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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 14, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number: 33-41791
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-0593940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
850 76TH STREET, S.W.
P.O. BOX 8700
GRAND RAPIDS, MICHIGAN 49518
(Address of Principal Executive Offices) (Zip Code)
(616) 878-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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As of October 17, 1996, the issuer had 1,210,448 outstanding shares of
Class A Common Stock, $20 par value.
_____________________
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
SECOND QUARTER (12 WEEKS) ENDED
--------------------------------
SEPTEMBER 14, SEPTEMBER 9,
1996 1995
(UNAUDITED) (UNAUDITED)
------------- ------------
NET SALES $577,750,655 $582,808,482
LESS VOLUME INCENTIVE REBATES 3,884,929
------------ ------------
577,750,655 578,923,553
COSTS AND EXPENSES
Cost of sales 534,408,763 534,874,814
Operating and administrative 33,858,906 36,417,723
Depreciation and amortization 4,555,467 4,473,532
Interest (net) 1,163,349 1,251,103
Gain on sale of property and equipment (196,307) (7,525)
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573,790,178 577,009,647
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EARNINGS BEFORE TAXES ON INCOME 3,960,477 1,913,906
TAXES ON INCOME 1,432,000 655,000
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NET EARNINGS $ 2,528,477 $ 1,258,906
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NET EARNINGS PER CLASS A SHARE $ 2.07 $ 1.00
WEIGHTED AVERAGE NUMBER OF CLASS A
SHARES OUTSTANDING 1,222,416 1,259,783
DIVIDENDS DECLARED PER CLASS A SHARE $ 0.125 $ 0.125
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
TWO QUARTERS (24 WEEKS) ENDED
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SEPTEMBER 14, SEPTEMBER 9,
1996 1995
(UNAUDITED) (UNAUDITED)
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NET SALES $1,145,776,152 $1,152,963,011
LESS VOLUME INCENTIVE REBATES 7,791,419
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1,145,776,152 1,145,171,592
COSTS AND EXPENSES
Cost of sales 1,059,206,475 1,056,359,535
Operating and administrative 68,345,191 72,822,577
Depreciation and amortization 8,976,712 8,436,959
Interest (net) 2,503,414 2,444,983
Gain on sale of property and equipment (1,371,378) (183,906)
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1,137,660,414 1,139,880,148
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EARNINGS BEFORE TAXES ON INCOME 8,115,738 5,291,444
TAXES ON INCOME 2,829,000 2,035,000
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NET EARNINGS $ 5,286,738 $ 3,256,444
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NET EARNINGS PER CLASS A SHARE $ 4.30 $ 2.59
WEIGHTED AVERAGE NUMBER OF CLASS A
SHARES OUTSTANDING 1,229,281 1,257,287
DIVIDENDS DECLARED PER CLASS A SHARE $ 0.25 $ 0.25
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 14,
1996 MARCH 30,
(UNAUDITED) 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,472,815 $ 39,796,018
Marketable securities 15,671,035 16,051,608
Accounts receivable 73,743,709 68,444,576
Refundable taxes on income 3,737,009 10,173,305
Inventories 84,053,906 78,659,807
Prepaid expenses 5,061,166 4,072,104
Deferred taxes on income 7,567,000 7,579,000
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TOTAL CURRENT ASSETS 223,306,640 224,776,418
INVESTMENTS AND OTHER ASSETS 10,147,999 9,959,071
PROPERTY AND EQUIPMENT 292,414,211 279,534,993
Less Accumulated Depreciation and Amortization 128,042,754 126,819,069
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NET PROPERTY AND EQUIPMENT 164,371,457 152,715,924
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TOTAL ASSETS $397,826,096 $387,451,413
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 10,000,000 $ 15,000,000
Accounts payable 104,339,719 84,868,588
Insurance reserves 17,827,897 18,484,660
Current maturities of long-term debt 8,884,461 7,678,972
Current obligations under capital leases 580,981 582,135
Other current liabilities 28,109,890 28,878,016
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TOTAL CURRENT LIABILITIES 169,742,948 155,492,371
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DEFERRED GAIN ON SALE OF REAL PROPERTY 259,117 298,477
DEFERRED TAXES ON INCOME 654,000 600,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,101,483 4,101,483
LONG-TERM DEBT 116,958,335 122,013,296
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 2,085,347 2,359,075
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value
$20 per share 24,233,880 24,920,960
Additional paid-in capital 18,009,383 19,622,472
Retained earnings 61,781,603 58,043,279
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TOTAL SHAREHOLDERS' EQUITY 104,024,866 102,586,711
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $397,826,096 $387,451,413
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
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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)
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BALANCE - MARCH 30, 1996 24,920,960 19,622,472 58,043,279
CLASS A COMMON STOCK TRANSACTIONS
49,975 shares purchased (999,500) (2,915,294) (1,242,811)
15,621 shares issued 312,420 1,302,205
NET EARNINGS 5,286,738
CASH DIVIDENDS - $.25 PER SHARE (305,603)
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BALANCE - SEPTEMBER 14, 1996 $24,233,880 $18,009,383 $61,781,603
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWO QUARTERS (24 WEEKS) ENDED
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SEPTEMBER 14, SEPTEMBER 9,
1996 1995
(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 5,286,738 $ 3,256,444
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,976,712 8,436,959
Rebates paid in common stock 1,954,721
Deferred taxes on income 66,000 139,000
Gain on sale of property and equipment (1,371,378) (183,906)
Change in assets and liabilities:
Marketable securities 380,573 (2,692,827)
Accounts receivable (5,299,133) 1,286,994
Refundable taxes on income 6,436,296
Inventories (5,394,099) 8,977,385
Prepaid expenses (989,062) (313,528)
Accounts payable 19,471,131 6,511,283
Rebates due to customers 930,167 725,681
Accrued payroll and benefits (1,204,863) (211,518)
Insurance reserves (656,763) 526,373
Other accrued expenses (493,430) 6,626,354
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NET CASH PROVIDED BY OPERATING ACTIVITIES 26,138,889 35,039,415
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (25,339,898) (18,927,396)
Proceeds from the sale of property and equipment 6,235,809 406,099
Other (385,067) 769,561
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NET CASH USED IN INVESTING ACTIVITIES (19,489,156) (17,751,736)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable (5,000,000) (2,221,420)
Proceeds from long-term borrowings 19,786,698 8,677,940
Repayment of long-term debt (23,636,169) (12,441,582)
Reduction of obligations under capital leases (274,882) (249,800)
Proceeds from sale of common stock 1,614,625 883,076
Common stock purchased (5,157,605) (4,366,606)
Dividends paid (305,603) (313,284)
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NET CASH USED IN FINANCING ACTIVITIES (12,972,936) (10,031,676)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,323,203) 7,256,003
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,796,018 25,161,193
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CASH AND CASH EQUIVALENTS AT END OF SECOND QUARTER $33,472,815 $32,417,196
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES:
The 1996 annual report contains a summary of significant accounting
policies in the notes to consolidated financial statements. The Company
follows the same accounting policies in the preparation of interim
financial statements.
ACCOUNTS RECEIVABLE
Accounts receivable include the current portion of notes receivable and are
shown net of allowances for credit losses of $2,483,000 and $2,300,000 at
September 14, 1996, and March 30, 1996, respectively.
INVENTORIES:
Inventories are stated at the lower of cost or market using the LIFO (last-
in, first-out) method. If replacement cost had been used, inventories
would have been $43,900,000 and $43,500,000 higher at September 14, 1996
and March 30, 1996, respectively.
ACCOUNTS PAYABLE:
Accounts payable include $16,105,000 and $19,130,000 at September 14, 1996
and March 30, 1996, respectively, representing checks which have been
issued and have not cleared the Company's controlled disbursing bank
accounts.
INTEREST (NET):
Interest (net) includes interest income of $1,038,000 and $964,000 for the
second quarter of fiscal 1997 and 1996, respectively. Interest income for
the first twenty-four weeks of fiscal 1997 and 1996 was $2,122,000 and
$1,976,000, respectively.
TAXES ON INCOME:
The difference between the Company's effective tax rate and the statutory
rate is due primarily to goodwill amortization for each of the two quarters
of fiscal 1996.
STATEMENT OF REGISTRANT:
The data presented herein is unaudited, but in the opinion of management
includes all adjustments (which consist solely of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position of the Company and its subsidiaries at September 14, 1996 and the
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results of their operations and the changes in cash flows for the periods
ended September 14, 1996 and September 9, 1995. These interim results are
not necessarily indicative of the results of the fiscal years as a whole.
CONTINGENCIES:
On August 21, 1996, the Attorney General for the State of Michigan filed an
action in Michigan circuit court against the leading United States
cigarette manufacturers, 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. The Company believes that its
subsidiaries have valid defenses to this legal action. This action will be
vigorously defended. One of the cigarette manufacturers named as a
defendant in this action has agreed to indemnify the Company's subsidiaries
from damages arising out of this action. Management believes that the
ultimate outcome of this action should not have a material adverse effect
on the consolidated financial position, results of operations or liquidity
of 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.
ITEM 2. 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,
transportation costs and other services are no longer included in the
selling price and volume incentive rebates have been discontinued.
RESULTS OF OPERATIONS
Net sales, less any volume incentive rebates, decreased $1.2 million or .2%
for the second quarter and increased $.6 million or .1% for the first
twenty-four weeks of fiscal 1997 compared to the corresponding periods of
fiscal 1996. Net sales increased in both the second quarter and the first
twenty-four weeks of fiscal 1997 due to new retail customers. This
increase in sales was partially offset, however, by a decrease in sales
attributable to the implementation of the cost-plus pricing program in
which transportation and other service costs are no longer included in the
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selling price. In addition, sales were lost due to the consolidations of
underperforming distribution centers at J.F. Walker, Inc., the closing of
Capistar, Inc. during the fourth quarter of fiscal 1996 and the continuing
highly competitive retail market conditions.
Gross profit in the Distribution segment as a percentage of net sales, less
any volume incentive rebates, decreased to 6.2% for the second quarter of
fiscal 1997 compared to 6.6% for the same period last year and decreased to
6.4% for the first twenty-four weeks of fiscal 1997 compared to 6.8% for
the same period last year. These decreases were attributable primarily to
the implementation of the cost-plus pricing program during February, 1996,
in which transportation and other service costs are no longer included in
the selling price. The decrease in gross profit for the second quarter and
the first twenty-four weeks as compared to the same periods last year was
mitigated partially by the consolidations of underperforming J.F. Walker
distribution center and the closing of Capistar.
Operating and administrative expenses as a percentage of net sales, less
any volume incentive rebates, improved to 5.9% for the second quarter and
6.0% for the first twenty-four weeks of fiscal 1997 compared to 6.3% for
the second quarter and 6.4% for the first twenty-four weeks of fiscal 1996.
The reduction in operating and administrative expenses for the second
quarter and first twenty-four weeks of fiscal 1997 was due primarily to the
implementation of the cost-plus pricing program during February, 1996. As
a result, the Company anticipates a reduction in operating and
administrative expenses of $20 to $25 million in fiscal 1997 due to
separately charging customers for transportation and other service costs.
Net earnings increased by approximately $1.3 million (100%) and $2.0
million (62%) over the comparable second quarter and year to date periods
ended in September 1995. Net earnings in the Distribution segment were
$1.4 million for the second quarter and $3.2 million for the first twenty-
four weeks of fiscal 1997 compared to $1.4 million and $.5 million,
respectively, for the same periods of fiscal 1996. The improvement in net
earnings in the Distribution segment for both the second quarter and first
twenty-four weeks of fiscal 1997 compared to the same periods last year was
due primarily to the consolidation of underperforming J.F. Walker
distribution centers and the closing of Capistar. Net earnings in the
Insurance segment for the second quarter and first twenty-four weeks of
fiscal 1997 were $.5 million and $1.0 million, respectively, which was
approximately the same as the corresponding periods last fiscal year. Net
earnings in the Real Estate and Finance segment were $.6 million for the
second quarter and $1.0 million for the first twenty-four weeks of fiscal
1997 compared to $.2 million and $.7 million, respectively, for the same
periods last year. The improvement in net earnings in the Real Estate and
Finance segment for both the second quarter and first twenty-four weeks of
fiscal 1997 compared to the same periods last year was due primarily to the
rental of new facilities.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operating
activities and borrowings under bank line of credit agreements. Cash
provided by operations was $26.1 million for the first twenty-four weeks of
fiscal 1997 compared to $35.0 million for the same period last year. The
decrease in cash provided by operations resulted primarily from increases
in accounts receivable and inventories and a decrease in other accrued
expenses, which were offset partially by increases in accounts payable and
the collection of refundable taxes on income.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Except for the historical information contained in the report, the matters
discussed in this report include forward looking statements which involve
risk and uncertainties including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of certain litigation, reference is made to
"Contingencies" in the Notes to Consolidated Financial Statements included
in Part I, Item 1, of this report, which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on July 16,
1996, at which the shareholders elected James G. Buick, Martin P. Hill,
Dan R. Prevo and Russell H. Van Gilder, Jr. as directors of the Company,
for terms expiring in 1999. The votes for and withheld with respect to
each director were as follows:
VOTES FOR VOTES WITHHELD
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James G. Buick 818,914 413,160
Martin P. Hill 818,931 413,143
Dan R. Prevo 818,931 413,143
Russell H. Van Gilder, Jr. 818,891 413,183
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The directors whose terms continued after the meeting are as
follows: Donald J. Koop, Roger L. Boyd, Ronald A. DeYoung, John S. Carton,
Parker T. Feldpausch, Glen A. Catt, Daniel L. Deering and Patrick M. Quinn.
ITEM 5. OTHER INFORMATION
Patrick M. Quinn, President and Chief Executive Officer,
announced his retirement at the Company's Annual Meeting of Shareholders on
July 16, 1996. Mr. Quinn will remain Chief Executive Officer of the
Company until July, 1997.
Effective August 14, 1996, the Board of Directors appointed
James B. Meyer, formerly Senior Vice President and Chief Financial Officer,
as the Company's President and Chief Operating Officer and it designated
him to succeed Mr. Quinn as Chief Executive Officer when Mr. Quinn retires
in July, 1997. Mr. Meyer was also appointed to the Board of Directors on
August 14, 1996, with a term expiring at the Annual Meeting of Shareholders
in July, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as
exhibits to this report on Form 10-Q:
EXHIBIT NUMBER DOCUMENT
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been
filed during the period for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: October 29, 1996 SPARTAN STORES, INC.
(Registrant)
By S/JAMES B. MEYER
James B. Meyer
President and Chief Operating
Officer
(Duly authorized Signatory for
Registrant)
By S/CHARLES B. FOSNAUGH
Charles B. Fosnaugh
Senior Vice President Business
Development and Finance
(Principal Financial Officer)
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