAIN ON SALE OF PROPERTY AND EQUIPMENT The gain on sale of property and equipment of $.9 million in the first quarter of fiscal 1998 was due primarily to the sale of a retail property. The gain of $1.2 million reported for the first quarter of fiscal 1997 was due primarily to the sale of the distribution facility of Capistar, Inc. ("Capistar"), a former subsidiary of the Company. NET EARNINGS Net earnings increased 1.7% over the comparable quarter last year. Net earnings in the Distribution segment were $1.5 million for the first quarter of fiscal 1998 compared to $1.9 million for the same period last year. The decrease in net earnings in the Distribution segment for the first quarter of fiscal 1998 was due primarily to the gain realized on the sale of the Capistar facility in the first quarter of fiscal 1997. Net earnings in the Insurance segment for the first quarter of fiscal 1998 were $.4 million, which were approximately the same as last fiscal year. Net -11-
earnings in the Real Estate and Finance segment were $.9 million for the first quarter of fiscal 1998 compared to $.4 million for the same period last year. The improvement in net earnings in the Real Estate and Finance segment for the first quarter of fiscal 1998 was due primarily to the gain on the sale of a retail facility. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities, one of the Company's primary sources of liquidity, was $22.2 and $12.7 million for the first quarter of fiscal 1998 and 1997, respectively. The improvement in net cash provided by operating activities for the first quarter of fiscal 1998 compared to the same period last year was due primarily to a reduction of accounts receivable and inventories. Cash provided by operating activities during the first quarter of fiscal 1998 was used primarily to repay long-term debt in the amount of $16.4 million. Net cash used in investing activities, primarily purchases of property and equipment, was $4.1 million for the first quarter of fiscal 1998 compared to $9.8 million for the comparable quarter last year. The reduction of cash used in investing activities during the first quarter of fiscal 1998 compared to the same period last year was due primarily to lower levels of capital expenditures of BASE (Business Automation Support Environment) projects. Management expects that fiscal 1998 capital expenditures will be approximately $25 million. CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained in the report, the matters discussed in this report include forward looking statements which involve risk and uncertainties including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission. -12-
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS For a discussion of certain litigation, reference is made to "Contingencies" in the Notes to Consolidated Financial Statements included in Part I, Item 1, of this report, which is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES For a discussion of an amendment to the Company's Restated Articles of Incorporation, reference is made to Part II, Item 5, of this report, which is incorporated herein by reference. ITEM 5. OTHER INFORMATION On May 28, 1997, the Board of Directors declared a ten-for-one stock split pursuant to a share dividend payable to shareholders of record on May 31, 1997, subject to the shareholders approving a proposed increase in the authorized shares of common stock of the Company at the Annual Meeting of Shareholders on July 15, 1997. At the Annual Meeting, the shareholders approved an amendment to the Company's Restated Articles of Incorporation to increase the number of authorized shares of Class A common stock from 2,000,000 shares to 20,000,000 shares and the number of authorized shares of Class B common stock from 500,000 shares to 5,000,000 shares. The amendment also decreased the par value per share of Class A common stock from $20 per share to $2 per share. The amendment was approved by 905,901 shares voting for, 1,916 shares voting against, and 8,499 shares abstaining from vote on the proposed amendment. The amendment became effective on July 15, 1997. At the Annual Meeting, the shareholders also elected Glen A. Catt, Parker T. Feldpausch, Dorothy A. Johnson and James B. Meyer as directors of the Company, for terms expiring in 2000. The votes for and withheld with respect to each director were as follows: -13-
<TABLE> <CAPTION> VOTES FOR VOTES WITHHELD --------- -------------- <S> <C> <C> <C> Glen A. Catt 915,833 483 Parker T. Feldpausch 915,833 483 Dorothy A. Johnson 915,833 483 James B. Meyer 915,833 483 </TABLE> The directors whose terms continued after the meeting are as follows: Roger L. Boyd, James G. Buick, John S. Carton, Ronald A. DeYoung, Martin P. Hill, Donald J. Koop, Dan R. Prevo, and Russell H. VanGilder, Jr. The Company consummated the ten-for-one stock split pursuant to a share dividend paid on July 15, 1997, to shareholders of record on May 31, 1997. Mr. Patrick M. Quinn retired from the Company on July 15, 1997. Mr. Quinn served as a director and as Chief Executive Officer of the Company from 1985 until his retirement and as President of the Company from 1985 to 1996. Effective July 15, 1997, the Board of Directors appointed James B. Meyer, formerly President and Chief Operating Officer, as the Company's President and Chief Executive Officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following documents are filed as exhibits to this report on Form 10-Q: EXHIBIT NUMBER DOCUMENT -------------- -------- 27 Financial Data Schedule (b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed during the period for which this report is filed. -14-
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 5, 1997 SPARTAN STORES, INC. (Registrant) By /S/CHARLES B. FOSNAUGH Charles B. Fosnaugh Senior Vice President Business Development and Finance (Principal Financial Officer and duly authorized signatory for Registrant) -15-
EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT - -------------- -------- 27 Financial Data Schedule