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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended March 29, 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 Identification No.)
of Incorporation or Organization)
850 76TH STREET, S.W.
P.O. BOX 8700
GRAND RAPIDS, MICHIGAN 49518
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 31, 1997, was $92,851,080.
The number of shares of the registrant's Class A Common Stock, $20 par
value, outstanding at May 31, 1997, was 1,204,354 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
Spartan Stores, Inc., and its subsidiaries, distribute grocery
and related products to retail stores located in Michigan, Illinois,
Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, and West Virginia. As
used in this Report, the term "Spartan" refers to Spartan Stores, Inc.,
without its subsidiaries, and the term "Company" refers to Spartan and its
subsidiaries. The owners or operators of the retail stores served by the
Company are referred to as "Customers."
Grocery store Customers served by the Company range from single
stores to supermarket chains with as many as 26 stores. In addition,
Spartan's subsidiaries distribute candy, tobacco, and other grocery
products to approximately 8,600 convenience stores and other retail
locations. The Company conducts a predominant portion of its business with
retail stores located in Michigan. According to industry sources, the
Company is the ninth largest wholesaler of grocery and related products in
the United States.
In 1917, a group of independent food retailers incorporated the
Grand Rapids Wholesale Grocery Company, seeking to gain lower food prices
and other economies of scale by purchasing together on a cooperative basis.
In 1957, the name was changed to Spartan Stores, Inc., to take advantage of
the "Spartan" name, which is widely recognized in Michigan. Although
Spartan was incorporated as a cooperative, in 1973 Spartan was converted to
a Michigan business corporation.
Spartan is authorized to sell its shares of common stock to
Customers of Spartan, employees of the Company ("Associates"), and other
persons designated by the Board of Directors from time to time ("Approved
Holders"). In addition, pursuant to the Bylaws, Spartan may issue shares
of its Class A Common Stock, $20 par value ("Class A Shares"), in
connection with the acquisition of businesses, assets, or capital stock of
another corporation. On May 28, 1997, the Board of Directors designated as
Approved Holders (i) any shareholder or other equity owner of any
Shareholder-Customer who owns 5 percent or more of the equity interests in
the Shareholder-Customer; (ii) any member of the Board of Directors of
Spartan; or (iii) any spouse of an Associate, any biological or adopted
child of an Associate, if the child is 21 years of age or younger, or any
trust created by the Associate or his or her spouse which is established
for the benefit of the Associate or the spouse or any such child of the
Associate.
The Company operates on a 52-53 week fiscal year, with the fiscal
year ending on the last Saturday in March. The principal executive offices
of Spartan are located at 850 76th Street, S.W., P.O. Box 8700, Grand
Rapids, Michigan 49518. Spartan's telephone number is (616) 878-2000.
DESCRIPTION OF BUSINESS.
GENERAL
The Company operates in three reportable business segments:
distribution; insurance sales and underwriting; and real estate and
finance. The Company's largest business segment, distribution, includes
the distribution of grocery and related products. The distribution
operations include product sales to independently owned and operated food
stores and convenience stores as well as services directly related to the
operation of those stores. Insurance sales and underwriting includes
commission and premium income generated by sales to Customers and others.
Real estate and finance represents revenues from financing and real estate
activities with Customers and other businesses. Spartan owns seven
subsidiaries which distribute products or provide support, insurance, and
services to Customers and fulfill other functions for the Company.
Financial information on the business segments is set forth under
the caption "Business Segment Information" in the notes to the Consolidated
Financial Statements of the Company included on pages 41 through 42 in
this Report.
BUSINESS STRATEGY
In the highly competitive food wholesaling industry, the
Company's current business strategy is to remain exclusively a full-service
wholesaler of grocery and related products. The Company recognizes that
many food wholesalers, including several companies that are direct
competitors of the Company, have developed and own "corporate stores." The
Company's present plans do not anticipate any significant presence in
retailing, but instead the Company plans to concentrate on wholesaling to
avoid competing with its Customers. The Company may, however, from time to
time determine to purchase one or more retail store locations.
The Company's business strategy emphasizes a philosophy of
service to the Customers. Management of the Company believes that by
providing grocery retailers with a broad array of products and services,
these retailers should be better able to grow and compete at the retail
level. This growth and success of its Customers at the retail level
should, in turn, enable the Company to grow and prosper as well.
In addition, Spartan believes that Customers who are also
shareholders of Spartan ("Shareholder-Customers") gain an important
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competitive advantage by access to the "Spartan" name and image. The
"Spartan" name and logo are widely recognized by consumers in Michigan and
other parts of the Midwest who have come to associate the "Spartan" name
with service, selection, and quality in their grocery shopping.
Substantially all stores supplied by Spartan display the "Spartan" name and
logo on their doors, and some stores use the "Spartan" name prominently in
store signs and advertising.
DISTRIBUTION
GENERAL
Spartan is a full-service distributor of grocery and related
products, and provides its Customers with a selection of over 50,000 items,
including dry grocery, produce, dairy products, meat, frozen food, tobacco
products, health and beauty care items, and fresh fish and seafood.
Spartan supplies its Customers with both nationally advertised products and
with over 1,800 "Spartan" private label items. Spartan ships the products
from Spartan's main warehouse and distribution center in Grand Rapids,
Michigan, and from a warehouse in Plymouth, Michigan.
Several subsidiaries of the Company operate and are included in
the distribution business segment. L & L/Jiroch Distributing Company
("L & L/Jiroch") and J.F. Walker Company, Inc. ("J.F. Walker") are
wholesale distributors of candy, tobacco, and other grocery products to
approximately 8,600 convenience stores and other retail locations in
Michigan, Illinois, Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, and
West Virginia. United Wholesale Grocery Company ("United Wholesale")
operates 13 cash and carry outlets in Michigan and Ohio. Capistar, a
wholesale distributor of grocery and other products, closed its wholesale
operation in February 1996. In May 1996, Capistar sold its warehouse
located in Lansing, Michigan. Approximately 40 percent of the volume of
Capistar's business is now supplied by Spartan or L & L/Jiroch.
In February 1996, Spartan introduced a cost-plus pricing program
for the distribution of its products and services to Customers. The cost-
plus pricing program marks a substantial departure from the variable markup
pricing with rebate program that Spartan used previously. Through the
cost-plus pricing program, Spartan prices products, services, and
transportation as separate elements. Spartan intends the program to
reflect accurately the different costs in warehousing and distributing
various commodities to assist Spartan and its Customers to work together to
reduce costs.
Cost-plus pricing consists of two parts. The first part is the
"cost," which is generally the cost that the manufacturer charges Spartan,
subject to definitions and exceptions in the program. The second part is
the "plus," which is a charge generally consisting of: (i) a fixed amount
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per case times the number of cases on the invoice; (ii) a percentage of the
total invoice product billing; (iii) a transportation charge based on a
transportation pricing schedule that reflects Spartan's general
transportation expenses; and (iv) a charge for assets used. Similarly,
services are priced generally at the break-even cost of the service plus a
charge for any assets used in providing the service.
Spartan, itself and through its subsidiaries, provides Customers
with a broad spectrum of services that the Company believes make it
possible for the retailers to compete with large competitors, such as
supermarket chains. Customers decide individually which services to use
and are charged a fee for the services used.
SITE IDENTIFICATION AND MARKET ANALYSIS. The Company assists
Customers in identifying potential new store locations. Once the Company
or a Customer has identified a potential site, the Company will undertake
or commission an independent site feasibility analysis of the location,
which includes a study of the demographics of the general area, the
supermarket competitors located in the primary and secondary trading areas,
and the volume a new store should expect to achieve at the location.
STORE PLANNING AND DEVELOPMENT. The Company assists Customers in new
store development, from site planning through construction, including
financing and lease negotiations, store layout, space management, product
display, and promotion. In addition, services available from the Company
include engineering support, contracting assistance, layout strategy,
front-end design and setup, and assistance in leasing space to other
commercial tenants. Similar services are available to Customers who desire
to remodel existing stores. Other services include consulting services on
management operations and business valuations.
MARKETING, PROMOTION, AND ADVERTISING ASSISTANCE. The Company offers
its Customers the services of its in-house advertising department, which
include developing marketing strategies, designing and producing signs and
flyers, and coordinating print and media advertising campaigns. Customers
may use the Company's print shop to print signs, flyers, and other items.
In addition, the Company offers Customers the opportunity to participate in
printed, radio, and television advertising programs conducted in most major
media markets.
INFORMATION SERVICES. The Company provides information services and
customized software programs to Customers using a direct computer link to
many of its Customers' stores. The Company can provide Customers with a
product and price file for products. In addition, Customers may order
inventory directly from the Company using their store-to-warehouse computer
link-up and order entry system.
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ACCOUNTING AND TAX PREPARATION SERVICES. The Company provides a wide
array of accounting services to Customers ranging from preparing monthly
and annual financial reports to preparing tax returns.
HUMAN RESOURCE SERVICES. The Company offers an extensive variety of
human resource services to its Customers. The services include:
recruiting; interviewing and staffing assistance; benefit program planning;
handbook preparation, design, and printing; labor relations assistance;
personnel record keeping; training; and development. The services listed
above, as well as many others, are provided on an individual basis and are
tailored to meet the needs of each Customer.
COUPON REDEMPTION AND PRODUCT RECLAMATION. The Company provides
coupon redemption services, making it possible for retailers to send all
consumer value coupons directly to the Company for processing of refunds
from manufacturers. In addition, the Company operates a 20,300 square-foot
product reclamation center to handle all damaged products that Customers
may return. Damaged products are returned to manufacturers, where
appropriate, and credits received from manufacturers are then passed along
to the Customers.
INSURANCE SERVICES
Through its subsidiaries, the Company offers insurance for
Customers and their employees, and employees of the Company. Customers are
offered coverage for fire and other casualties, liability, automobile,
fidelity, theft, bonds, workers' compensation, business interruption, and
group health plans. In addition, individuals are offered automobile and
homeowners coverage. Shield Insurance Services, Inc. ("Shield"), and
Shield Benefit Administrators, Inc., a wholly owned subsidiary of Shield,
provide insurance brokerage services and third-party claims administration
and services. Spartan Insurance Company Ltd. ("Spartan Insurance")
provides insurance underwriting for Customers. Spartan Insurance, which is
incorporated and licensed in Bermuda, issues policies of another carrier
through a fronting agreement. Under this agreement, Spartan Insurance
insures some of the coverage limits and reinsures with reinsurance
companies the balance of the coverage limit. Shield services the insurance
programs offered by Spartan Insurance.
REAL ESTATE AND FINANCE
The Company may loan funds to Shareholder-Customers to be used to
develop new stores or expand or remodel existing stores. For qualified
Shareholder-Customers, the management of Spartan may approve loans of up to
$100,000. Loans in excess of $100,000 are recommended by management and
approved by the Board of Directors of Spartan.
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As of March 29, 1997, the Company had 52 loans outstanding to
Shareholder-Customers. Loans are collateralized by the inventory,
facilities, or equipment financed, and some loans may be collateralized by
Class A Shares or other additional assets or personal assets or guaranties
of equity owners of the Customer.
Loans currently are made only on a floating rate basis, based on
the prime rate. Most loans to retailers from the Company carry interest
rates from prime plus 1/2 percent to prime plus 3 percent. Maturity dates
on the loans range from 1997 to 2004. As of the fiscal years ended March
1997, 1996, and 1995, the Company had outstanding loans to Customers
totaling $9,771,108, $11,663,457, and $9,728,580, respectively. Over the
last 15 years, the Company has not experienced significant aggregate
losses on loans to Customers. Impaired loans totaled approximately
$2,400,000 at March 29, 1997, including the current portion, with related
allowances of $1,600,000. The estimated fair market value of the loans
approximates the net carrying value at March 29, 1997.
Market Development Corporation ("Market Development"), a
subsidiary of Spartan, owns 29 retail grocery facilities or sites that are
leased to Customers and others and leases 16 other sites for sublease to
Customers.
The Company finances its direct investment in shopping centers or
new retail food stores through internally generated capital and borrowed
funds.
COMPETITION
The grocery and convenience store industries are characterized by
intense competition and low profit margins. The principal methods of
competition in the grocery industry are price, product quality and variety,
and service. The principal methods of competition in the convenience store
industry are price and product quality, and to a lesser extent, service.
The Company believes that the Company and its Customers are competitive in
their markets. However, the Company competes with a number of grocery and
convenience store wholesalers and with a number of other businesses that
market their products directly to food retailers, including companies
having greater assets and larger sales volume than the Company. Customers
compete with other retailers and with several large chain stores which have
integrated wholesale and retail operations. Customers also compete with
mass merchandisers, limited assortment stores, wholesale membership clubs,
convenience stores, shop-at-home services, restaurants, and fast food
businesses. The Company's success is in large part dependent upon the
ability of its Customers to compete with the larger grocery store and
convenience store chains. Competition in Michigan and the other states
served by the Company has been, and continues to be, aggressive.
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In its eight-state market area of Michigan, Illinois, Indiana,
Kentucky, Ohio, Pennsylvania, Tennessee, and West Virginia, the Company
competes at the wholesale level with a number of larger and smaller food
wholesalers, including Super Valu Stores, Inc.; Roundy's, Inc.; Nash Finch
Company; Foodland Distributors (a joint venture between Wetterau, Inc. and
the Kroger Company); and S. Abrahams and Sons, Inc.
Customers compete with supermarket chains, other independent
retailers, restaurants, fast food businesses, and convenience stores at the
retail level. Among the largest supermarket chains that compete with
Customers are Meijer, Inc.; The Great Atlantic and Pacific Tea Company
(A&P); Borman's, Inc. (a wholly owned subsidiary of A&P); and the Kroger
Company. Customers also compete with members-only shopping and discount
clubs. Among the largest such clubs that compete with Customers is Sam's
Club (a unit of Wal-Mart Stores, Inc.).
According to industry sources, the market share of groceries sold
by Shareholder-Customers is approximately 25 percent in Michigan,
consisting of approximately 49 percent in Western Michigan (a 26 county
market area), 13 percent in Eastern and Southern Michigan (a 24 county
market area), and 65 percent in Northern Michigan (an 18 county market
area).
The insurance industry also is highly competitive. The Company
believes that it is competitive, but many competitors may have far greater
financial and other resources than those of the Company.
SUPPLIERS
The Company purchases its products from a large number of
national, regional, and local suppliers of name brand and private label
merchandise. The Company is dependent upon these suppliers for brand name
products. However, the Company has not encountered difficulty in procuring
or maintaining an adequate level of products to service its Customers.
REGULATION
The Company is subject to federal, state, and local laws and
regulations covering the purchase, handling, sale, and transportation of
its products, and is subject to the jurisdiction of the federal Food and
Drug Administration ("FDA"). Management believes that the Company is in
material compliance with all FDA and other federal and state laws and
regulations governing its businesses.
SHAREHOLDER-CUSTOMERS
At March 29, 1997, Spartan was the primary supplier to 447 retail
food stores operated by 232 shareholders of the Company. As of such date,
the average annualized purchases per store was $3,910,170.
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While the number of stores supplied by Spartan has not changed
significantly during the past seven years, the average weekly purchases by
Shareholder-Customers has increased. In addition, Spartan's largest
Shareholder-Customers grew substantially. The five largest Shareholder-
Customers operated a total of 80 stores in 1990, and a total of 91 stores
as of March 29, 1997.
Spartan supplies a diverse group of independent store operators
ranging from single stores to supermarket chains with as many as 26 stores.
Management believes that the diverse nature of the Customers it now
supplies helps to insulate Spartan from any potential significant adverse
effects of losing a single large Shareholder-Customer or from potential
adverse economic conditions. Spartan does not believe that its success is
dependent upon maintaining the supply business of any one Shareholder-
Customer. Spartan's 10 largest Shareholder-Customers accounted for
approximately 48 percent of its total net sales for fiscal year 1997, but
no single Shareholder-Customer accounted for more than 8 percent
of Spartan's total net sales. In the last five years, no Shareholder-
Customer who was among the 10 largest Shareholder-Customers has terminated
all of its business with Spartan to associate with another distributor.
ASSOCIATES
As of March 29, 1997, the Company employed approximately 3,100
Associates, of which approximately 1,100 were represented by several
unions. Certain warehouse and transportation Associates are represented by
different Teamsters Union locals, with contracts expiring in 1997 through
2001. The Company considers its relations with all Associates to be
satisfactory, and has not had any work stoppages in the last five years.
REQUIRED INVESTMENT POLICY
The Board of Directors of Spartan has adopted a policy which
requires Shareholder-Customers to purchase and hold a minimum investment
(the "Required Investment") in the Class A Shares. From time to time, the
Board may change the minimum investment and other terms of the Required
Investment policy.
If a Shareholder-Customer no longer purchases grocery and related
products from Spartan, it is Spartan's policy (but not a contractual
obligation) to redeem, at the Shareholder-Customer's request, that number
of Class A Shares then held by the Shareholder-Customer with an aggregate
Trading Value (see below) which equals the Shareholder-Customer's Required
Investment as of the date the Shareholder-Customer ceased purchasing from
Spartan. Payment for such redeemed Class A Shares is made in six equal
installments over a five-year period.
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In addition to Class A Shares sold to Shareholder-Customers to
satisfy the applicable Required Investment, Spartan offers all Shareholder-
Customers the opportunity to purchase Class A Shares at any time and from
time to time. Spartan sells the Class A Shares at the Trading Value in
effect at the time of the purchase.
TRADING VALUE
The price at which Shareholder-Customers must acquire Class A
Shares from Spartan is the "Trading Value." The Board of Directors
customarily establishes the Trading Value once a year, based on the
Company's financial condition, the results of its operations, operating
trends, market conditions, the state of the economy, and such other factors
as the Board deems appropriate. No specific formula is used to set the
Trading Value. Effective June 22, 1997, the Trading Value was established
at $113 per share. During the fiscal years ended March 1997, 1996, and
1995, the Trading Value was $105, $100, and $93 per share, respectively.
CONCENTRATION REBATES
In January 1996, the Board adopted a policy for Spartan to pay in
fiscal year 1997 to its Customers a concentration rebate based upon each
Customer's purchases from the Company as a percentage of the Customer's
total retail sales (the "Concentration Rebate"). The concentration
brackets that earned a Concentration Rebate began at 40 percent and were
capped at the level of 60 percent or greater. Concentration Rebate amounts
were weighted toward the higher concentration brackets. The total
Concentration Rebate paid in fiscal year 1997 was $4.2 million. The
Company does not expect to pay Concentration Rebates in fiscal year 1998.
TERMS OF SALE AND BAD DEBT EXPERIENCE
The Company furnishes to its Customers in the distribution
segment weekly statements of accounts. Statements include deliveries
through and including the date of the statement. Payment is due within
seven days from date of the statement, and those not paid within seven days
are considered delinquent. Additional deliveries occur during this time
which are billed on a subsequent statement. The timing of payments varies
among Customers, but the Company generally may have receivables outstanding
at any given time which average up to two week's sales. The Company
believes that it adequately monitors its outstanding receivables, and bad
debt expenses have not been material to the Company's operations.
ITEM 2. PROPERTIES
Spartan owns approximately 1,300,000 square feet of warehouse,
distribution, and office space located on 211 acres in Grand Rapids,
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Michigan. Spartan supplies primarily its West Michigan Customers from this
main warehouse and distribution center. The center is located within one
mile of U.S. 131, a main artery that links Grand Rapids with Kalamazoo on
the south and connects with Interstate 96, one of the major east-west
arteries serving Western Michigan and leading east into the Detroit area.
Approximately 72 acres of the 211-acre complex in Grand Rapids are
presently vacant land.
The main warehouse and distribution center in Grand Rapids
includes a general merchandise warehouse of approximately 233,000 square
feet; refrigerated space of approximately 327,000 square feet; dry grocery
space of approximately 585,000 square feet; general office space, including
a print shop, of approximately 107,000 square feet; and transportation and
salvage buildings of approximately 55,000 square feet. Spartan leases a
403,000 square-foot warehouse, garage, and office complex in Plymouth,
Michigan, a western suburb of Detroit. This warehouse is used to supply
its Customers located in the greater Detroit area and in Eastern Michigan.
Shareholder-Customers are supplied by a fleet of approximately 135
tractors, 224 conventional trailers, and 115 refrigerated trailers.
Deliveries by Spartan can occur as often as daily for large stores, or as
infrequently as weekly for smaller stores.
Spartan also owns a Reclamation Center/Support Services complex
in Charlotte, Michigan consisting of an approximately 11 acre site
containing two warehouses totaling 80,000 square feet. In addition,
Spartan leases for various purposes 80,000 square feet of warehouse space
in Grand Rapids, Michigan and a trailer relay station in Kalkaska, Michigan
which consists of four trailer parking stations in a secured area.
L & L/Jiroch owns approximately 180,000 square feet of warehouse
and office space located in Wyoming, Michigan, to service its Customers. L
& L/Jiroch moved into its current space in November 1995. L & L/Jiroch
leases approximately 107,700 square feet of space also located in Wyoming,
Michigan, which it formerly used as warehouse and office space. L &
L/Jiroch subleased approximately 56,000 square feet of this leased space in
1996 and intends to sublease the remaining space.
Market Development owns approximately 1,967,400 square feet of
space that it leases to Customers and other retailers, consisting of
approximately 1,669,500 square feet of grocery retail space and
approximately 297,900 square feet of other retail space. In addition,
three developments are in the planning stages for retail Customer and
shopping center leasing.
The square footage of lease space includes 11 shopping centers,
located in Brighton, Michigan (78,000 square feet of retail space); Cascade
Township, Michigan (90,000 square feet of retail space); Fenton, Michigan
(77,300 square feet of retail space); Fremont, Michigan (41,000 square feet
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of retail space); Huntington, Indiana (54,000 square feet of retail space);
Kentwood, Michigan (78,000 square feet of retail space); Ludington,
Michigan (43,000 square feet of retail space); Sterling Heights, Michigan
(101,424 square feet of retail space); Stevensville, Michigan (61,000
square feet of retail space); Ortonville, Michigan (53,000 square feet of
retail space); and Three Rivers, Michigan (67,000 square feet of retail
space) (the "Shopping Centers"). All Shopping Centers are substantially
full and each Shopping Center is anchored by a lease with a retail grocery
store, all but one of which is a Shareholder-Customer. In addition, Market
Development owns vacant land in Canton, Milford, and Macomb Townships,
Michigan. Market Development plans to sell the vacant land to developers
to build a supermarket at each location for a Shareholder-Customer.
Market Development owns 29 retail grocery store facilities or
sites (including those leased in the Shopping Centers) that are leased to
Customers, with terms expiring from 1997 to 2016. Aggregate lease rental
income received for the grocery stores was $6,496,000, $6,599,000, and
$5,760,000 in fiscal years 1997, 1996, and 1995, respectively.
Market Development owns one vacant property located in Goshen,
Indiana. Market Development acquired this property in January 1996, in
exchange for property that Market Development formerly owned in Logansport,
Indiana. The Goshen site is on the market to be sold.
Currently, Market Development is planning to sell a number of
retail sites to Shareholder-Customers as part of a portfolio reduction
program to provide flexibility for future financing and growth
opportunities for Spartan Customers.
In addition, Market Development leases 16 sites for sublease to
Customers. Under this program, Market Development has leased real estate
with lease terms expiring from 1997 to 2016. Aggregate lease rental income
received pursuant to the subleases was $2,471,000, $1,765,000, and
$1,490,000 in fiscal years 1997, 1996, and 1995, respectively. Site lease
rental expenses were $2,361,000, $1,644,000, and $1,380,000 for fiscal
years 1997, 1996, and 1995, respectively. All stores are owned and leased
to Customers and all stores leased and subleased to Customers are in all
material respects operating according to required lease terms.
J.F. Walker leases 13 locations totaling approximately 158,000
square feet of warehouse and distribution space at its locations in
Michigan, Indiana, Kentucky, Ohio, Pennsylvania, and Tennessee to service
its customers. J.F. Walker also owns two locations totaling approximately
97,500 square feet of warehouse and distribution space. During fiscal year
1996, J.F. Walker sold three locations totalling approximately 53,000
square feet of space.
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United Wholesale operates 13 "cash and carry" wholesale grocery
facilities, 12 of which are located in Michigan, and one of which is
located in Ohio. United Wholesale owns 10 and leases three of these retail
outlets, which have a total of approximately 246,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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, 12 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. Subsequent 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 a
class action in one case and on behalf of the State of Tennessee and its
taxpayers in the other case, 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.
Spartan and its subsidiaries are parties, as plaintiff or
defendant, to various other legal proceedings incidental to their
businesses. In the opinion of management, such matters are not,
individually or in the aggregate, material to the Company's financial
condition or results of operations. All such legal proceedings arose in
the ordinary course of the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION.
There is and has been no established public trading market for
Spartan's securities, including the Class A Shares. Spartan does not
expect an active market for the Class A Shares to develop. In addition,
although Spartan has a policy to redeem Class A Shares under certain
circumstances, Spartan is not obligated to do so. Only limited classes of
persons are eligible to hold Class A Shares.
A holder may transfer the Class A Shares only to: (i) a
Shareholder-Customer who continues to purchase from Spartan grocery and
related products; (ii) an Associate; (iii) a Qualified Holder; or (iv) an
Approved Holder. On May 28, 1997, the Board of Directors designated as
Approved Holders (i) any shareholder or other equity owner of any
Shareholder-Customer who owns 5 percent or more of the equity interests in
the Shareholder-Customer; (ii) any member of the Board of Directors of
Spartan; or (iii) any spouse of an Associate, any biological or adopted
child of an Associate, if the child is 21 years of age or younger, or any
trust created by the Associate or his or her spouse which is established
for the benefit of the Associate or the spouse or any such child of the
Associate.
The Board of Directors from time to time, usually on an annual
basis, establishes the Trading Value for the Class A Shares. The Board
determines the Trading Value, in its sole and absolute discretion, based on
the Company's financial condition, results of operations, operating trends,
market conditions, the state of the economy, and such other factors as the
Board deems appropriate. During the fiscal year ending March 29, 1997, the
Trading Value was $105 per share. However, effective June 22, 1997, the
Trading Value has been established at $113 per share.
Spartan is authorized to issue 500,000 shares of Class B Common
Stock ("Class B Shares") with such preferences, limitations, and voting,
distribution, dividend, liquidation, conversion, participation, redemption,
and other rights as the Board may determine before issuance of the shares.
The Board of Directors may authorize and issue one or more series of Class
B Shares with preferences and rights superior to the rights of the holders
of the Class A Shares. As of the date of this Report, no Class B Shares
are outstanding.
On May 28, 1997, the Board of Directors authorized a ten-for-one
stock split pursuant to a share dividend payable to shareholders of record
on May 31, 1997, and approved an amendment to the Articles of Incorporation
-13-
to increase the authorized capital stock from 2,000,000 to 20,000,000 Class
A Shares and from 500,000 to 5,000,000 Class B Shares. The amendment also
would reduce the par value of the Class A Shares from $20 per share to $2
per share. The stock split is subject to approval of the amendment by the
Company's shareholders. Upon payment by the Company of the share dividend
pursuant to the stock split, the Trading Value will be reduced from $113
per share to $11.30 per share.
HOLDERS.
As of May 31, 1997, there were approximately 402 record holders
of the Company's Class A Shares. There were no holders of the Company's
Class B Shares.
DIVIDENDS.
For at least 20 years, the Board of Directors has declared, and
Spartan has paid, a regular quarterly dividend. The amount of such
quarterly dividends for each of the three fiscal years in the period ended
March 29, 1997, was $0.125 per share. While the Board of Directors expects
to continue to declare dividends quarterly, future dividends will depend on
earnings, capital requirements, financial conditions, and other relevant
factors. Certain loan agreements to which Spartan is a party contain
covenants which restrict the payment of dividends or other distributions to
shareholders in the event of a default of the agreement or in excess of
permitted amounts. As of March 29, 1997, under the most restrictive of
these agreements, Spartan had approximately $12,000,000 available for the
payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information presented below
as of and for the years ended March 29, 1997, March 30, 1996, March 25,
1995, March 26, 1994, and March 27, 1993, has been derived from
consolidated financial statements, and should be read in conjunction with
the consolidated financial statements and related notes, for each of the
three years in the period ended March 29, 1997, audited by Deloitte &
Touche LLP, independent certified public accountants, appearing elsewhere
in this Report. The following data also should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Report.
-14-
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA: FOR THE YEAR ENDED
----------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net Sales $2,475,025 $2,554,688 $2,526,128 $2,194,754 $2,062,719
Volume Incentive
Rebates $ 15,577 $ 17,584 $ 17,626 $ 17,710
Costs and Expenses $2,459,641 $2,571,279 $2,494,446 $2,165,938 $2,035,966
Earnings (Loss) Before
Taxes on Income $ 15,384 $ (32,168) $ 14,098 $ 11,190 $ 9,043
Net Earnings (Loss) $ 9,703 $ (21,668) $ 9,030 $ 7,105 $ 3,241
Net Earnings (Loss)
Per Share $ 7.99 $ (17.42) $ 7.40 $ 6.09 $ 2.75
BALANCE SHEET DATA: AS OF
----------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Working Capital $ 60,673 $ 69,284 $ 64,381 $ 50,439 $ 77,077
Total Assets $ 403,630 $ 387,451 $ 386,141 $ 373,286 $ 332,394
Long-Term Debt and
Capital Lease
Obligations $ 125,776 $ 124,372 $ 106,794 $ 69,468 $ 86,817
Shareholders' Equity $ 107,258 $ 102,587 $ 125,801 $ 113,176 $ 107,838
Book Value Per
Class A Share $ 89.14 $ 82.33 $ 100.28 $ 93.59 $ 88.16
Return on Average
Shareholders' Equity 9.26% (17.66%) 7.52% 6.41% 3.02%
-15-
Cash Dividends $ 606 $ 623 $ 613 $ 591 $ 596
Dividends Paid Per Share $ .50 $ .50 $ .50 $ .50 $ .50
Shares Outstanding 1,203 1,246 1,254 1,209 1,223
On November 8, 1993, the Company acquired all of the issued and
outstanding stock of J.F. Walker. The consolidated financial
information includes the operations of J.F. Walker from November 8,
1993.
Certain reclassifications relating to service revenues and pass-
through billings have been made to prior years' data to conform to
the 1997 presentation. The effect of the reclassifications was to
increase net sales and costs and expenses by $18,100,000,
$13,700,000, $5,259,000, and $4,065,000 in 1996, 1995, 1994, and
1993, respectively.
Until February 1996, Spartan's policy was to pay volume incentive
rebates to its Shareholder-Customers based upon each store's order
size from Spartan. Prior to June 14, 1995, volume incentive rebates
were paid approximately 50 percent in cash on a quarterly basis. At
Spartan's fiscal year end, the Shareholder-Customers would receive
Class A Shares at the Trading Value then in effect in exchange for
the remaining approximately 50 percent of the volume incentive
rebate. On June 14, 1995, the Board of Directors changed the rebate
policy to pay volume incentive rebates on a quarterly basis
approximately 75 percent in cash, and at the fiscal year end, the
Shareholder-Customer received Class A Shares at the Trading Value
then in effect in exchange for the remaining 25 percent of the
rebate. As of February 1996, Spartan no longer pays any volume
incentive rebates.
During the year ended March 30, 1996, the Company incurred
restructuring, reorganization, and other charges amounting to
$46,439,743.
The Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective March 29,
1992. Adopting SFAS No. 106 resulted in a decrease in net earnings
of $2,393,416 or $2.03 per share for the year ending March 27, 1993.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On February 4, 1996, the Company changed its pricing methodology
from a variable mark-up program with volume incentive rebates to a cost-
plus pricing program. As a result of adopting the cost-plus pricing
strategy, all transportation and certain other service costs were no longer
included in the selling price and volume incentive rebates were
discontinued. Historically, fees that were charged to Customers for
transportation and other services were reported as a reduction of operating
and administrative expense. Effective fiscal 1997, all significant fees
for transportation and other services are included in sales. As a result,
prior years' financial statements have been restated to conform to the 1997
presentation. Net earnings (loss) as previously reported were not
affected.
During fiscal 1997, the Company paid $4.2 million in
Concentration Rebates to its Customers. This rebate program has been
discontinued effective fiscal 1998. In addition, 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.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's
Consolidated Statements of Operations as percentages of net sales, less any
volume incentive rebates:
- ---------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Gross profit 9.6 9.6 9.7
Less:
Operating and
administrative
expenses 8.8 8.8 9.0
Restructuring,
reorganization
and other charges 1.8
Interest expense .4 .4 .3
Interest income (.1) (.1) (.1)
-17-
Gain on sale of property
and equipment (.1) (.1)
- ---------------------------------------------------------------------------
Total 9.0 10.9 9.1
- ---------------------------------------------------------------------------
Earnings (loss) before
income taxes .6 (1.3) .6
Taxes (benefit)
on income .2 (.4) .2
- ---------------------------------------------------------------------------
Net earnings (loss) .4% (.9%) .4%
- ---------------------------------------------------------------------------
NET SALES
Net sales for 1997 were slightly higher than 1996 after
adjustment for the closing of the Company's Capistar subsidiary and for
fiscal 1996 having 53 weeks of operations compared to 52 weeks in 1997.
Without adjustment for the previously mentioned items, net sales, less any
volume incentive rebates, decreased by 2.5 percent to $2.5 billion. Net
sales, less volume incentive rebates, increased 1.2 percent in fiscal 1996
over 1995 due primarily to an additional week in 1996, partially offset by
sales lost due to the closing of the Capistar facility as a result of the
restructuring program in 1996.
Distribution segment sales decreased 3.3 percent in 1997 and
increased 1.2 percent in 1996 due primarily to the factors mentioned in the
previous paragraph and the loss of a major Customer and the consolidation
of certain distribution centers at J.F. Walker. The Company's Customers
operate in a dynamic and competitive industry. Food at home sales relative
to total food sales continue to decrease as consumers purchase more
prepared food for consumption in the home. In addition, consumers now
purchase more of their food and related products at locations not
traditionally supplied by food wholesalers such as the Company. Continued
investments by national retail chain stores in the Company's market area
also contributed to increased competition for retail sales. The Company
also faces increased competition for its Customers as other wholesalers and
distributors have improved or expanded their presence in the Company's
market area.
Insurance segment sales increased 3.0 percent and 5.7 percent in
fiscal 1997 and 1996, respectively, primarily as a result of increased
volume.
Real Estate and Finance segment revenues increased 42.1 percent
to $12.0 million in 1997 due primarily to an increase in property rentals
-18-
and gains realized on the sale of real estate. Real Estate and Finance
segment revenues decreased 12.2 percent in 1996 due primarily to the
absence of significant real estate transactions.
GROSS PROFIT
Gross profit as a percentage of net sales, less any volume
incentive rebates, was 9.6 percent in 1997 and 1996, compared to 9.7
percent in 1995. The decrease in 1997 and 1996 compared to 1995 was due
primarily to a nonrecurring Michigan cigarette inventory holding gain
realized in 1995 amounting to $3.7 million before taxes.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percentage of net
sales, less any volume incentive rebates, were 8.8 percent in 1997 and
1996, compared to 9.0 percent in 1995. The reduction in operating and
administrative expenses in 1997 and 1996 compared to 1995 was due primarily
to the closing of Capistar and the consolidation of certain J.F. Walker
distribution centers.
During fiscal 1997, two labor contracts were ratified. Each
agreement has a four-year term and collectively they cover approximately
1,050 Associates. Management believes that customer service will improve
and operating expense will be reduced due to improvements in scheduling
flexibility under the new contracts.
RESTRUCTURING, REORGANIZATION AND OTHER CHARGES IN 1996
In fiscal 1996, the Company incurred restructuring,
reorganization and other charges amounting to approximately $46.4 million
all of which related to the Distribution segment.
In fiscal 1993, the Company commenced a reengineering project,
described by the acronym BASE (Business Automation Support Environment).
In fiscal 1996, the Company conducted an in-depth review of the BASE
project and determined that the project was not meeting all anticipated
objectives. Accordingly, in February 1996, the Company and the BASE
project manager agreed to terminate the project management and related
contracts. Company personnel assumed project management responsibilities.
The Company segmented the BASE project into individual projects and
evaluated them separately. Certain projects with no expected return were
terminated and the associated costs written off. Certain other costs
associated with the continuing projects were also written off if they were
deemed to be of no value to the continuing project. The restructuring
charges included $35.4 million of such costs. During fiscal 1996 the
Company closed and combined certain of its distribution facilities.
Restructuring, reorganization and other charges include a provision of $1.8
-19-
million for property and lease discontinuance at closed facilities, $4.1
million for costs related to transferring the Capistar business and closing
its facilities and $1.6 million for severance and termination of employment
agreements.
The Company also provided $3.5 million for the impairment of
long-lived assets, inasmuch as the projected future undiscounted cash flows
were not sufficient to recover their carrying value.
GAIN ON SALE OF PROPERTY AND EQUIPMENT
The gain on sale of property and equipment of $1.7 million in
1997 was due primarily to the sale of retail and wholesale properties and
the gain of $1.4 million reported in 1995 was due primarily to the sale of
retail store operations. There were no significant transactions in 1996.
OPERATING EARNINGS (LOSS)
The Company's pretax operating earnings exclude interest in the
Distribution segment whereas it is included in the other business segments.
Operating earnings for 1997 were $20.1 million, compared with an operating
loss for 1996 of $27.6 million and operating earnings for 1995 of $18.6
million. The decrease in operating earnings in 1996 was due to
restructuring, reorganization and other charges totaling $46.4 million.
Excluding the restructuring charge in 1996, operating earnings in 1997
increased 6.6 percent.
Distribution segment operating earnings, before the
restructuring, reorganization and other charges reported in 1996, decreased
$.8 million in 1997 after increasing $2.2 million in 1996. The decrease in
operating earnings in 1997 was due primarily to the reasons described in
"Net Sales" above. The increase in operating earnings in 1996, before
restructuring, reorganization and other charges, was due primarily to the
consolidation of certain J.F. Walker distribution centers.
Insurance segment operating earnings increased $1.0 million in
1997 to $3.9 million. In 1996, operating earnings in the Insurance segment
decreased $.5 million. Operating earnings in both 1997 and 1996 were
affected primarily by changes in incurred losses and loss reserves.
Real Estate and Finance segment operating earnings were $2.0,
$1.0 and $2.6 million in 1997, 1996 and 1995, respectively. The change in
operating earnings in 1997 and 1995 compared to 1996 was due primarily to
net gains on the sale of real property.
-20-
INTEREST EXPENSE AND INCOME
Interest expense for 1997 decreased $1.1 million to $8.5 million
from $9.6 million in 1996. This decrease was due primarily to lower
borrowing levels attributable to the liquidation of inventory and sale of
buildings resulting from the closing of Capistar, the decrease in inventory
relating to the consolidation of certain J.F. Walker distribution
facilities and a decrease in short-term borrowing rates. Interest expense
for 1996 increased to $9.6 million from $8.7 million in 1995 due primarily
to an increase in debt levels and higher short-term interest rates.
Interest income decreased to $3.6 million in 1997 compared with $4.1
million in 1996 and $3.4 million in 1995. Interest income for 1996 was
higher than 1997 and 1995 due primarily to an increase in notes receivable
levels and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operating activities and borrowings under a bank credit agreement. On
December 23, 1996, the Company entered into a $140 million credit agreement
with a syndication of banks. Interest rates are based on various market
rate options selected by the Company at the time of borrowing. At year-end
1997, the Company would have been allowed to borrow an additional $21.4
million under the credit agreement and another agreement. Management
believes that cash flows from operating activities and the Company's
ability to borrow under the bank credit agreement will be adequate in the
next fiscal year for the Company's operating, investing and financing
activities.
Cash provided by operations was $16.4 million in 1997, compared
with $42.9 million in 1996 and $58.3 million in 1995. The decrease in cash
provided by operations in 1997 compared to 1996 and 1995 was due primarily
to an increase in inventory levels to take advantage of purchasing
opportunities. The reduction in inventory levels of $10.3 million and
$25.5 million in 1996 and 1995, respectively, was due primarily to the
Company's strategic move to a continuous replenishment method for
inventories, the closing of Capistar and the consolidation of certain
Walker distribution centers. Management has budgeted for the sale of
certain properties in fiscal 1998 previously held for investment with
proceeds approximating $25 million.
Cash used in investing activities, primarily purchases of
property and equipment, was $35.8 million in 1997 compared to $49.5 and
$51.6 million in 1996 and 1995, respectively. The reduction of cash used
in investing activities in 1997 was due primarily to lower levels of
capital expenditures on BASE projects. Management expects that fiscal 1998
capital expenditures will be approximately $25 million.
-21-
Net cash provided by financing activities amounted to $13.8
million in 1997 resulting primarily from an increase in the Company's short
and long-term borrowing position. Short-term debt increased to $33.5
million at the end of fiscal 1997 compared to $15.0 million at the end of
fiscal 1996 and long-term debt, including capitalized leases, increased to
$125.8 million at the end of fiscal 1997 compared to $124.4 million at the
end of fiscal 1996. The additional borrowings were used primarily to fund
retail site development.
CAPITAL STRUCTURE
The following table summarizes the capital structure for the last
two fiscal years:
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
Average short-term borrowing
during the year $ 19,965,799 7.1% $ 10,632,357 4.0%
Long-term debt at year-end 130,609,321 46.4 129,692,268 48.6
Present value at year-end:
Capital leases 2,359,074 .8 2,941,210 1.1
Operating leases:
Used in operations 5,321,587 1.9 6,395,172 2.4
Subleased to others 15,936,923 5.7 14,497,931 5.4
- ---------------------------------------------------------------------------------------------------------
Total debt capital 174,192,704 61.9 164,158,938 61.5
Shareholders' equity 107,257,574 38.1 102,586,711 38.5
- ---------------------------------------------------------------------------------------------------------
Total capitalization $281,450,278 100.0% $266,745,649 100.0%
- ---------------------------------------------------------------------------------------------------------
The Trading Value of the Class A Shares is established annually
by the Board of Directors during the first quarter of the fiscal year. Any
change adopted by the Board becomes effective upon acceptance of the
Trading Value by the Michigan Corporation, Securities and Land Development
Bureau (the "Bureau"). The Trading Value of the Class A Shares was $105
per share at March 29, 1997. On June 16, 1997, the Company received notice
from the Bureau that $113 per share had been accepted as the new Trading
Value effective June 22, 1997.
The Company paid quarterly dividends of $.125 per share for each
of the past three fiscal years. Dividends were $606,000 for the fiscal
year ended March 29, 1997. Certain loan agreements to which Spartan is a
-22-
party contain covenants that, pursuant to financial ratios or formulas,
restrict the incurrence of additional indebtedness, the payment of
dividends or other distributions to shareholders, the payment of rebates or
the redemption of shares of common stock in the event of a default of the
agreement or in excess of permitted amounts.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained in this 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.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Spartan Stores, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of
Spartan Stores, Inc. and subsidiaries as of March 29, 1997 and March
30, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended March 29, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the consolidated financial position of Spartan
Stores, Inc. and subsidiaries as of March 29, 1997, and March 30,
1996, and the results of their operations and their cash flows for
each of the three years in the period ended March 29, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Grand Rapids, Michigan
June 9, 1997
-24-
CONSOLIDATED BALANCE SHEETS
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
ASSETS 1997 1996
- ------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 34,198,752 $ 39,796,018
Marketable securities 17,605,880 16,051,608
Accounts receivable 67,045,013 68,444,576
Refundable taxes on income 6,026,221 10,173,305
Inventories 85,209,192 78,659,807
Prepaid expenses 7,867,173 4,072,104
Deferred taxes on income 5,751,000 7,579,000
------------ ------------
TOTAL CURRENT ASSETS 223,703,231 224,776,418
OTHER ASSETS
Notes receivable 6,353,405 8,073,203
Other 564,945 1,885,868
------------ ------------
TOTAL OTHER ASSETS 6,918,350 9,959,071
PROPERTY AND EQUIPMENT
Land and improvements 36,391,244 31,644,867
Buildings 138,569,686 124,817,021
Equipment 134,035,643 123,073,105
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 308,996,573 279,534,993
Less accumulated depreciation and amortization 135,988,572 126,819,069
------------ ------------
NET PROPERTY AND EQUIPMENT 173,008,001 152,715,924
------------ ------------
TOTAL ASSETS $403,629,582 $387,451,413
============ ============
See notes to consolidated financial statements.
-25-
CONSOLIDATED BALANCE SHEETS (continued)
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES
Notes payable $ 33,500,000 $ 15,000,000
Accounts payable 78,130,484 84,868,588
Rebates due to customers 2,581,674 1,365,774
Accrued payroll and benefits 11,815,711 10,677,621
Insurance reserves 17,172,342 18,484,660
Other accrued expenses 12,637,721 16,834,621
Current maturities of long-term debt 6,598,927 7,678,972
Current obligations under capital leases 593,078 582,135
------------ ------------
TOTAL CURRENT LIABILITIES 163,029,937 155,492,371
DEFERRED GAIN ON SALE OF REAL PROPERTY 213,198 298,477
DEFERRED TAXES ON INCOME 2,807,000 600,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,545,483 4,101,483
LONG-TERM DEBT 124,010,394 122,013,296
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 1,765,996 2,359,075
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value $20
a share; authorized 2,000,000 shares;
outstanding 1,203,285 and 1,246,048 24,065,700 24,920,960
Additional paid-in capital 18,406,969 19,622,472
Retained earnings 64,784,905 58,043,279
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 107,257,574 102,586,711
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $403,629,582 $387,451,413
============ ============
-26-
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTAN STORES, INC. AND SUBSIDIARIES
YEAR ENDED
----------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
-------------- -------------- --------------
NET SALES $2,475,025,242 $2,554,687,929 $2,526,128,380
LESS VOLUME INCENTIVE REBATES 15,576,939 17,583,927
-------------- -------------- --------------
2,475,025,242 2,539,110,990 2,508,544,453
COSTS AND EXPENSES
Cost of sales 2,238,364,428 2,295,129,609 2,265,803,791
Operating and administrative 218,124,494 223,817,233 224,738,044
Restructuring, reorganization and
other charges 46,439,743
Interest expense 8,466,452 9,600,177 8,729,708
Interest income (3,609,410) (4,111,032) (3,382,303)
(Gain) loss on sale of
property and equipment (1,704,447) 402,855 (1,442,688)
-------------- -------------- --------------
TOTAL COSTS AND EXPENSES 2,459,641,517 2,571,278,585 2,494,446,552
-------------- -------------- --------------
EARNINGS (LOSS) BEFORE INCOME
TAXES (BENEFIT) 15,383,725 (32,167,595) 14,097,901
INCOME TAXES (BENEFIT) 5,681,000 (10,500,000) 5,068,000
-------------- -------------- --------------
NET EARNINGS (LOSS) $ 9,702,725 $ (21,667,595) $ 9,029,901
============== ============== ==============
NET EARNINGS (LOSS) PER CLASS A
SHARE $ 7.99 $ (17.42) $ 7.40
============== ============== ==============
See notes to consolidated financial statements.
-27-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SPARTAN STORES, INC. AND SUBSIDIARIES
CLASS A ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL EARNINGS
------------ --------------- --------
Balance March 27, 1994 $24,185,800 $12,329,472 $76,660,900
Class A common
stock transactions 58,703 shares purchased (1,174,060) (2,414,428) (1,839,471)
103,862 shares issued 2,077,240 7,557,966
Net earnings 9,029,901
Cash dividends $.50 per share (612,588)
- --------------------------------------------------------------------------------------------------------------
Balance March 25, 1995 25,088,980 17,473,010 83,238,742
Class A common
stock transactions 76,046 shares purchased (1,520,920) (3,165,335) (2,904,751)
67,645 shares issued 1,352,900 5,314,797
Net loss (21,667,595)
Cash dividends $.50 per share (623,117)
- --------------------------------------------------------------------------------------------------------------
Balance March 30, 1996 24,920,960 19,622,472 58,043,279
Class A common
stock transactions 80,141 shares purchased (1,602,820) (4,367,053) (2,355,162)
37,378 shares issued 747,560 3,151,550
Net earnings 9,702,725
Cash dividends $.50 per share (605,937)
- --------------------------------------------------------------------------------------------------------------
Balance March 29, 1997 $24,065,700 $18,406,969 $64,784,905
See notes to consolidated financial statements.
-28-
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTAN STORES, INC. AND SUBSIDIARIES
YEAR ENDED
----------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 9,702,725 $(21,667,595) $ 9,029,901
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 20,175,210 19,224,433 17,834,432
Rebates paid in common stock 4,000,121 8,082,258
Restructuring, reorganization and other charges 41,344,222
Postretirement benefits other than pensions 444,000 107,306 116,399
Deferred taxes on income 4,035,000 1,194,000 (2,386,000)
(Gain) loss on sale of property and equipment (1,704,447) 402,855 (1,442,688)
Change in assets and liabilities:
Marketable securities (1,554,272) (2,806,890) (45,673)
Accounts receivable 1,399,563 6,358,071 (8,577,068)
Refundable taxes on income 4,147,084 (10,173,305)
Inventories (6,549,385) 10,330,922 25,518,707
Prepaid expenses (3,795,069) 99,410 2,018,224
Accounts payable (6,738,104) (6,146,663) 660,355
Rebates due to customers 1,215,900 (570,867) (163,320)
Accrued payroll and benefits 1,138,090 183,184 641,975
Insurance reserves (1,312,318) (635,043) 2,029,250
Other accrued expenses (4,196,900) 1,633,999 4,989,285
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,407,077 42,878,160 58,306,037
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (46,237,512) (42,261,541) (31,225,239)
Additions to software engineering in progress (5,707,083) (24,061,316)
Proceeds from the sale of property and
equipment 7,805,730 2,083,122 2,566,750
Other 2,624,384 (3,610,725) 1,100,335
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (35,807,398) (49,496,227) (51,619,470)
------------ ------------ ------------
-29-
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable 18,500,000 10,056,580 (47,988,222)
Proceeds from long-term borrowings 37,274,127 34,871,387 56,058,357
Repayment of long-term debt (36,357,074) (17,587,293) (15,537,981)
Reduction of obligations under capital leases (582,136) (541,235) (489,950)
Proceeds from sale of common stock 3,899,110 2,667,576 1,552,948
Common stock purchased (8,325,035) (7,591,006) (5,427,959)
Dividends paid (605,937) (623,117) (612,588)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 13,803,055 21,252,892 (12,445,395)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,597,266) 14,634,825 (5,758,828)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 39,796,018 25,161,193 30,920,021
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,198,752 $ 39,796,018 $ 25,161,193
============ ============ ============
See notes to consolidated financial statements.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OWNERSHIP
The Company's common stock is substantially owned by its customers and a
majority of the Company's sales are to its shareholder-customers. A
description of the Company's transactions with its customers is included in
the Business Segment Information note to the consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany profits, transactions
and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
FISCAL YEAR
The fiscal year of the Company ends on the last Saturday of March. The
fiscal years ended March 29, 1997 and March 25, 1995 were comprised of
fifty-two weeks. The fiscal year ended March 30, 1996 was comprised of
fifty-three weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company and are disclosed in the marketable securities, notes
receivable and long-term debt notes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly-liquid investments
with an original maturity of three months or less at the date of purchase.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
ACCOUNTS RECEIVABLE
Accounts receivable include the current portion of notes receivable of
$3,772,303 in 1997 and $3,957,755 in 1996 and are shown net of allowances
for credit losses of $3,160,000 in 1997 and $2,635,000 in 1996.
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 $45,000,000 and $43,500,000 higher at March 29, 1997 and
March 30, 1996, respectively. During 1997, 1996 and 1995, certain
inventory quantities were reduced. These reductions resulted in
liquidations of LIFO inventory carried at lower costs prevailing in prior
years as compared with the costs of purchases in these years, the effect of
which increased income before taxes in 1997 and 1995 by $441,000 and
$1,932,000, respectively and decreased the loss before tax benefit in 1996
by $480,000.
RECOGNITION OF LOAN IMPAIRMENT
The Company records allowances for loan impairment when it is determined
that the Company will be unable to collect all amounts due according to the
terms of the underlying agreement. Interest income on impaired loans is
recognized only when interest payments are received.
LONG-LIVED ASSETS
The carrying values of long-lived assets are analyzed using undiscounted
future cash flows of the assets. Any adjustment to its carrying value is
recognized on a current basis.
INTANGIBLE ASSETS
Goodwill consists of amounts paid in excess of the fair value of acquired
net assets and is being amortized over ten years on a straight-line basis
and is shown net of accumulated amortization of $3,149,121 and $4,233,507
as of March 29, 1997 and March 30, 1996, respectively. Amortization of
goodwill amounted to $1,051,984, $960,827 and $1,175,977 in 1997, 1996 and
1995, respectively. In 1996, the Company recognized an impairment of
approximately $3,160,000 as part of the restructuring, reorganization and
other charges.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over the
shorter of the estimated useful lives or lease periods of the assets.
Expenditures for normal repairs and maintenance are charged to operations
as incurred. Depreciation is computed using the straight-line and
declining balance methods as follows:
Land improvements 15 to 40 years
Buildings and improvements 15 to 40 years
Machinery and equipment 5 to 20 years
Furniture and fixtures 3 to 10 years
Capital leases are initially stated at the present value of future lease
payments and are amortized using the straight-line and declining balance
methods over the related lease terms.
Software engineering costs are capitalized, and amortization over a five
year period commences as each system is implemented.
ACCOUNTS PAYABLE
Accounts payable include $15,522,845 and $19,130,454 at March 29, 1997 and
March 30, 1996, respectively, of checks which have been issued and have not
cleared the Company's controlled disbursing bank accounts.
INSURANCE RESERVES
Insurance reserves represent a provision for reported losses and incurred
but not reported losses. Losses are recorded when reported and consist of
individual case basis estimates. Incurred but not reported losses are
estimated based on available historical information.
DEFERRED GAIN
Gain on sale and leaseback of certain real property has been deferred and
is being amortized as a reduction of rent expense over the life of the
lease.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
TAXES ON INCOME
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future. Such
deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
EARNINGS PER SHARE
Net earnings per Class A share are computed by dividing net earnings by the
weighted average number of common shares outstanding. The weighted average
shares used in the computations were 1,213,671, 1,243,866 and 1,220,847 for
1997, 1996 and 1995, respectively.
STOCK-BASED COMPENSATION
Effective March 31, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," and as permitted by the standard, will continue
to apply the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25 to its stock-based compensation. The
Company has determined that stock-based compensation expense calculated
under SFAS No. 123 is not significant in relation to reported net income
and earnings per share.
RECLASSIFICATIONS
Certain reclassifications relating to service revenues and pass-through
billings have been made to prior years' financial statements to conform to
the 1997 presentation. Previously, service revenues were netted against
the related costs and pass-through billings were recorded as sales and cost
of sales. The effect of the reclassifications was to increase net sales in
1996 and 1995 by $18,100,000 and $13,700,000, respectively, decrease cost
of sales in 1996 and 1995 by $26,500,000 and $24,300,000, respectively and
increase operating and administrative expenses in 1996 and 1995 by
$44,600,000 and $38,000,000, respectively. These reclassifications did not
affect net earnings (loss) as previously reported.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
RESTRUCTURING, REORGANIZATION AND OTHER CHARGES
During the fiscal year ended March 30, 1996, the Company incurred
restructuring, reorganization and other charges amounting to approximately
$46,400,000 relating to the Distribution segment. The aggregate charge
includes $35,400,000 which represents certain costs which were incurred as
part of the Company's program to design and implement its business
automation and support environment (BASE). The Company decided to
terminate certain projects and wrote off costs incurred as there was no
estimated future benefit. In addition, certain other costs associated with
the continuing projects were also written off if they were deemed to be of
no value to the continuing project.
To improve the effectiveness and efficiency of its distribution systems,
various distribution facilities were closed in 1996. Restructuring,
reorganization and other charges included $7,500,000 in 1996 for costs
associated with the closing of these facilities. As of March 30, 1996,
other accrued expenses included $2,600,000 related to the aforementioned
costs. Amounts paid in 1997 did not materially differ from the amounts
accrued in 1996.
The Company also provided $3,500,000 for the impairment of long-lived
assets, inasmuch as the projected future undiscounted cash flows were not
sufficient to recover their carrying value.
MARKETABLE SECURITIES
The amortized cost and estimated fair values of marketable securities
available-for-sale as of March 29, 1997 and March 30, 1996 are shown below.
Unrealized gains and losses as of March 29, 1997 and March 30, 1996 were
not material.
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
1997
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
Securities available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 4,057,217 $ 3,840,157
Debt securities issued by foreign
governments, corporations and
agencies 13,652,619 13,765,723
----------- -----------
$17,709,836 $17,605,880
=========== ===========
1996
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
Securities available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $ 5,644,368 $ 5,530,289
Debt securities issued by
foreign governments 2,739,869 2,753,933
Corporate debt securities 7,745,748 7,767,386
----------- -----------
$16,129,985 $16,051,608
=========== ===========
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
The amortized cost and estimated fair values of investments as of March 29,
1997, by contractual maturity, are shown below:
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
Due in one year or less $ 4,655,219 $ 4,841,173
Due after one year
through five years 8,032,059 7,984,405
Due after five years
through ten years 5,022,558 4,780,302
----------- -----------
$17,709,836 $17,605,880
=========== ===========
NOTES RECEIVABLE
Notes receivable relate to loans to shareholder-customers used to develop
new stores or expand or remodel existing stores. Loans are collateralized
by the inventory, facilities or equipment financed and in some instances by
the Company's Class A Shares held by the shareholder-customer. Loans are
made on a floating rate basis, based on the prime rate. Most loans carry
interest rates from prime plus one-half percent to prime plus three
percent. Maturity dates range to 2004 at March 29, 1997. Impaired notes
total approximately $2,400,000, including the current portion. The
allowance for credit losses on accounts receivable at March 29, 1997
includes $1,600,000 relating to impaired notes. The estimated fair market
value of notes receivable approximates the net carrying value at March 29,
1997 and March 30, 1996.
NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured $140 million credit agreement. This agreement
is segregated into a short-term $60 million line of credit, a long-term $60
million revolving loan and a long-term $20 million single facility loan.
Notes payable included in current liabilities represent borrowings under
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
the short-term line of credit. The line of credit agreement requires the
payment of interest at a negotiated rate at the date of the borrowing. The
weighted average rates for 1997 and 1996 were 6.04%, and 6.48%,
respectively. The unused portion of the available lines of credit
aggregates $21,421,162 at March 29, 1997.
Long-term debt consists of the following:
MARCH 29, MARCH 30,
1997 1996
------------ ------------
9.3% Senior notes, unsecured, due
December, 2004, annual principal
payments of $2,000,000 due
December 1 $ 16,000,000 $ 18,000,000
9.11% Senior notes, unsecured, due
December, 1999, annual principal
payments of $1,500,000 due
December 1 4,500,000 6,000,000
7.27% Senior notes, unsecured, due
February, 2003, annual principal
payments of $2,000,000 due
February 1 12,000,000 14,000,000
Bank credit agreement, unsecured, interest
rate negotiated daily, monthly and
quarterly. Due December 23, 1997
and December 23, 1999 79,000,000
Line of credit, unsecured, interest rate
negotiated daily, 6.75% at March 30, 1996 31,150,000
Line of credit, unsecured, interest rate
negotiated monthly, 6.36% at March 30, 1996 42,330,000
Variable Rate Promissory Notes, unsecured,
due March 31, 1997, interest payable
quarterly at 1% below the prime rate 12,599,410 11,314,554
-38-
Other 6,509,911 6,897,714
------------ ------------
130,609,321 129,692,268
Less current portion 6,598,927 7,678,972
------------ ------------
Total long-term debt $124,010,394 $122,013,296
============ ============
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
At March 29, 1997, long-term debt is due as follows:
YEAR ENDING MARCH,
------------------
1998 $ 6,598,927
1999 17,888,832
2000 84,706,586
2001 4,306,042
2002 4,337,277
Later 12,771,657
------------
$130,609,321
============
Certain loan agreements contain covenants which include restrictions on
additional indebtedness, payment of cash dividends (restricted to an
additional $12,170,863 at March 29, 1997) and payment of cash rebates.
The Variable Rate Promissory Notes are issued under a note offering which
permits the Company to sell notes with a total principal amount of
$100,000,000. The notes are offered in minimum denominations of $1,000 and
may be issued by the Company at any time. Issues will be redeemed on March
31 of every other calendar year after March 31, 1993. As of March 29,
1997, the Company may still issue $56,667,644 of the notes.
At March 29, 1997 and March 30, 1996 the estimated fair value of the
Company's long-term debt (including current maturities) exceeded the
carrying value by approximately $860,000 and $1,891,000, respectively. The
estimated fair value was based on anticipated rates available to the
Company for debt with similar terms and maturities. The estimated fair
market value of notes payable included in current liabilities as of March
29, 1997 and March 30, 1996 approximated the carrying value.
COMMITMENTS AND CONTINGENCIES
The Company has guaranteed payment of indebtedness to financial
institutions aggregating $12.7 million at March 29, 1997 on behalf of
certain customers.
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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. Subsequent 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 a
class action in one case and on behalf of the State of Tennessee and its
taxpayers in the other case, 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.
LEASES
The Company and certain subsidiaries lease equipment and warehouse and
store facilities. Many of these leases include renewal options. The
following represents property which is leased under capital leases and
included in property and equipment:
-41-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
1997 1996
---------- ----------
Buildings $7,300,000 $7,300,000
Less accumulated amortization 6,268,838 5,974,220
---------- ----------
Net buildings $1,031,162 $1,325,780
========== ==========
Amortization of property under capital leases was $294,618, in 1997, 1996
and 1995.
Future minimum obligations under capital leases in effect at March 29, 1997
are as follows:
USED IN
YEAR ENDING MARCH, OPERATIONS
------------------ ----------
1998 $ 793,872
1999 793,872
2000 793,872
2001 396,936
----------
Total future minimum obligations 2,778,552
Less interest 419,478
----------
Present value of net future minimum obligations 2,359,074
Less current portion 593,078
----------
Long-term obligations $1,765,996
==========
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Future minimum obligations under operating leases in effect at March 29,
1997 are as follows:
YEAR ENDING USED IN SUBLEASED
MARCH, OPERATIONS TO OTHERS TOTAL
----------- ---------- ----------- -----------
1998 $2,699,598 $ 2,412,863 $ 5,112,461
1999 1,855,330 2,260,432 4,115,762
2000 1,041,155 2,260,432 3,301,587
2001 332,570 2,198,752 2,531,322
2002 165,066 2,122,462 2,287,528
Later 59,566 14,465,733 14,525,299
---------- ----------- -----------
Total future minimum
obligations $6,153,285 $25,720,674 $31,873,959
========== =========== ===========
Rental expense under those leases which are classified as operating leases
amounted to $9,690,000, $11,030,000 and $12,500,000 in 1997, 1996 and 1995,
respectively.
One of the Company's subsidiaries leases retail store facilities to non-
related entities. Of the stores leased, several are owned and others were
obtained through leasing arrangements and are accounted for as operating
leases. Substantially all of the leases provide for minimum and contingent
rentals.
Owned assets, included in property and equipment, which are leased to
others are as follows:
-43-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
1997 1996
----------- -----------
Land and improvements $18,618,760 $10,839,355
Buildings 57,836,784 44,965,508
----------- -----------
76,455,544 55,804,863
Less accumulated depreciation 16,100,102 14,599,605
----------- -----------
Net land and buildings $60,355,442 $41,205,258
=========== ===========
Future minimum receivables under operating leases in effect at March 29,
1997 are as follows:
YEAR ENDING OWNED LEASED
MARCH, PROPERTY PROPERTY TOTAL
----------- ------------ ----------- ------------
1998 $ 9,513,859 $ 2,513,950 $ 12,027,809
1999 9,088,951 2,372,519 11,461,470
2000 8,623,106 2,372,520 10,995,626
2001 8,276,477 2,305,868 10,582,345
2002 8,044,037 2,226,747 10,270,784
Later 83,420,522 15,224,948 98,645,470
------------ ----------- ------------
Total future minimum
receivables $126,966,952 $27,016,552 $153,983,504
============ =========== ============
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
ASSOCIATE RETIREMENT PLANS
The Company's retirement programs include pension plans providing non-
contributory benefits and contributory benefits. Substantially all of the
Company's associates not covered by collective bargaining agreements are
covered by either a non-contributory defined benefit pension plan (Company
Plan), a defined contribution plan or both. Associates covered by
collective bargaining agreements are included in multi-employer pension
plans.
The benefits in the Company Plan are based on years of service and the
associate's compensation. Annual payments to the pension trust fund are
determined in compliance with the Employee Retirement Income Security Act
(ERISA), except that prior years' contributions in excess of the minimum
are being amortized over the period ending March 31, 2016. Plan assets
consist principally of common stocks and U.S. Government and corporate
obligations.
The following information sets forth the Company's defined benefit pension
plans' significant actuarial assumptions:
1997 1996 1995
---- ---- ----
Weighted average discount rate 7.50% 7.00% 8.25%
Rate of increase in future compensation levels 4.75% 4.75% 4.75%
Long-term rate of return on assets 9.00% 8.75% 8.75%
The following table sets forth the Company's defined benefit pension plans'
funded status and the amounts recognized in the Company's financial
statements:
-45-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
1997 1996
------------ ------------
Date of actuarial valuation MARCH 31, MARCH 31,
Actuarial present value of accumulated 1996 1995
------------ ------------
benefit obligations:
Vested $ 30,832,302 $ 29,499,199
Total $ 32,077,675 $ 30,584,584
------------ ------------
Projected benefit obligation $(44,707,977) $(44,705,246)
Plan assets at fair value 38,952,059 34,523,724
------------ ------------
Projected benefit obligation in excess of
plan assets (5,755,918) (10,181,522)
Unrecognized net loss 1,324,133 6,109,105
Unrecognized prior service cost 1,954,044 2,082,064
Initial net credit at April 1, 1987 being
amortized over 19 years 47,670 52,967
------------ ------------
Pension liability $ (2,430,071) $ (1,937,386)
============ ============
Net pension expense included the following components:
1997 1996 1995
----------- ----------- -----------
Service cost $ 2,214,766 $ 1,644,379 $ 1,691,521
Interest cost 3,121,058 2,747,457 2,315,919
Actual return on plan assets (3,579,463) (5,583,071) (1,371,039)
Net amortization and deferral 1,011,568 3,132,667 (944,343)
----------- ----------- -----------
Net pension expense $ 2,767,929 $ 1,941,432 $ 1,692,058
=========== =========== ===========
-46-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Matching contributions made by the Company to salary reduction defined
contribution pension plans aggregated $1,371,000, $1,188,000 and $999,000
in 1997, 1996 and 1995, respectively.
In addition to the plans described above, the Company participates in
several multi-employer and other defined contribution plans for
substantially all associates covered by collective bargaining agreements.
The expense for these plans aggregated approximately $4,740,000 in 1997,
$5,025,000 in 1996 and $4,960,000 in 1995.
The Multi-Employer Pension Plan Amendments Act of 1980 amended ERISA to
establish funding requirements and obligations for employers participating
in multi-employer plans, principally related to employer withdrawal from or
termination of such plans. Separate actuarial calculations of the
Company's position are not available with respect to the multi-employer
plans.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Spartan Stores, Inc. and certain subsidiaries provide health care benefits
to retired associates who have at least ten years of service and have
attained age fifty-five, and who are not covered by collective bargaining
arrangements during their employment (covered associates). Qualified
covered associates retiring prior to April 1, 1992, receive major medical
insurance with deductible and coinsurance provisions until age sixty-five
and medicare supplemental benefits thereafter. Covered associates retiring
after April 1, 1992, are eligible for monthly postretirement health care
benefits of five dollars multiplied by the associate's years of service.
The Company accrues the estimated cost of retiree benefit payments, other
than pensions, during the employee's active service period.
The accumulated postretirement benefit obligation is as follows:
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 29, MARCH 30,
1997 1996
---------- ----------
Retired participants $2,215,302 $2,040,223
Other fully eligible participants 994,641 957,108
Other active participants 2,585,826 2,551,608
---------- ----------
Accumulated postretirement benefit
obligation 5,795,769 5,548,939
Unrecognized loss 1,250,286 1,447,456
---------- ----------
Postretirement benefit liability $4,545,483 $4,101,483
========== ==========
Postretirement health care expense consisted of the following components:
1997 1996
-------- --------
Service cost-benefits earned during the period $294,630 $200,740
Interest cost on the accumulated postretirement
benefit obligation 393,971 363,877
Net amortization and deferral 50,532 5,883
-------- --------
Periodic postretirement benefit cost $739,133 $570,500
======== ========
The Company continues to fund these benefits as incurred. Payment of these
benefits was $295,133, $463,194 and $277,725 in 1997, 1996 and 1995,
respectively.
-48-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 5% for the fiscal year ended March
29, 1997 and remains at that level thereafter. A 1% increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation by 5.2% and the periodic postretirement
benefit cost by 6.4%.
The assumed discount rate used in determining the postretirement benefit
obligation was 7.5% and 7.0% in 1997 and 1996, respectively.
TAXES ON INCOME
The income tax provision (benefit) is summarized as follows:
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
---------- ------------ -----------
Currently payable (refundable) $1,646,000 $(11,694,000) $ 7,454,000
Net deferred 4,035,000 1,194,000 (2,386,000)
---------- ------------ -----------
$5,681,000 $(10,500,000) $ 5,068,000
========== ============ ===========
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
1997 1996 1995
---- ---- ----
Statutory income tax rate 35.0% (34.0%) 34.0%
Amortization of goodwill 2.4 4.5 2.8
Research and development credit (2.5)
Other (.5) (.6) (.9)
---- ----- ----
Effective income tax rate 36.9% (32.6%) 35.9%
==== ===== ====
-49-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Deferred tax assets and liabilities resulting from temporary differences
and carry forwards as of March 29, 1997 and March 30, 1996 are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Employee benefits $ 5,159,341 $ 5,288,359
Depreciation 2,618,504 1,751,715
Inventory 1,485,413 1,065,745
Accounts receivable 962,500 918,750
Lease transactions 637,000 754,538
Insurance reserves 787,266 576,853
Research & development credit 642,567
All other 1,108,098 2,060,939
----------- -----------
Subtotal 12,758,122 13,059,466
Valuation allowance (269,043)
----------- -----------
Total deferred tax assets 12,758,122 12,790,423
----------- -----------
Deferred tax liabilities:
Depreciation 8,217,630 4,130,109
Inventory 415,577 206,959
All other 1,180,915 1,474,355
----------- -----------
Total deferred tax liabilities 9,814,122 5,811,423
----------- -----------
Net deferred tax asset $ 2,944,000 $ 6,979,000
=========== ===========
-50-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest and income taxes were as follows:
1997 1996 1995
---------- ----------- ----------
Interest $8,916,115 $10,085,527 $8,812,658
Income taxes 2,185,507 4,755,049 6,108,123
SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the Board of Directors
may at any time, and from time to time, provide for the issuance of up to
500,000 shares of Class B common stock in one or more series, each with
such designations, and, relative to the Class A common stock and to other
series of Class B common stock, such voting, distribution, dividend and
other rights and restrictions as shall be stated in the resolution(s)
providing for the issuance thereof. At March 29, 1997, there were no Class
B shares outstanding.
Under the Company's Bylaws the Board of Directors establishes the price at
which the Company issues and purchases its Class A common stock (the
"Trading Value").
The Company's shareholder-customers are required to own Class A common
stock of the Company in an amount relative to their purchases up to a
maximum of $125,000 of common stock per store. Spartan Stores, Inc. sells
its common stock to new customers and also issues common stock in partial
payment of volume incentive rebates. As of February 4, 1996, the Company
discontinued payment of volume incentive rebates. The current Company
policy is to redeem, at the request of the shareholder, stock held in
excess of the required investment. This policy does not create or evidence
any obligation on the Company's behalf and the Board of Directors may
revise or terminate the policy at any time. At March 29, 1997, there were
891,000 shares outstanding in excess of the maximum requirement.
The Company has a shareholder approved stock option plan covering 50,000
shares of the Company's Class A common stock. The plan provides for
-51-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
incentive stock options as well as non-qualified stock options. Options
under the plan are granted to corporate officers at prices equal to the
Trading Value. Options must be exercised within ten years of the date of
the grant. The authorization to grant options under the plan terminates on
October 31, 2001. At March 29, 1997, options covering 3,900 shares were
outstanding and had been granted at $84.00 to $105.00 per share.
The Company has a shareholder-approved stock bonus plan covering 50,000
shares of the Company's Class A common stock. Under the provisions of this
plan, officers and certain key employees of the Company may elect to
receive a portion of their annual bonus in Class A shares rather than cash
and will be granted additional shares of stock worth thirty percent of the
portion of the bonus they elect to receive in stock. The value of shares
issued under the plan is the Trading Value. At March 29, 1997, 42,471
shares remained unissued under the plan.
An associate stock purchase plan approved by the shareholders covers 50,000
shares of the Company's Class A common stock. The plan provides that
associates of the Company and its subsidiaries may purchase shares at the
Trading Value. At March 29, 1997, 48,401 shares remained unissued under
the plan.
On May 28, 1997, the Board of Directors approved an amendment to the
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 is subject to approval of the
amendment by the Company's shareholders.
BUSINESS SEGMENT INFORMATION
The Company's distribution operations include product sales to
independently owned and operated food stores and convenience stores as well
as services directly related to the operation of these stores. Revenue is
recognized when the product is shipped.
The Insurance segment includes operations as a general line insurance
agency, third party claims administration (TPA) and insurance underwriting.
Commissions are recognized as of the policy billing dates, which
approximate effective dates of the applicable policies. TPA revenues are
recognized as services are performed and underwriting revenues are
recognized over the life of the policies.
-52-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Real estate and finance represents revenues from financing and real estate
activities with retail food stores and non-food related businesses.
Revenue is recognized according to the terms of the lease or loan.
Business segment operating earnings were computed as net sales less related
operating expenses. In the Distribution segment interest is excluded from
operating expenses whereas it is included in the other segments.
Identifiable assets represent total assets directly associated with the
various business segments. Eliminations in assets identified to segments
include intercompany receivables, payables and investments.
The following table sets forth, for each of the last three fiscal years,
information required by Financial Accounting Standards Board, Statement No.
14, "Financial Reporting for Segments of a Business Enterprise":
1997 1996 1995
-------------- -------------- --------------
NET SALES
Distribution $2,446,409,470 $2,530,111,284 $2,501,253,918
98.84% 99.04% 99.02%
Insurance 16,620,923 16,135,365 15,261,527
.67% .63% .60%
Real estate and finance 11,994,849 8,441,280 9,612,935
.49% .33% .38%
-------------- -------------- --------------
Total $2,475,025,242 $2,554,687,929 $2,526,128,380
============== ============== ==============
100.0% 100.0% 100.0%
============== ============== ==============
-53-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
OPERATING EARNINGS (LOSS)
Distribution $ 14,205,200 $ (31,464,572) $ 12,727,947
Insurance 3,881,823 2,890,739 3,341,250
Real estate and finance 2,005,782 984,581 2,550,111
-------------- -------------- --------------
Total operating earnings 20,092,805 (27,589,252) 18,619,308
Interest (net) (4,709,080) (4,578,343) (4,521,407)
-------------- -------------- --------------
Earnings (loss) before taxes
on income $ 15,383,725 $ (32,167,595) $ 14,097,901
============== ============== ==============
ASSETS IDENTIFIED TO SEGMENTS
Distribution $ 323,642,458 $ 345,649,449 $ 367,955,546
Insurance 28,723,527 26,405,013 24,387,064
Real estate and finance 74,302,366 55,128,402 48,365,298
Less eliminations (23,038,769) (39,731,451) (54,566,415)
-------------- -------------- --------------
Total $ 403,629,582 $ 387,451,413 $ 386,141,493
============== ============== ==============
DEPRECIATION AND AMORTIZATION
Distribution $ 17,722,415 $ 17,182,016 $ 16,029,108
Insurance 181,905 258,686 208,793
Real estate and finance 2,270,890 1,783,731 1,596,531
-------------- -------------- --------------
Total $ 20,175,210 $ 19,224,433 $ 17,834,432
============== ============== ==============
CAPITAL EXPENDITURES
Distribution $ 22,478,047 $ 38,858,158 $ 44,628,983
Insurance 126,596 201,677 269,291
Real estate and finance 23,632,869 8,908,789 10,388,281
-------------- -------------- --------------
Total $ 46,237,512 $ 47,968,624 $ 55,286,555
============== ============== ==============
-54-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and principal occupations of directors, nominees
for director, and executive officers of Spartan as of June 13, 1997, are
set forth below.
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
------------ ------------------------------
Donald J. Koop (60) Chairman of the Board since 1989
and director since 1985;
Chairman of the Board, Family
Fare Inc. (retail grocery
chain)
Russell H. VanGilder, Jr. (63) Vice Chairman of the Board since
1992 and director since 1970;
Chairman of the Board, V.G.'s
Food Center, Inc. (retail
grocery chain)
Roger L. Boyd (50) Secretary of the Board since 1993
and director since 1992;
President and General Manager,
Bob's Market House, Inc.
(retail grocery store);
President and General Manager,
Hillsdale Market House, Inc.
(retail grocery store)
James G. Buick (64) Director since 1995; Retired;
Former President and Chief
Executive Officer, The
Zondervan Corporation (1984 to
1993) (producer and distributor
of Christian books and gifts)
John S. Carton (56) Director since 1995; Chairman of
the Board, Pine View Golf Club,
Inc., and Turfside, Inc. (golf
course and restaurant)
-55-
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
------------ ------------------------------
Glen A. Catt (49) Director since 1988; President and
Chief Executive Officer, Glen's
Markets, Inc. (retail grocery
chain)
Daniel L. Deering (62) Director since 1967; President,
Tom's Food Markets, Inc.
(retail grocery chain)
Ronald A. DeYoung (63) Director since 1974; President,
Great Day, Inc. (retail grocery
chain)
Parker T. Feldpausch (65) Director since 1990; President,
G & R Felpausch Co. (retail
grocery chain)
Martin P. Hill (52) Director since 1996; President,
Harding & Hill, Inc. (retail
grocery chain)
Dorothy A. Johnson (56) Nominee for director; President,
Council of Michigan Foundations
since 1975 (association of
foundations and corporations);
Trustee, W.K. Kellogg Foundation
since 1980; President, Community
Foundation Youth Project since
1994; Director, First of America
Bank Corporation since 1985
Dan R. Prevo (47) Director since 1996; President,
Prevo's Family Market, Inc.
(retail grocery chain)
Patrick M. Quinn (63) Chief Executive Officer of Spartan
and director since 1985;
President of Spartan from 1985
to 1996
-56-
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
------------ ------------------------------
James B. Meyer (51) President and Chief Operating
Officer of Spartan and director
since August 1996; Treasurer
since 1994; Senior Vice
President Corporate Support
Services from June 1994 to
August 1996; Chief Financial
Officer and Assistant Secretary
from October 1990 to August
1996; Senior Vice President
from 1981 to 1994
Charles B. Fosnaugh (47) Senior Vice President Business
Development and Finance since
September 1996; Senior Vice
President Business Development
from July 1994 to September
1996; Vice President, Business
Development from 1990 to 1994;
President, Market Development
Corporation since 1990;
President, Valuland Inc. since
1992
Dennis J. Otto (47) Vice President Sales and Marketing
since July 1996; Vice President
Retail Marketing and Operations
from June 1994 to July 1996;
Director of Customer Support
Services from April 1993 to
June 1994; Manager Retail
Sales/Marketing from February
1991 to April 1993
David deS. Couch (46) Vice President Information
Technology since May 1996;
Director of Management
Information Services from
December 1991 to May 1996
Alex J. DeYonker (47) General Counsel and Assistant
Secretary since May 1995;
partner of Warner Norcross &
Judd LLP since 1988 (law firm)
-57-
Directors are elected at annual meetings of shareholders and hold
office for a term of three years and until their successors are elected and
qualified. Annual elections of directors are held to elect approximately
one-third of the members of the Board. On August 14, 1996, Mr. Meyer was
appointed to the Board of Directors to fill a vacancy that resulted from
increasing the number of directors of Spartan from 12 to 13. On May 28,
1997, the Board of Directors established the number of directors of Spartan
at 12. The terms of Messrs. Catt, Deering, Feldpausch, Meyer, and Quinn
expire in 1997; Messrs. Boyd, Carton, DeYoung, and Koop expire in 1998; and
Messrs. Buick, Hill, Prevo, and VanGilder expire in 1999. The election of
directors will be held at the Annual Meeting of Shareholders to be held on
July 15, 1997. Nominees for election to the Board of Directors are Messrs.
Catt, Feldpausch, and Meyer and Ms. Johnson. Executive officers are
appointed by the Board of Directors at its organizational meeting following
each annual meeting of shareholders and serve until their successors are
appointed.
Because the Company's capital stock is not registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended, the
directors, officers, and persons owning greater than 10 percent of any
class of the Company's equity securities are not subject to Section 16 of
such act.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table sets forth the cash and non-cash compensation
earned during the fiscal years ended March 29, 1997 (52 weeks), March 30,
1996 (53 weeks), and March 25, 1995 (52 weeks) by the persons who were the
Chief Executive Officer and the four most highly compensated executive
officers (other than the Chief Executive Officer) of Spartan for the fiscal
year ended March 29, 1997:
-58-
SUMMARY COMPENSATION TABLE
--------------------------
LONG-
TERM
COMPEN-
SATION
AWARDS
-----------
NUMBER OF
SECURITIES ALL OTHER
NAME AND ANNUAL COMPENSATION UNDERLYING COMPEN-
PRINCIPAL FISCAL ------------------- OPTIONS SATION
POSITION YEAR SALARY BONUS
---------- ------ ------ --------- ----------- ---------
Patrick M. Quinn 1997 $373,150 $ 37,497 400 $108,833
(Chief Executive Officer) 1996 353,658 75,000 400 107,317
1995 341,949 61,250 400 106,393
James B. Meyer 1997 $308,250 $ 24,500 400 $ 6,348
(President and Chief 1996 231,995 37,375 200 4,832
Operating Officer) 1995 213,060 32,200 200 3,908
Charles B. Fosnaugh 1997 $190,640 $ 18,688 200 $ 5,921
(Senior Vice President 1996 182,940 37,375 200 4,405
Business Development 1995 159,860 30,100 100 3,481
and Finance)
Dennis J. Otto 1997 $132,000 $ 9,000 100 $ 6,478
(Vice President 1996 113,375 19,350 100 4,052
Sales and Marketing) 1995 101,005 15,050 100 4,038
David deS. Couch 1997 $120,330 $ 7,500 100 $ 6,824
(Vice President 1996 101,975 15,000 0 3,934
Information Technology) 1995 92,110 12,900 0 3,010
__________________
Includes bonus amounts elected under the 1991 Stock Bonus Plan,
as amended, plus an amount equal to 30 percent of such bonus
amounts to be received in Class A Shares.
All reported awards were under the 1991 Stock Option Plan, as
amended (the "1991 Stock Option Plan"). These awards have vested
and are exercisable at the date of grant.
-59-
The compensation listed in this column for fiscal year 1997
consists of: (i) amounts paid by Spartan for split dollar and
term life insurance; (ii) Spartan's matching contributions under
its Savings Plus Plan; and (iii) for Mr. Quinn only, amounts
deferred under the Spartan, Inc. Supplemental Retirement Plan.
The amounts included for each such factor for fiscal year 1997
are:
(i) (ii) (iii)
------ ------ --------
Mr. Quinn $2,612 $4,750 $101,471
Mr. Meyer 1,598 4,750
Mr. Fosnaugh 1,171 4,750
Mr. Otto 1,728 4,750
Mr. Couch 2,074 4,750
STOCK OPTIONS
Under the 1991 Stock Option Plan, options to purchase Class A
Shares may be granted to officers of Spartan. The following tables set
forth information concerning stock options granted under the 1991 Stock
Option Plan during the fiscal year ended March 29, 1997, to the named
executive officers and the unexercised options held by them as of the end
of the fiscal year. None of the named executive officers exercised any
stock options during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
--------------------------------------
INDIVIDUAL GRANTS
- ------------------------------------------------------------------ POTENTIAL
PERCENT REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL
OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE EXPIRA- FOR OPTION TERM
OPTIONS IN FISCAL PRICE PER TION ---------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
---- ------- ---------- ----- ------- -- ---
Patrick M. Quinn 400 44% $105 5/2006 $26,414 $66,937
James B. Meyer 200 22 105 5/2006 13,207 33,469
Charles B. Fosnaugh 200 22 105 5/2006 13,207 33,469
Dennis J. Otto 100 11 105 5/2006 6,603 16,734
David deS. Couch 0 N/A N/A N/A N/A N/A
__________________
-60-
The per share exercise price of each option equals the Trading Value
of the Class A Shares effective as of June 23, 1996. All options were
granted for a term of 10 years. Options terminate, subject to limited
exercise provisions, in the event of death, retirement, or other
termination of employment. All options currently are exercisable.
The exercise price of the options may be paid in cash, by delivering
Class A Shares which are already owned by the option holder, or any
combination thereof.
FISCAL YEAR-END OPTION VALUES
-----------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
--------------- -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Patrick M. Quinn 2000 0 $22,000 $0
James B. Meyer 1000 0 11,000 0
Charles B. Fosnaugh 700 0 6,000 0
Dennis J. Otto 200 0 500 0
David deS. Couch 0 0 0 0
________________
Represents the difference between the exercise price of the options
for the Class A Shares and the Trading Value of $105 per share at
fiscal year-end.
EMPLOYMENT AGREEMENTS
The officers of Spartan are appointed annually by and serve at
the pleasure of the Board of Directors or the Chief Executive Officer.
Except for Messrs. Quinn and Meyer, Spartan has not entered into any
employment agreement with any officer.
On June 1, 1987, Mr. Quinn entered into an employment agreement
with Spartan. Under the employment agreement, Mr. Quinn's annual base
salary is to be and has been revised upon mutual agreement of Spartan and
-61-
Mr. Quinn on a year-to-year basis. Under the employment agreement, Spartan
provides Mr. Quinn with an automobile and certain other fringe benefits.
The employment agreement may be terminated upon mutual agreement, upon
Mr. Quinn's death or disability, by either party at its option upon
90 days' written notice to the other, or upon certain other events. Upon
termination by Spartan, Mr. Quinn will receive an amount equal to his
current salary, payable in the same manner as if he remained employed with
Spartan, for one year after the date of severance or until he is employed
elsewhere, whichever occurs first.
On August 14, 1996, the Board of Directors appointed Mr. Meyer
President and Chief Operating Officer of Spartan, and as of that date Mr.
Meyer entered into an employment agreement with Spartan. Under the
employment agreement, Mr. Meyer's annual base salary is to be revised upon
mutual agreement of Spartan and Mr. Meyer on a year-to-year basis. Under
the employment agreement, Spartan provides Mr. Meyer with an automobile and
certain other fringe benefits. The employment agreement may be terminated
upon mutual agreement, upon Mr. Meyer's death or disability, by either
party at its option upon 90 days' written notice to the other, for cause, or
upon certain other events. Upon termination by Spartan for any reason
other than for cause or Mr. Meyer's death or disability, or upon
termination by Mr. Meyer for good reason, Mr. Meyer will receive life,
health, accident, and dental insurance benefits and an amount equal to his
current salary for one year after the date of severance. In addition, all
options held by Mr. Meyer to acquire Class A Shares will immediately vest
and become exercisable for 90 days after the date of severance, all risks
of forfeiture applicable to any restricted stock granted to Mr. Meyer will
lapse and no longer apply, and Spartan will purchase and transfer to Mr.
Meyer the automobile then furnished to him.
PENSION PLAN
The following table illustrates estimated annual benefits payable
under the noncontributory, defined benefit plans of Spartan (the "Pension
Plan") to Associates upon retirement, assuming retirement at age 65,
including the amounts attributable to the Supplemental Executive Retirement
Plan of Spartan which provides benefits that would otherwise be denied
participants by reason of certain limitations on qualified benefit plans in
the Internal Revenue Code of 1986, as amended.
-62-
PENSION PLAN TABLE
------------------
AVERAGE
REMUNERATION YEARS OF BENEFIT SERVICE
- ------------ ------------------------
5 10 15 20 25
- -- -- -- --
$ 50,000 $ 4,030 $ 8,060 $ 12,090 $ 16,120 $ 20,150
100,000 8,655 17,310 25,965 34,620 43,275
200,000 17,905 35,810 53,715 71,620 89,525
300,000 27,155 54,310 81,465 108,620 135,775
400,000 36,405 72,810 109,215 145,620 182,025
500,000 45,655 91,310 136,965 182,620 228,275
The compensation shown under the heading "Annual Compensation" in
the Summary Compensation Table on page 46 is representative of the most
recent calendar year compensation used in calculating average remuneration
for the Spartan Pension Plan. Credited years of service of the named
executive officers under the Spartan Pension Plan as of March 29, 1997,
are:
CREDITED YEARS OF SERVICE
-------------------------
Patrick M. Quinn 12
James B. Meyer 24
Charles B. Fosnaugh 7
Dennis J. Otto 7
David deS. Couch 11
Benefits under the Pension Plan become vested after five years of
service. Upon reaching the normal retirement age of 65, a covered employee
is entitled to retirement benefits computed using the average annual
compensation (including salary, hourly wages, overtime, incentive pay,
bonuses, and commissions) from the plan employers during the
five consecutive calendar years in the last 10 calendar years during which
the participant's compensation was greatest.
The basic pension benefit is an annual benefit, paid in equal
monthly installments, and is equal to the sum of (i) 1.2 percent of the
participant's annual compensation plus 0.65 percent of the participant's
average compensation in excess of the amount which would be used to compute
-63-
Social Security benefits, multiplied by the participant's years of benefit
service (up to 25 years of benefit service), plus (ii) 0.5 percent of the
participant's average compensation, multiplied by the participant's years
of benefit service in excess of 25 years of benefit service. For persons
who were participants prior to April 1, 1989, the Pension Plan provides
that their retirement benefit will not be less than the benefit accrued as
of March 31, 1989. (In general, the Pension Plan provisions in effect
prior to April 1, 1989, provided higher retirement benefits for highly
compensated employees, and lower benefits for less highly compensated
employees than the current provisions of the Pension Plan.)
COMPENSATION OF DIRECTORS
Each director receives a base compensation of $10,000 per year
and $1,000 per day for attendance at any meetings of the Board or a
committee. Directors also are reimbursed for travel expenses for meetings
attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Buick,
Catt, Deering, and Hill. Each member of the Compensation Committee, except
Mr. Buick, has an ownership interest in a business which is a Shareholder-
Customer of the Company and purchases groceries, perishables, general
merchandise, and other products and services from the Company on an ongoing
basis. For a discussion of transactions with entities related to directors
and the Board's policy with respect to transactions in which a director has
an interest, see "Certain Relationships and Related Transactions."
-64-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of the Class A Shares as of May 31, 1997, of (i) each
of the directors and nominees for director of Spartan, (ii) each of the
named executive officers of Spartan, and (iii) all directors and executive
officers of Spartan as a group. As of May 31, 1997, no person is known to
Spartan to be the beneficial owner of more than five percent of the Class A
Shares.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ ------------------------- ----------------
Donald J. Koop 59,289 4.9%
Parker T. Feldpausch 50,839 4.2
Russell H. VanGilder, Jr. 50,741 4.2
Glen A. Catt 37,047 3.1
Dan R. Prevo 25,882 2.2
Daniel L. Deering 25,019 2.1
Ronald A. DeYoung 22,413 1.9
Martin P. Hill 22,224 1.8
Roger L. Boyd 16,931 1.4
Patrick M. Quinn 5,163
James B. Meyer 2,377
Charles B. Fosnaugh 1,594
Dennis J. Otto 400
David deS. Couch 139
All Directors and Executive
Officers as a group 320,058 26.56%
______________________________
Less than one percent.
Except for Messrs. Quinn and Meyer, the Class A Shares reported as
beneficially owned by each director are directly owned by a
corporation which is a Spartan retail customer that conducts business
with the Company and with whom the director is affiliated. Thus, each
such director indirectly owns the Class A Shares through the
corporation which he controls either individually or with others. The
Class A Shares owned by each such corporation are included in the
amount reported for the appropriate director. For the name of each
such entity related to each director, see "Directors and Executive
Officers of the Registrant" above. Messrs. Quinn and Meyer and the
named executive officers directly own the Class A Shares reported to
be owned by each and hold the sole voting and dispositive power with
respect to the shares.
-65-
The amount of shares beneficially owned by each executive officer
includes shares which may be acquired through the exercise of stock
options which are exercisable within 60 days. The number of shares
subject to such stock options for each person is shown below. The
reported shares include the shares subject to options granted on May
28, 1997.
Mr. Quinn 2,400
Mr. Meyer 1,400
Mr. Fosnaugh 900
Mr. Otto 300
Mr. Couch 100
All executive officers as a group 5,100
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Spartan's directors (except Ms. Johnson, if elected, and Messrs.
Buick, Carton, Meyer, and Quinn) have ownership interests in businesses
which are Shareholder-Customers and purchase groceries, perishables,
general merchandise, and other products and services from the Company on an
ongoing basis. To the extent that the Company engages in transactions and
offers services which benefit its Customers, the businesses in which such
directors have ownership interests may benefit. Consequently, a director
may have a conflict of interest between the best interests of the Company
and the business in which the director has an ownership interest.
For any transaction involving a sale in the ordinary course of
business of groceries, perishables, general merchandise, insurance, or
other products or services of the Company to a Customer of the Company in
which the director owns an equity interest or is an officer, director, or
employee or otherwise has an interest (a "Related Entity"), it is the
Company's policy that the sale is deemed fair to the Company, and Board
approval is not specifically required, if the sale is made at prices and on
terms, including discounts and rebates, no less favorable than those
offered generally to Customers who are not affiliated with any director.
For any other transaction in which a director has an interest
(including, without limitation, the Company's leasing, purchasing, or
selling any property involving any loan or guarantee of an obligation by
the Company in a transaction involving a Related Entity), it is the
Company's policy and practice that the director shall proceed with the
transaction only if the material facts of the transaction and the
director's interest in the transaction have been disclosed to the Board,
the Board determines that it is fair to the Company, and the transaction is
approved by the affirmative vote of a majority of the Board of Directors
who have no interest in the transaction. Each such transaction is made on
-66-
terms no less favorable to the Company than those offered generally to
Customers who are not affiliated with any director.
During fiscal year ended March 29, 1997, in the aggregate,
Related Entities paid to the Company approximately $543,405,000 for grocery
and related products (21.96 percent of the Company's total net sales for
fiscal year 1997). No single Related Entity accounted for more than
4.62 percent of the Company's total net sales in fiscal year 1997. In
connection with the purchases of such products, the Company paid to the
Related Entities concentration rebates, discounts, and allowances on
purchases at the same rates and on the same terms as applicable to all
Customers. For the name of the entity related to each director, see
"Directors and Executive Officers of the Registrant."
In addition, in the aggregate, Related Entities:
(a) in the fiscal year ended March 29, 1997, paid to the
Company insurance premiums and commissions equal to approximately
$4,060,000, or 23 percent of all premiums and commissions paid
(no single Related Entity accounted for more than five percent of
the total insurance premiums and commissions paid); and
(b) in the fiscal year ended March 29, 1997, made lease
payments to the Company in the amount of approximately
$2,890,662, or 24 percent of all lease payments made (no single
Related Entity accounted for more than 12 percent of lease
payments made).
Management believes all such leases have been made in the
ordinary course, based upon fair and reasonable terms and on an arm's-
length basis. All such leases are current on all required payments, and
none of these leases are delinquent or in default as of March 29, 1997.
As of the end of fiscal year 1997, no loans were outstanding
between the Company and any director, executive officer, or Related Entity.
In the fiscal year ended March 29, 1997, the Company incurred construction
costs of approximately $5,800,000 on projects to construct retail stores
that have been leased to Related Entities.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS.
Independent Auditors' Report of Deloitte & Touche LLP dated
June 9, 1997
-67-
Consolidated Balance Sheets at March 29, 1997 and March 30,
1996
Consolidated Statements of Operations for each of the three
years in the period ended March 29, 1997
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended March 29, 1997
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 29, 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
SCHEDULE DOCUMENT
-------- --------
II Valuation and Qualifying Accounts
3. EXHIBITS.
EXHIBIT
NUMBER DOCUMENT
------- --------
2 Share Purchase Agreement between the Shareholders
of J.F. Walker Company, Inc., and Spartan Stores,
Inc., dated October 4, 1993. Previously filed as
Exhibit 2 to the Registrant's Current Report on
Form 8-K filed November 23, 1993. Here
incorporated by reference.
3.1 Restated Articles of Incorporation of Spartan Stores,
Inc.
3.2 Bylaws of Spartan Stores, Inc.
4.1 Articles III, V, VI and IX of the Restated Articles of
Incorporation--Included in Exhibit 3.1 and incorporated
herein by reference.
4.2 Articles II, III, IV, VII, VIII and IX of the Bylaws--
Included in Exhibit 3.2 and incorporated herein by
reference.
4.3(a) Form of Spartan Stores, Inc. Stock Subscription
Agreement--Shareholder Customers.
-68-
EXHIBIT
NUMBER DOCUMENT
------- --------
4.3(b) Form of Spartan Stores, Inc. Stock Subscription
Agreement--Capistar Customers. Previously filed as an
exhibit to the Registrant's Amendment No. 2 to the
Registration Statement on Form S-1 filed January 23,
1992. Here incorporated by reference.
4.4 Form of Spartan Stores, Inc. Customer Agreement.
4.5 Note Purchase Agreement between Spartan Stores, Inc.
and Teachers Insurance and Annuity Association of
America, Nationwide Life Insurance Company and West
Coast Life Insurance Company.
4.6 Note Agreement between Spartan Stores, Inc. and The
Ohio National Life Insurance Company and United of
Omaha Life Insurance Company.
4.7 Note Agreement between Spartan Stores, Inc. and
Massachusetts Mutual Life Insurance Company, The
Franklin Life Insurance Company and The Columbus Mutual
Life Insurance Company.
4.8 Form of Spartan Stores, Inc. Class A Common Stock
Certificate.
4.9 Note Agreement between Spartan Stores, Inc. and
United of Omaha Life Insurance Company, United
World Life Insurance Company, Companion Life
Insurance Company, Principal Mutual Life Insurance
Company and Nippon Life Insurance Company, dated
as of January 15, 1993. Previously filed as an
exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 27,
1993. Here incorporated by reference.
4.10 First Amendment to Note Purchase Agreement between
Spartan Stores, Inc. and Teachers Insurance and
Annuity Association of America, Nationwide Life
Insurance Company and West Coast Life Insurance
Company, dated as of March 29, 1996. Previously
filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 30, 1996. Here incorporated by reference.
-69-
EXHIBIT
NUMBER DOCUMENT
------- --------
4.11 First Amendment and Waiver to Note Agreements
between Spartan Stores, Inc. and Principal Mutual
Life Insurance Company, Nippon Life Insurance
Company of America, United of Omaha Life Insurance
Company, Companion Life Insurance Company and
United World Life Insurance Company, dated as of
June 20, 1996. Previously filed as an exhibit to
the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 30, 1996. Here
incorporated by reference.
4.12 Credit Agreement among Spartan Stores, Inc.,
Michigan National Bank, and Michigan National Bank
and Old Kent Bank, NBD Bank, Harris Trust and
Savings Bank and National City Bank of Columbus,
dated December 23, 1996. Previously filed as an
exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 4, 1997.
Here incorporated by reference.
10.1 Note Purchase Agreement--Included as Exhibit 4.5 and
incorporated herein by reference.
10.2 Note Agreement--Included as Exhibit 4.6 and
incorporated herein by reference.
10.3 Note Agreement--Included as Exhibit 4.7 and
incorporated herein by reference.
10.4 Warehouse Lease Agreement, dated October 6, 1988,
between Warehouse Systems Co. and Spartan Stores, Inc.
10.5 Warehouse Lease Agreement, dated October 14, 1975,
between Connecticut Mutual Life Insurance Company and
Spartan Stores, Inc.
10.6 Warehouse Lease Agreement, dated November 11, 1988,
between Norman J. Leven and L & L/Jiroch Distributing
Company.
10.7 Computer Lease Agreement, dated May 30, 1989, between
Atlantic Computer Systems, Inc. and Spartan Stores,
Inc.
10.8 Equipment Lease Agreement, dated March 3, 1988, between
PHH Financial Services, Inc. and Spartan Stores, Inc.
10.9 Employment Agreement, dated June 1, 1987, between
Spartan Stores, Inc. and Patrick M. Quinn.
Previously filed as an exhibit to the Registrant's
Form S-1 Registration Statement filed July 18,
1991. Here incorporated by reference.
10.10 Spartan Stores, Inc. 1991 Stock Bonus Plan.
-70-
EXHIBIT
NUMBER DOCUMENT
------- --------
10.11 Spartan Stores, Inc. 1991 Stock Option Plan as
amended. Previously filed as an exhibit to the
Registrant's Form S-1 Registration Statement filed
July 23, 1993. Here incorporated by reference.
10.12 Spartan Stores, Inc. 1991 Associate Stock Purchase
Plan.
10.13 Spartan Stores, Inc. Supplemental Executive
Retirement Plan.
10.14 Note Agreement--Included as Exhibit 4.9.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 27, 1993. Here incorporated by
reference.
10.15 Warehouse Lease Agreement, dated November 8, 1993,
between Walker Realty Co. and J.F. Walker Company,
Inc. Previously filed as an exhibit to the
Registrant's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 filed March 16,
1994. Here incorporated by reference.
10.16 First Amendment to Note Purchase Agreement--Included
as Exhibit 4.10. Here incorporated by reference.
10.17 First Amendment and Waiver to Note Agreements--
Included as Exhibit 4.11. Here incorporated by
reference.
10.18 Employment Agreement, dated August 14, 1996,
between Spartan Stores, Inc. and James B.
Meyer.
21 Subsidiaries of Registrant. Previously filed as
an exhibit to the Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on
Form S-1 filed March 16, 1994. Here incorporated
by reference.
23 Consent and Report on Schedule of Deloitte and Touche
LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
_________________________
Previously filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here incorporated by
reference.
These documents are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
-71-
(b) Reports on Form 8-K:
None.
-72-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SPARTAN STORES, INC.
(Registrant)
By /S/ JAMES B. MEYER
James B. Meyer
President and Chief Operating Officer
Date: June 26, 1997
-73-
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
June 26, 1997 By /S/ DONALD J. KOOP*
Donald J. Koop
Chairman of the Board and Director
June 26, 1997 By /S/ RUSSELL H. VANGILDER, JR.*
Russell H. VanGilder, Jr.
Vice Chairman of the Board and Director
June 26, 1997 By /S/ ROGER L. BOYD*
Roger L. Boyd
Secretary of the Board and Director
June 26, 1997 By /S/ JAMES G. BUICK*
James G. Buick
Director
June 26, 1997 By /S/ JOHN S. CARTON*
John S. Carton
Director
June 26, 1997 By /S/ GLEN A. CATT*
Glen A. Catt
Director
June 26, 1997 By /S/ DANIEL L. DEERING*
Daniel L. Deering
Director
June 26, 1997 By /S/ RONALD A. DEYOUNG*
Ronald A. DeYoung
Director
-74-
June 26, 1997 By /S/ PARKER T. FELDPAUSCH*
Parker T. Feldpausch
Director
June 26, 1997 By /S/ MARTIN P. HILL*
Martin P. Hill
Director
June 26, 1997 By /S/JAMES B. MEYER
James B. Meyer
Director
June 26, 1997 By /S/ DAN R. PREVO*
Dan R. Prevo
Director
June 26, 1997 By /S/ PATRICK M. QUINN
Patrick M. Quinn
Chief Executive Officer
and Director (Principal Executive
Officer)
June 26, 1997 By /S/ CHARLES B. FOSNAUGH
Charles B. Fosnaugh
Senior Vice President Business
Development and Finance (Principal
Financial and Accounting Officer)
June 26, 1997 *By /S/ JAMES B. MEYER
James B. Meyer
Attorney-in-Fact
-75-
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
In Appendix A to this Form 10-K, Spartan is furnishing
supplementally to the Securities and Exchange Commission a copy of the Proxy
Statement Supplement, Proxy Statement, form of Proxy, and other proxy
soliciting material sent by Spartan to its shareholders in connection with
the Annual Meeting of Shareholders to be held on July 15, 1997.
As of the date of this Form 10-K, Spartan has not yet furnished,
for the fiscal year ending March 29, 1997, an annual report to its
shareholders. Spartan plans to furnish an annual report to its
shareholders subsequent to the filing of this Form 10-K. Spartan shall
furnish copies of such annual report to the Securities and Exchange
Commission when it is sent to the shareholders.
The foregoing material shall not be deemed to be "filed" with the
Securities and Exchange Commission or otherwise subject to the liabilities
of Section 18 of the Securities and Exchange Act of 1934.
-76-
SCHEDULE II
-----------
SPARTAN STORES, INC. AND SUBSIDIARIES
- -------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E
- -------- -------- -------- --------- -------- --------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- --------------------------------------------------------------------------------------------------------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended 3/25/95 $1,778,443 $1,211,404 $1,029,847 $1,960,000
Year ended 3/30/96 $1,960,000 $2,252,012 $1,577,012 $2,635,000
Year ended 3/29/97 $2,635,000 $1,710,556 $1,186,588 $3,158,968
Represents the write-off of uncollectible accounts
F-1
SUPPLEMENTAL INFORMATION FURNISHED PURSUANT
TO THE INSTRUCTIONS TO FORM 10-K
APPENDIX A
SPARTAN STORES, INC.
850 76TH STREET, S.W.
POST OFFICE BOX 8700
GRAND RAPIDS, MICHIGAN 49518
PROXY STATEMENT SUPPLEMENT
ANNUAL MEETING OF SHAREHOLDERS
JULY 15, 1997
On or about June 13, 1997, the Board of Directors of Spartan
Stores, Inc. ("Spartan Stores" or the "Company") mailed to each shareholder
a Proxy Statement to solicit a proxy for use at the Annual Meeting of
Shareholders to be held at the Grand Traverse Resort, 100 Grand Traverse
Village Boulevard, Acme, Michigan 49610, on Tuesday, July 15, 1997, at
10:00 a.m., local time, and any adjournment thereof.
The meeting will be held for the purposes set forth in the Notice
of Annual Meeting of Shareholders accompanying the Proxy Statement, includ-
ing to consider and vote upon the approval of a proposed amendment to Article
III of the Restated Articles of Incorporation to increase the number of
authorized shares of Spartan Stores' Class A Common Stock, $20 par value,
("Class A Shares") and the number of authorized shares of Spartan Stores'
Class B Common Stock, no par value. The proposed amendment also would
decrease the par value of the Class A Shares from $20 per share to $2 per
share. As amended, the first sentence of Article III would read as follows:
The total authorized capital stock of the corporation is Twenty
Million (20,000,000) shares of Class A common stock with the par
value of $2 per share and Five Million (5,000,000) shares of
Class B common stock.
Class A Shares represented by a proxy in the form enclosed with
the Proxy Statement that is properly signed and that already has been or is
returned to Spartan Stores will be voted on the proposals at the meeting
and any adjournment thereof as specified in the proxy. Upon request,
Spartan Stores will return the proxy to any shareholder who already has
signed and returned the proxy to Spartan Stores. Spartan Stores also will
return the proxy to any shareholder who attends the meeting and notifies
the Company that the shareholder intends to vote in person.
A-1
This Proxy Statement Supplement is being mailed on or about June
20, 1997, to the shareholders of Spartan Stores.
By the Order of the Board of Directors,
/s/Alex J. DeYonker
Grand Rapids, Michigan Alex J. DeYonker
June 20, 1997 Assistant Secretary
A-2
[Spartan Stores, Inc. Letterhead]
June 13, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of
Shareholders of Spartan Stores, Inc., to be held on TUESDAY, JULY 15, 1997,
AT THE GRAND TRAVERSE RESORT, 100 GRAND TRAVERSE VILLAGE BOULEVARD, ACME,
MICHIGAN 49610, commencing at 10:00 A.M., LOCAL TIME. Your Board of
Directors looks forward to greeting personally those shareholders able to
attend.
At the meeting, you will be asked to elect four directors to
terms of three years each. You also will be asked to approve a proposed
amendment to the Restated Articles of Incorporation to increase the number
of authorized Class A shares of the Company's common stock from two million
shares to twenty million shares and the number of authorized Class B shares
of the Company's common stock from five hundred thousand shares to five
million shares. If you approve the amendment, the Company will effect a
ten-for-one stock split for the shares that you own. Enclosed are the
Notice of the Meeting and the Proxy Statement, which includes information
about each of the nominees for the Board of Directors and the proposed
amendment to the Restated Articles of Incorporation.
Regardless of the size of your holdings, it is important that
your shares are represented and voted at the meeting. To ensure a quorum,
please take a moment now to sign and date the enclosed Proxy and return it
to us in the enclosed self-addressed envelope. If you attend the meeting
and request us to do so, we will return the Proxy to you to vote your
shares at the meeting.
Thank you.
Sincerely,
/s/Patrick M. Quinn
Patrick M. Quinn
Chief Executive Officer
A-3
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders:
The Annual Meeting of Shareholders of Spartan Stores, Inc., will
be held at the Grand Traverse Resort, 100 Grand Traverse Village Boulevard,
Acme, Michigan 49610, on Tuesday, July 15, 1997, at 10:00 a.m., local time,
to consider and vote upon:
1. The election of four directors to terms of three years each;
2. The approval of a proposed amendment to the Restated Articles of
Incorporation to increase the number of authorized shares of
Spartan Stores' Class A Common Stock, $20 par value, and the
number of authorized shares of Spartan Stores' Class B Common
Stock, no par value;
3. The ratification of the acts or proceedings, or both, of the
directors and officers of Spartan Stores that may be
submitted to the meeting; and
4. Any other business as may properly come before the meeting.
Shareholders of record at the close of business on May 31, 1997,
are entitled to notice of and to vote at the meeting and any adjournment
thereof. The following Proxy Statement and enclosed Proxy are being
furnished to shareholders on or about June 13, 1997.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Alex J. DeYonker
Alex J. DeYonker
Assistant Secretary
June 13, 1997
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE
MEETING. EVEN IF YOU EXPECT TO ATTEND THE MEETING,
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY.
A-4
SPARTAN STORES, INC.
850 76TH STREET, S.W.
POST OFFICE BOX 8700
GRAND RAPIDS, MICHIGAN 49518
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
JULY 15, 1997
INTRODUCTION
The Board of Directors of Spartan Stores, Inc. ("Spartan Stores"
or the "Company") solicits your proxy for use at the Annual Meeting of
Shareholders to be held at the Grand Traverse Resort, 100 Grand Traverse
Village Boulevard, Acme, Michigan 49610, on Tuesday, July 15, 1997, at
10:00 a.m., local time, and any adjournment thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders.
A form of proxy is enclosed. Shares of Spartan Stores' Class A
Common Stock, $20 par value (the "Class A Shares"), represented by a proxy
in the enclosed form that is properly signed and returned to Spartan Stores
will be voted at the meeting and any adjournment thereof. If a shareholder
specifies a choice, the shares represented by the proxy will be voted as
specified. If no choice is specified, the shares represented by the proxy
will be voted for the election of the four director nominees named in this
Proxy Statement for three-year terms; for the approval of the proposed
amendment to the Restated Articles of Incorporation to increase the number
of authorized Class A Shares and the number of authorized shares of Class B
Common Stock, no par value ("Class B Shares"); for the ratification of the
acts or proceedings, or both, of the directors and officers of Spartan
Stores that may be submitted to the meeting; and in accordance with the
judgment of the designated proxies with respect to any other matter that
may come before the meeting or any adjournment thereof.
A proxy may be revoked at any time before it is voted at the
Annual Meeting by giving notice in writing to the Secretary of Spartan
Stores, by submitting a proxy bearing a later date, or by attending the
meeting, requesting a return of the proxy and voting in person. Spartan
Stores will return the proxy to each shareholder who attends the meeting
and notifies the Company that the shareholder intends to vote in person.
This Proxy Statement is being mailed on or about June 13, 1997, to the
shareholders of Spartan Stores.
A-5
VOTING RIGHTS
Holders of record of Class A Shares at the close of business on
May 31, 1997, will be entitled to notice of and vote at the Annual Meeting
of Shareholders to be held July 15, 1997, and any adjournment thereof.
As of May 31, 1997, 1,204,354 Class A Shares were issued and
outstanding. Each Class A Share issued and outstanding entitles its holder
to one vote on each matter presented for shareholder action at the meeting.
ELECTION OF DIRECTORS
The Board consists of thirteen directors and is divided into
three classes, with the term of one class expiring in each successive year.
Eight current directors are serving terms that will expire in 1998 and
1999. At the Annual Meeting of Shareholders, four directors are to be
elected for terms of three years each and until their successors are
elected and qualified. The persons designated as proxies intend to vote
for the election of the four nominees named below. Accordingly, after the
election of directors at the Annual Meeting of Shareholders, the Board will
consist of twelve directors.
Each of the nominees is willing to be elected and to serve. If
any nominee should become unable to serve or is otherwise unavailable for
election, which is not expected, the incumbent Board of Directors may or
may not select a substitute nominee. If a substitute nominee is selected,
the proxies will be voted for the election of the substitute nominee
selected by the incumbent Board of Directors. If a substitute nominee is
not selected, all proxies will be voted for the election of the remaining
nominees. Proxies will not be voted for a number of persons greater than
the number of nominees named in this Proxy Statement.
Directors will be elected by a plurality of the votes cast by
shareholders who are present in person or represented by proxy at the
meeting. For the purpose of counting votes on the election of directors,
abstentions and other shares not voted will not be counted as shares voted,
and the number of shares of which a plurality is required will be reduced
by the number of shares not voted.
The following table shows certain information as of May 31, 1997,
supplied by each director whose term will continue and each nominee for
director.
A-6
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST 5 YEARS
------------ ---------------------------
NOMINEES TO BE ELECTED
TERMS EXPIRING IN 2000
----------------------
Glen A. Catt (age 49) Director since 1988; President and Chief
Executive Officer, Glen's Markets, Inc.
(retail grocery chain)
Parker T. Feldpausch (age 65) Director since 1990; President, G &
R Felpausch Co. (retail grocery
chain)
Dorothy A. Johnson (age 56) President, Council of Michigan
Foundations since 1975 (association
of foundations and corporations);
Trustee, W.K. Kellogg Foundation
since 1980; President, Community
Foundation Youth Project since
1994; Director, First of America
Bank Corporation since 1985
James B. Meyer (age 51) President and Chief Operating Officer of
the Company and director since August
1996; Treasurer since 1994; Senior Vice
President Corporate Support Services
from June 1994 to August 1996; Chief
Financial Officer and Assistant
Secretary from October 1990 to August
1996; Senior Vice President from 1981 to
1994
INCUMBENT DIRECTORS
TERMS EXPIRING IN 1998
----------------------
Roger L. Boyd (age 50) Secretary of the Board since 1993
and director since 1992; President
and General Manager, Bob's Market
House, Inc. (retail grocery store);
President and General Manager,
Hillsdale Market House, Inc.
(retail grocery store)
A-7
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST 5 YEARS
------------ ---------------------------
John S. Carton (age 56) Director since 1995; Chairman of
the Board, Pine View Golf Club,
Inc. and Turfside, Inc. (golf
course and restaurant)
Ronald A. DeYoung (age 63) Director since 1974;
President, Great Day, Inc.
(retail grocery chain)
Donald J. Koop (age 60) Chairman of the Board since 1989
and director since 1985; Chairman
of the Board, Family Fare Inc.
(retail grocery chain)
INCUMBENT DIRECTORS
TERMS EXPIRING IN 1999
----------------------
James G. Buick (age 64) Director since 1995; Retired;
Former President and Chief
Executive Officer, The Zondervan
Corporation (1984 to 1993)
(producer and distributor of
Christian books and gifts)
Martin P. Hill (age 52) Director since 1996; President,
Harding & Hill, Inc. (retail
grocery chain)
Dan R. Prevo (age 47) Director since 1996; President,
Prevo's Family Market, Inc. (retail
grocery chain)
Russell H. VanGilder, Jr. Vice Chairman of the Board since 1992
(age 63) and director since 1970; Chairman of
the Board, V.G.'s Food Center, Inc.
(retail grocery chain)
YOUR BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR ELECTION OF ALL NOMINEES AS DIRECTORS
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION
The Board of Directors proposes to amend Article III of the
Company's Restated Articles of Incorporation to increase the Company's
A-8
authorized capital stock from two million (2,000,000) Class A Shares to
twenty million (20,000,000) Class A Shares and from five
hundred thousand (500,000) Class B Shares to five million (5,000,000)
Class B Shares. The purpose of the amendment is to provide additional
shares of capital stock for possible future issuance.
As of May 31, 1997, 1,204,354 authorized Class A Shares were
issued and outstanding and the Company had not issued any Class B Shares.
The Board of Directors believes that it is advisable to have additional
authorized Class A Shares and Class B Shares available for possible future
stock splits and dividends, employee benefit plans, and other corporate
purposes that might be proposed in the future. 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. The Company
currently does not have a sufficient number of authorized Class A Shares
for the Board of Directors to issue the share dividend pursuant to the
ten-for-one stock split. Accordingly, the Board of Directors declared the
stock split subject to the shareholders approving the amendment to the
Restated Articles of Incorporation to increase the authorized capital stock
of the Company. If the amendment is approved by the shareholders, the
Company will issue the shares payable in the stock split as soon as
practicable after the effective date of the amendment to the Restated
Articles of Incorporation. Except for shares to be issued in the ten-for-one
stock split and shares to be issued under the Company's stock plans,
the Company does not have any present plans to issue additional Class A
Shares. The Company does not have any present plans to issue Class B
Shares.
All of the additional shares resulting from the increase in the
number of authorized Class A Shares would be of the same class, with the
same dividend, voting and liquidation rights as the Class A Shares
presently outstanding. All of the additional shares resulting from the
increase in the number of authorized Class B Shares would be of the same
class, with such dividend, voting, distribution, conversion, redemption,
participation and liquidation rights as determined by the Board of
Directors. Shareholders have no preemptive rights to acquire shares issued
by the Company under its existing Restated Articles of Incorporation, and
shareholders would not acquire any such rights with respect to such
additional shares under the proposed amendment to the Company's Restated
Articles of Incorporation. Under some circumstances, issuance of
additional Class A Shares or issuance of Class B Shares could dilute the
voting rights, equity, and earnings per share of existing shareholders.
If the proposed amendment is adopted, the newly authorized Class
A Shares and Class B Shares would be unreserved and available for issuance.
No further shareholder authorization would be required prior to the
issuance of such shares by the Company. The Board of Directors believes
that the availability of the additional shares for such purposes without
delay or the necessity for a special shareholders meeting would be
beneficial to the Company.
A-9
The proposed increase in authorized Class A Shares and Class B
Shares could be considered an anti-takeover measure because the additional
authorized but unissued Class A Shares and Class B Shares could be used by
the Board of Directors to make a change in control of the Company more
difficult. The Board of Directors' purpose in recommending this proposal
is for the reasons discussed above and not as an anti-takeover measure.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF THE AMENDMENT TO THE COMPANY'S
RESTATED ARTICLES OF INCORPORATION
BOARD COMMITTEES AND MEETINGS
During fiscal year 1997, there were nine meetings of the Board of
Directors. The Board of Directors has four standing committees: the
Executive Committee, the Audit Committee, the Compensation Committee and
the Nominating Committee. All directors attended at least 75 percent of
the aggregate number of meetings of the Board of Directors and meetings of
committees on which he served during fiscal year 1997.
EXECUTIVE COMMITTEE. The Executive Committee has the full power
and authority of the Board of Directors in the management of the business
affairs and property of the Company during intervals between meetings of
the full Board of Directors. The Executive Committee has the power and
authority to declare distributions and dividends and to authorize the
issuance of stock, as permitted by the Company's Bylaws and all applicable
laws. In addition, the Executive Committee recommends to the Board of
Directors a successor to the Chief Executive Officer when a vacancy occurs
through retirement or otherwise. Messrs. Boyd, Koop, Quinn and VanGilder
currently serve on the Executive Committee. Mr. Koop is Chairman of the
Executive Committee. The Executive Committee met seven times during fiscal
year 1997.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of
Directors the employment of independent accountants; reviews the
compensation, terms of engagement and the independence of the independent
accountants; reviews the results of each audit by the independent
accountants; reviews the Company's annual financial statements and any
disputes between management and the independent accountants; consults with
the internal auditor and the independent accountants regarding the adequacy
of the Company's internal financial controls; and, provides additional
assistance to the Board of Directors relating to corporate accounting,
reporting practices of the Company, and the quality and integrity of the
financial reports of the Company, as specified in the Audit Committee
Charter approved by the Board of Directors. Messrs. Carton, DeYoung,
Feldpausch and Prevo currently serve on the Audit Committee. Mr. DeYoung
is Chairman of the Audit Committee. The Audit Committee met five times
during fiscal year 1997.
A-10
COMPENSATION COMMITTEE. The Compensation Committee administers
the 1991 Stock Option, Stock Bonus and Stock Purchase Plans of the Company;
determines the compensation of the Chief Executive Officer; reviews the
salaries, bonuses, stock options and other benefits of the other executive
officers and submits recommendations to the Board of Directors; authorizes
the issuance of stock pursuant to the option and other benefit plans of the
Company; reviews on a periodic basis the policies regarding and the
operation of the Company's executive compensation programs to determine
whether they are properly coordinated; and, provides additional assistance
to the Board of Directors relating to the Company's compensation and
benefit programs and policies, as specified in the Compensation Committee
Charter approved by the Board of Directors. Messrs. Buick, Catt, Deering
and Hill currently serve on the Compensation Committee. Mr. Catt is
Chairman of the Compensation Committee. The Compensation Committee met ten
times during fiscal year 1997.
NOMINATING COMMITTEE. The Nominating Committee identifies
potential nominees for election as directors and reviews their
qualifications to serve as directors; submits to the Board of Directors a
list of candidates for election as directors and recommends to the Board of
Directors the slate of nominees of directors to be elected by the
shareholders; recommends to the Board of Directors the directors to be
selected for membership on the various Board of Directors' committees;
establishes standards for membership on the Board of Directors and any
committee of the Board of Directors; and, provides additional assistance to
the Board of Directors relating to the recommendation of nominees to the
Board of Directors and its various committees, as specified in the
Nominating Committee Charter approved by the Board of Directors.
Messrs. Boyd, Prevo and VanGilder currently serve on the Nominating
Committee. Mr. VanGilder is Chairman of the Nominating Committee. The
Nominating Committee met two times during fiscal year 1997.
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the
beneficial ownership of the Class A Shares as of May 31, 1997, of (i) each
of the directors and nominees for director of Spartan Stores, (ii) each of
the named executive officers of Spartan Stores, and (iii) all directors and
executive officers of Spartan Stores as a group. As of May 31, 1997, no
person is known to Spartan Stores to be the beneficial owner of more than
five percent of the Class A Shares.
A-11
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ ------------------------ ----------------
Donald J. Koop 59,289 4.9%
Parker T. Feldpausch 50,839 4.2
Russell H. VanGilder, Jr. 50,741 4.2
Glen A. Catt 37,047 3.1
Dan R. Prevo 25,882 2.2
Daniel L. Deering 25,019 2.1
Ronald A. DeYoung 22,413 1.9
Martin P. Hill 22,224 1.8
Roger L. Boyd 16,931 1.4
Patrick M. Quinn 5,163
James B. Meyer 2,377
Charles B. Fosnaugh 1,594
Dennis J. Otto 400
David deS. Couch 139
All Directors and Executive
Officers as a group 320,058 26.56%
__________________________
Less than one percent.
Except for Messrs. Quinn and Meyer, the Class A Shares reported as
beneficially owned by each director are directly owned by a
corporation which is a Spartan Stores retail customer that conducts
business with the Company and with whom the director is affiliated.
Thus, each such director indirectly owns the Class A Shares through
the corporation which he controls either individually or with others.
The Class A Shares owned by each such corporation are included in the
amount reported for the appropriate director. For the name of each
such entity related to each director, see "Election of Directors"
above. Messrs. Quinn and Meyer and the named executive officers
directly own the Class A Shares reported to be owned by each and hold
the sole voting and dispositive power with respect to the shares.
The amount of shares beneficially owned by each executive officer
includes shares which may be acquired through the exercise of stock
options which are exercisable within 60 days. The number of shares
subject to such stock options for each person is shown below. The
reported shares include the shares subject to options granted on May
28, 1997.
A-12
Mr. Quinn 2,400
Mr. Meyer 1,400
Mr. Fosnaugh 900
Mr. Otto 300
Mr. Couch 100
All executive officers as a group 5,100
EXECUTIVE COMPENSATION AND OTHER BENEFITS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the cash and non-cash compensation
earned during the fiscal years ended March 29, 1997 (52 weeks), March 30,
1996 (53 weeks) and March 25, 1995 (52 weeks) by the persons who were the
Chief Executive Officer and the four most highly compensated executive
officers (other than the Chief Executive Officer) of Spartan Stores for the
fiscal year ended March 29, 1997.
SUMMARY COMPENSATION TABLE
LONG-
TERM
COMPEN-
SATION
AWARDS
-----------
NUMBER OF
SECURITIES ALL OTHER
NAME AND ANNUAL COMPENSATION UNDERLYING COMPEN-
PRINCIPAL FISCAL ------------------- OPTIONS SATION
POSITION YEAR SALARY BONUS
---------- ------ ------ -------- ---------- ---------
Patrick M. Quinn 1997 $373,150 $ 37,497 400 $108,833
(Chief Executive Officer) 1996 353,658 75,000 400 107,317
1995 341,949 61,250 400 106,393
James B. Meyer 1997 $308,250 $ 24,500 400 $ 6,348
(President and Chief 1996 231,995 37,375 200 4,832
Operating Officer) 1995 213,060 32,200 200 3,908
Charles B. Fosnaugh 1997 $190,640 $ 18,688 200 $ 5,921
(Senior Vice President 1996 182,940 37,375 200 4,405
Business Development 1995 159,860 30,100 100 3,481
and Finance)
Dennis J. Otto 1997 $132,000 $ 9,000 100 $ 6,478
(Vice President 1996 113,375 19,350 100 4,052
Sales and Marketing) 1995 101,005 15,050 100 4,038
A-13
David deS. Couch 1997 $120,330 $ 7,500 100 $ 6,824
(Vice President 1996 101,975 15,000 0 3,934
Information Technology) 1995 92,110 12,900 0 3,010
__________________
Includes bonus amounts elected under the 1991 Stock Bonus Plan,
as amended, plus an amount equal to 30 percent of such bonus
amounts to be received in Class A Shares.
All reported awards were under the 1991 Stock Option Plan. These
awards have vested and are exercisable at the date of grant.
The compensation listed in this column for fiscal year 1997
consists of: (a) amounts paid by Spartan Stores for split dollar
and term life insurance; (b) Spartan Stores' matching
contributions under its Savings Plus Plan; and (c) for Mr. Quinn
only, amounts deferred under the Spartan Stores, Inc.
Supplemental Retirement Plan. The amounts included for each such
factor for fiscal year 1997 are:
(A) (B) (C)
------ ------ --------
Mr. Quinn $2,612 $4,750 $101,471
Mr. Meyer 1,598 4,750
Mr. Fosnaugh 1,171 4,750
Mr. Otto 1,728 4,750
Mr. Couch 2,074 4,750
STOCK OPTIONS
Under the 1991 Stock Option Plan, as amended (the "1991 Stock
Option Plan"), options to purchase Class A Shares may be granted to
officers of Spartan Stores. The following tables set forth information
concerning stock options granted under the 1991 Stock Option Plan during
the fiscal year ended March 29, 1997, to the named executive officers and
the unexercised options held by them as of the end of the fiscal year.
None of the named executive officers exercised any stock options during
fiscal year 1997.
A-14
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ------------------------------------------------------------------ POTENTIAL
PERCENT REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL
OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE EXPIRA- FOR OPTION TERM
OPTIONS IN FISCAL PRICE PER TION -------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
---- ---------- ---------- --------- ------ -- ---
Patrick M. Quinn 400 44% $105 5/2006 $26,414 $66,937
James B. Meyer 200 22 105 5/2006 13,207 33,469
Charles B. Fosnaugh 200 22 105 5/2006 13,207 33,469
Dennis J. Otto 100 11 105 5/2006 6,603 16,734
David deS. Couch 0 N/A N/A N/A N/A N/A
__________________
The per share exercise price of each option equals the Trading Value
of the Class A Shares effective as of June 23, 1996. The Board of
Directors from time to time, usually on an annual basis, establishes
the Trading Value of the Class A Shares, in the Board's sole and
absolute discretion, based on the Company's financial condition,
results of operations, operating trends, market conditions, the state
of the economy and such other factors as the Board deems appropriate.
All options were granted for a term of 10 years. Options terminate,
subject to limited exercise provisions, in the event of death,
retirement, or other termination of employment. All options currently
are exercisable. The exercise price of the options may be paid in
cash, by delivering Class A Shares which are already owned by the
option holder, or any combination thereof.
A-15
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
--------------- ---------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Patrick M. Quinn 2000 0 $22,000 $0
James B. Meyer 1000 0 11,000 0
Charles B. Fosnaugh 700 0 6,000 0
Dennis J. Otto 200 0 500 0
David deS. Couch 0 0 0 0
________________
Represents the difference between the exercise price of the options
for the Class A Shares and the Trading Value of $105 per share at
fiscal year-end.
EMPLOYMENT AGREEMENTS
The officers of Spartan Stores are appointed annually by and
serve at the pleasure of the Board of Directors or the Chief Executive
Officer. Except for Messrs. Quinn and Meyer, Spartan Stores has not
entered into any employment agreement with any officer.
On June 1, 1987, Mr. Quinn entered into an employment agreement
with Spartan Stores. Under the employment agreement, Mr. Quinn's annual
base salary is to be and has been revised upon mutual agreement of Spartan
Stores and Mr. Quinn on a year-to-year basis. Under the employment
agreement, Spartan Stores provides Mr. Quinn with an automobile and certain
other fringe benefits. The employment agreement may be terminated upon
mutual agreement, upon Mr. Quinn's death or disability, by either party at
its option upon 90 days' written notice to the other or upon certain other
events. Upon termination by Spartan Stores, Mr. Quinn will receive an
amount equal to his current salary, payable in the same manner as if he
remained employed with Spartan Stores, for one year after the date of
severance or until he is employed elsewhere, whichever occurs first.
On August 14, 1996, the Board of Directors appointed Mr. Meyer
the President and Chief Operating Officer of Spartan Stores, and as of that
date Mr. Meyer entered into an employment agreement with Spartan Stores.
Under the employment agreement, Mr. Meyer's annual base salary is to be
A-16
revised upon mutual agreement of Spartan Stores and Mr. Meyer on a year-to-
year basis. Under the employment agreement, Spartan Stores provides
Mr. Meyer with an automobile and certain other fringe benefits. The
employment agreement may be terminated upon mutual agreement, upon Mr.
Meyer's death or disability, by either party at its option upon 90 days'
written notice to the other, for cause or upon certain other events. Upon
termination by Spartan Stores for any reason other than for cause or Mr.
Meyer's death or disability, or upon termination by Mr. Meyer for good
reason, Mr. Meyer will receive life, health, accident and dental insurance
benefits and an amount equal to his current salary for one year after the
date of severance. In addition, all options held by Mr. Meyer to acquire
Class A Shares will immediately vest and become exercisable for 90 days
after the date of severance, all risks of forfeiture applicable to any
restricted stock granted to Mr. Meyer will lapse and no longer apply, and
Spartan Stores will purchase and transfer to Mr. Meyer the automobile then
furnished to him.
PENSION PLAN
The following table illustrates estimated annual benefits payable
under the noncontributory, defined benefit plans of Spartan Stores (the
"Pension Plan") to associates upon retirement, assuming retirement at age
65, including the amounts attributable to the Supplemental Executive
Retirement Plan of Spartan Stores which provides benefits that would
otherwise be denied participants by reason of certain limitations on
qualified benefit plans in the Internal Revenue Code of 1986, as amended.
PENSION PLAN TABLE
AVERAGE
REMUNERATION YEARS OF BENEFIT SERVICE
- ------------ ------------------------
5 10 15 20 25
- -- -- -- --
$ 50,000 $ 4,030 $ 8,060 $ 12,090 $ 16,120 $ 20,150
100,000 8,655 17,310 25,965 34,620 43,275
200,000 17,905 35,810 53,715 71,620 89,525
300,000 27,155 54,310 81,465 108,620 135,775
400,000 36,405 72,810 109,215 145,620 182,025
500,000 45,655 91,310 136,965 182,620 228,275
The compensation shown under the heading "Annual Compensation"
in the Summary Compensation Table above is representative of the most
recent calendar year compensation used in calculating average remuneration
for the Spartan Stores Pension Plan. Credited years of service of the
named executive officers under the Spartan Stores Pension Plan as of
March 29, 1997, are:
A-17
CREDITED YEARS OF SERVICE
-------------------------
Patrick M. Quinn 12
James B. Meyer 24
Charles B. Fosnaugh 7
Dennis J. Otto 7
David deS. Couch 11
Benefits under the Pension Plan become vested after five years of
service. Upon reaching the normal retirement age of 65, a covered employee
is entitled to retirement benefits computed using the average annual
compensation (including salary, hourly wages, overtime, incentive pay,
bonuses, and commissions) from the plan employers during the five consecutive
calendar years in the last 10 calendar years during which the participant's
compensation was greatest.
The basic pension benefit is an annual benefit, paid in equal monthly
installments, and is equal to the sum of (i) 1.2 percent of the
participant's annual compensation plus 0.65 percent of the participant's
average compensation in excess of the amount which would be used to compute
Social Security benefits, multiplied by the participant's years of benefit
service (up to 25 years of benefit service), plus (ii) 0.5 percent of the
participant's average compensation, multiplied by the participant's years
of benefit service in excess of 25 years of benefit service. For persons
who were participants prior to April 1, 1989, the Pension Plan provides
that their retirement benefit will not be less than the benefit accrued as
of March 31, 1989. (In general, the Pension Plan provisions in effect
prior to April 1, 1989, provided higher retirement benefits for highly
compensated employees, and lower benefits for less highly compensated
employees than the current provisions of the Pension Plan.)
COMPENSATION OF DIRECTORS
Each director receives a base compensation of $10,000 per year
and $1,000 per day for attendance at any meetings of the Board or a
committee. Directors also are reimbursed for travel expenses for meetings
attended.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Spartan Stores' directors (except Ms. Johnson, if elected, and
Messrs. Buick, Carton, Meyer and Quinn) have ownership interests in
businesses which are shareholders and customers of the Company and these
businesses purchase products and services from the Company on an ongoing
basis and enter into other transactions with the Company, including loans,
A-18
guarantees and leases. To the extent that the Company engages in
transactions and offers services which benefit its customers, the
businesses in which such directors have ownership interests may benefit.
Consequently, a director may have a conflict of interest between the best
interests of the Company and the business in which the director has an
ownership interest.
For any transaction involving a sale in the ordinary course of
business of products or services of the Company to a customer of the
Company in which the director owns an equity interest or is an officer,
director or employee or otherwise has an interest (a "Related Entity"), it
is the Company's policy that the sale is deemed fair to the Company, and
Board approval is not specifically required, if the sale is made at prices
and on terms, including discounts and rebates, no less favorable than those
offered generally to customers who are not affiliated with any director.
For any other transaction in which a director has an interest
(including, without limitation, the Company's leasing, purchasing or
selling any property involving any loan or guarantee of an obligation by
the Company in a transaction involving a Related Entity), it is the
Company's policy and practice that the director shall proceed with the
transaction only if the material facts of the transaction and the
director's interest in the transaction have been disclosed to the Board,
the Board determines that it is fair to the Company, and the transaction is
approved by the affirmative vote of a majority of the Board of Directors
who have no interest in the transaction. Each such transaction is made on
terms no less favorable to the Company than those offered generally to
customers who are not affiliated with any director.
APPOINTMENT OF AUDITORS AND OTHER MATTERS
The Board of Directors has appointed Deloitte & Touche LLP as the
Company's independent auditors for fiscal year 1998. Representatives of
Deloitte & Touche LLP are expected to be present at the annual meeting,
will have the opportunity to make a statement if they desire to do so, and
are expected to be available to answer appropriate questions.
The Company will bear the cost of soliciting proxies. The
Company expects to solicit proxies primarily by mail, but certain directors
and officers may solicit proxies personally or by telephone. The Company
does not expect to engage anyone for the purpose of soliciting proxies.
OTHER BUSINESS
At the date of this Proxy Statement, the management of Spartan
Stores has no knowledge of any business, other than that described above,
that will be presented at the meeting. If any other business should come
A-19
before the meeting, the proxies named in the enclosed form of proxy will
have discretionary authority to vote on those matters.
By the Order of the Board of Directors,
/s/Alex J. DeYonker
Grand Rapids, Michigan Alex J. DeYonker
June 13, 1997 Assistant Secretary
A-20
SPARTAN STORES, INC.
PROXY
The undersigned acknowledges receipt of a Notice of Annual Meeting and a
Proxy Statement dated June 13, 1997, and appoints Donald J. Koop, Patrick
M. Quinn, or James B. Meyer, and each of them, attorneys and proxies of the
undersigned, each with full power of substitution, to vote all stock that
the undersigned is entitled to vote at the ANNUAL MEETING OF SHAREHOLDERS
OF SPARTAN STORES, INC. at the Grand Traverse Resort, 100 Grand Traverse
Village Boulevard, Acme, Michigan 49610, on Tuesday, July 15, 1997, at
10:00 a.m., local time, and any adjournment thereof. THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
I. ELECTION OF DIRECTORS
[ ] For all nominees listed below for three-year terms
[ ] Withhold authority to vote for all nominees listed below
Glen A. Catt, Parker T. Feldpausch, James B. Meyer, and Dorothy A.
Johnson
(Instruction: To withhold authority to vote for any individual
nominee, write the nominee's name in the space provided below.)
________________________________________________________________________
II. AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
[ ] For approval of amendment to Restated Articles of Incorporation
[ ] Against approval of amendment to Restated Articles of
Incorporation
[ ] Abstain
III. IN THEIR DISCRETION, TO RATIFY THE ACTS OR PROCEEDINGS, OR BOTH, OF
THE DIRECTORS OR OFFICERS OF SPARTAN STORES THAT MAY BE SUBMITTED TO
THE MEETING.
[ ] For discretionary authority [ ] Withhold
discretionary authority
IV. IN THEIR DISCRETION, TO VOTE IN ACCORDANCE WITH THEIR JUDGMENT ON ANY
OTHER MATTER THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
[ ] For discretionary authority [ ] Withhold
discretionary authority
A-21
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED.
IF NO DIRECTION IS INDICATED, THEY WILL BE VOTED FOR THE ELECTION OF ALL OF
THE DIRECTORS NOMINATED BY THE BOARD, FOR APPROVAL OF THE PROPOSED
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION, FOR RATIFICATION OF THE
ACTS OR PROCEEDINGS SUBMITTED TO THE MEETING, AND IN THE DISCRETION OF THE
PERSONS NAMED AS PROXIES ON ANY OTHER MATTER THAT MAY COME BEFORE THE MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF SUCH ITEMS.
PLEASE MARK, SIGN, DATE, AND RETURN THE PROXY PROMPTLY.
Store No. ________________
Dated: _______________, 1997
Note: Signature(s) should be
identical with the name(s)
appearing on the certificates
that you own. Joint owners X ______________________________
should each sign personally. Signature of Shareholder
Persons signing as attorney,
executor, administrator,
trustee, or guardian should
indicate their capacity as
such. If a corporation,
please sign in full corporate
name by President or other
authorized officer, and
indicate full title as such. X ______________________________
If a partnership, please sign (Joint Owner, if applicable)
in partnership name by
authorized person.
__________________________________
A-22
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
------- --------
2 Share Purchase Agreement between the
Shareholders of J.F. Walker Company, Inc.,
and Spartan Stores, Inc., dated October 4,
1993. Previously filed as Exhibit 2 to the
Registrant's Current Report on Form 8-K filed
November 23, 1993. Here incorporated by
reference.
3.1 Restated Articles of Incorporation of Spartan
Stores, Inc.
3.2 Bylaws of Spartan Stores, Inc.
4.1* Articles III, V, VI and IX of the Restated
Articles of Incorporation--Included in
Exhibit 3.1 and incorporated herein by
reference.
4.2 Articles II, III, IV, VII, VIII and IX
of the Bylaws--Included in Exhibit 3.2
and incorporated herein by reference.
4.3(a) Form of Spartan Stores, Inc. Stock Subscription
Agreement--Shareholder Customers.
4.3(b) Form of Spartan Stores, Inc. Stock Subscription
Agreement--Capistar Customers. Previously filed
as an exhibit to the Registrant's Amendment No. 2
to the Registration Statement on Form S-1 filed
January 23, 1992. Here incorporated by reference.
4.4 Form of Spartan Stores, Inc. Customer Agreement.
4.5 Note Purchase Agreement between Spartan Stores,
Inc. and Teachers Insurance and Annuity
Association of America, Nationwide Life
Insurance Company and West Coast Life Insurance
Company.
4.6 Note Agreement between Spartan Stores, Inc. and
The Ohio National Life Insurance Company and
United of Omaha Life Insurance Company.
4.7 Note Agreement between Spartan Stores, Inc. and
Massachusetts Mutual Life Insurance Company, The
Franklin Life Insurance Company and The Columbus
Mutual Life Insurance Company.
4.8 Form of Spartan Stores, Inc. Class A Common Stock
Certificate.
EXHIBIT
NUMBER DOCUMENT
------- --------
4.9 Note Agreement between Spartan Stores, Inc.
and United of Omaha Life Insurance Company,
United World Life Insurance Company,
Companion Life Insurance Company, Principal
Mutual Life Insurance Company and Nippon Life
Insurance Company, dated as of January 15,
1993. Previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 27, 1993. Here
incorporated by reference.
4.10 First Amendment to Note Purchase Agreement
between Spartan Stores, Inc. and Teachers
Insurance and Annuity Association of America,
Nationwide Life Insurance Company and West
Coast Life Insurance Company, dated as of
March 29, 1996. Previously filed as an
exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 30,
1996. Here incorporated by reference.
4.11 First Amendment and Waiver to Note Agreements
between Spartan Stores, Inc. and Principal
Mutual Life Insurance Company, Nippon Life
Insurance Company of America, United of Omaha
Life Insurance Company, Companion Life
Insurance Company and United World Life
Insurance Company, dated as of June 20, 1996.
Previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 30, 1996. Here
incorporated by reference.
4.12 Credit Agreement among Spartan Stores,
Inc., Michigan National Bank, and
Michigan National Bank and Old Kent
Bank, NBD Bank, Harris Trust and Savings
Bank and National City Bank of Columbus,
dated December 23, 1996. Previously
filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the
quarter ended January 4, 1997. Here
incorporated by reference.
10.1 Note Purchase Agreement--Included as Exhibit 4.5
and incorporated herein by reference.
10.2 Note Agreement--Included as Exhibit 4.6 and
incorporated herein by reference.
-2-
EXHIBIT
NUMBER DOCUMENT
------- --------
10.3 Note Agreement--Included as Exhibit 4.7 and
incorporated herein by reference.
10.4 Warehouse Lease Agreement, dated October 6, 1988,
between Warehouse Systems Co. and Spartan Stores,
Inc.
10.5 Warehouse Lease Agreement, dated October 14, 1975,
between Connecticut Mutual Life Insurance Company
and Spartan Stores, Inc.
10.6 Warehouse Lease Agreement, dated November 11,
1988, between Norman J. Leven and L & L/Jiroch
Distributing Company
10.7 Computer Lease Agreement, dated May 30, 1989,
between Atlantic Computer Systems, Inc. and
Spartan Stores, Inc.
10.8 Equipment Lease Agreement, dated March 3, 1988,
between PHH Financial Services, Inc. and Spartan
Stores, Inc.
10.9 Employment Agreement, dated June 1, 1987, between
Spartan Stores, Inc. and Patrick M. Quinn.
Previously filed as an exhibit to the Registrant's
Form S-1 Registration Statement filed July 18,
1991. Here incorporated by reference.
10.10 Spartan Stores, Inc. 1991 Stock Bonus
Plan.
10.11 Spartan Stores, Inc. 1991 Stock Option
Plan as amended. Previously filed as an
exhibit to the Registrant's Form S-1
Registration Statement filed July 23,
1993. Here incorporated by reference.
10.12 Spartan Stores, Inc. 1991 Associate
Stock Purchase Plan.
10.13 Spartan Stores, Inc. Supplemental
Executive Retirement Plan.
10.14 Note Agreement--Included as Exhibit 4.9.
Previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended March 27, 1993. Here
incorporated by reference.
-3-
EXHIBIT
NUMBER DOCUMENT
------- --------
10.15 Warehouse Lease Agreement, dated
November 8, 1993, between Walker Realty
Co. and J.F. Walker Company, Inc.
Previously filed as an exhibit to the
Registrant's Post-Effective Amendment
No. 1 to the Registration Statement on
Form S-1 filed March 16, 1994. Here
incorporated by reference.
10.16 First Amendment to Note Purchase
Agreement--Included as Exhibit 4.10 and
incorporated herein by reference.
10.17 First Amendment and Waiver to Note
Agreements--Included as Exhibit 4.11 and
incorporated herein by reference.
10.18 Employment Agreement, dated August 14,
1996, between Spartan Stores, Inc. and
James B. Meyer.
21 Subsidiaries of Registrant. Previously filed
as an exhibit to the Registrant's Post-
Effective Amendment No. 1 to the Registration
Statement on Form S-1 filed March 16, 1994.
Here incorporated by reference.
23 Consent and Report on Schedule of Deloitte and
Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
_________________________
Previously filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here incorporated by
reference.
These documents are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
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