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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 January 4, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number: 33-41791
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-0593940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
850 76TH STREET, S.W.
P.O. BOX 8700
GRAND RAPIDS, MICHIGAN 49518
(Address of Principal Executive Offices) (Zip Code)
(616) 878-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
As of February 10, 1997, the issuer had 1,199,453 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
THIRD QUARTER (16 WEEKS) ENDED
--------------------------------
JANUARY 4, DECEMBER 30,
1997 1995
(UNAUDITED) (UNAUDITED)
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NET SALES $746,155,415 $782,199,949
LESS VOLUME INCENTIVE REBATES 5,859,270
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746,155,415 776,340,679
COSTS AND EXPENSES
Cost of sales 690,536,049 714,972,006
Operating and administrative 42,239,795 49,408,981
Depreciation and amortization 6,150,033 6,656,252
Interest (net) 1,665,945 1,849,136
(Gain) loss on sale of property and equipment (241,916) 73,841
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740,349,906 772,960,216
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EARNINGS BEFORE TAXES ON INCOME 5,805,509 3,380,463
TAXES ON INCOME 2,071,000 603,000
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NET EARNINGS $ 3,734,509 $ 2,777,463
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NET EARNINGS PER CLASS A SHARE $ 3.08 $ 2.26
WEIGHTED AVERAGE NUMBER OF CLASS A
SHARES OUTSTANDING 1,211,037 1,231,542
DIVIDENDS DECLARED PER CLASS A SHARE $ 0.125 $ 0.125
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE QUARTERS (40 WEEKS) ENDED
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JANUARY 4, DECEMBER 30,
1997 1995
(UNAUDITED) (UNAUDITED)
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NET SALES $1,891,931,567 $1,935,162,960
LESS VOLUME INCENTIVE REBATES 13,650,689
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1,891,931,567 1,921,512,271
COSTS AND EXPENSES
Cost of sales 1,749,742,524 1,771,331,541
Operating and administrative 110,584,986 122,231,558
Depreciation and amortization 15,126,745 15,093,211
Interest (net) 4,169,359 4,294,119
Gain on sale of property and equipment (1,613,294) (110,065)
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1,878,010,320 1,912,840,364
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EARNINGS BEFORE TAXES ON INCOME 13,921,247 8,671,907
TAXES ON INCOME 4,900,000 2,638,000
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NET EARNINGS $ 9,021,247 $ 6,033,907
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NET EARNINGS PER CLASS A SHARE $ 7.38 $ 4.84
WEIGHTED AVERAGE NUMBER OF CLASS A
SHARES OUTSTANDING 1,221,984 1,246,989
DIVIDENDS DECLARED PER CLASS A SHARE $ 0.375 $ 0.375
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JANUARY 4,
1997 MARCH 30,
(UNAUDITED) 1996
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 33,804,135 $ 39,796,018
Marketable securities 15,731,182 16,051,608
Accounts receivable 64,113,959 68,444,576
Refundable taxes on income 2,385,769 10,173,305
Inventories 87,706,871 78,659,807
Prepaid expenses 6,280,058 4,072,104
Deferred taxes on income 7,526,000 7,579,000
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TOTAL CURRENT ASSETS 217,547,974 224,776,418
OTHER ASSETS 8,016,872 9,959,071
PROPERTY AND EQUIPMENT 301,402,611 279,534,993
Less accumulated depreciation and amortization 133,817,745 126,819,069
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NET PROPERTY AND EQUIPMENT 167,584,866 152,715,924
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TOTAL ASSETS $393,149,712 $387,451,413
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 30,000,000 $ 15,000,000
Accounts payable 92,910,809 84,868,588
Insurance reserves 18,000,769 18,484,660
Current maturities of long-term debt 6,009,544 7,678,972
Current obligations under capital leases 580,216 582,135
Other current liabilities 20,406,591 28,878,016
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TOTAL CURRENT LIABILITIES 167,907,929 155,492,371
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DEFERRED GAIN ON SALE OF REAL PROPERTY 232,877 298,477
DEFERRED TAXES ON INCOME 690,000 600,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,101,483 4,101,483
LONG-TERM DEBT 112,010,161 122,013,296
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 1,902,860 2,359,075
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value
$20 per share 23,985,300 24,920,960
Additional paid-in capital 17,806,152 19,622,472
Retained earnings 64,512,950 58,043,279
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TOTAL SHAREHOLDERS' EQUITY 106,304,402 102,586,711
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $393,149,712 $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
70,924 shares purchased (1,418,480) (3,842,725) (2,096,045)
24,141 shares issued 482,820 2,026,405
NET EARNINGS 9,021,247
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CASH DIVIDENDS - $.375 PER SHARE (455,531)
BALANCE - JANUARY 4, 1997 $23,985,300 $17,806,152 $64,512,950
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE QUARTERS (40 WEEKS) ENDED
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JANUARY 4, DECEMBER 30,
1997 1995
(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,021,247 $ 6,033,907
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 15,126,745 15,093,211
Rebates paid in common stock 3,489,421
Deferred taxes on income 143,000 214,000
Gain on sale of property and equipment (1,613,294) (110,065)
Change in assets and liabilities:
Marketable securities 320,426 (1,658,767)
Accounts receivable 4,330,617 (1,726,520)
Refundable taxes on income 7,787,536
Inventories (9,047,064) 5,422,521
Prepaid expenses (2,207,954) 368,033
Accounts payable 8,042,221 (4,335,038)
Rebates due to customers 420,761 2,119,846
Accrued payroll and benefits (1,293,943) (446,667)
Insurance reserves (483,891) 444,588
Other accrued expenses (7,598,243) (583,260)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 22,948,164 24,325,210
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (36,002,250) (34,464,729)
Proceeds from the sale of property and equipment 7,876,157 1,070,703
Other 1,620,299 (816,547)
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NET CASH USED IN INVESTING ACTIVITIES (26,505,794) (34,210,573)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable 15,000,000 21,730,945
Proceeds from long-term borrowings 26,907,660 11,997,315
Repayment of long-term debt (38,580,223) (12,384,112)
Reduction of obligations under capital leases (458,134) (416,335)
Proceeds from sale of common stock 2,509,225 1,363,876
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Common stock purchased (7,357,250) (7,124,006)
Dividends paid (455,531) (467,356)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,434,253) 14,700,327
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,991,883) 4,814,964
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 THIRD QUARTER $33,804,135 $29,976,157
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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 $2,653,000 and $2,300,000 at
January 4, 1997, 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 $44,300,000 and $43,500,000 higher at January 4, 1997, and
March 30, 1996, respectively.
ACCOUNTS PAYABLE:
Accounts payable include $16,791,000 and $19,130,000 at January 4, 1997,
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 $1,405,000 and $1,206,000 for
the third quarter of fiscal 1997 and 1996, respectively. Interest income
for the first forty weeks of fiscal 1997 and 1996 was $3,527,000 and
$3,182,000, respectively.
TAXES ON INCOME:
The Company's effective tax rate for the third quarter and first forty
weeks of fiscal 1996 differs from the statutory rate due primarily to
goodwill amortization and tax credits for investments in research
activities.
CREDIT AGREEMENT:
On December 23, 1996, the Company entered into a new unsecured $140 million
revolving credit agreement. This agreement is segregated into a short-term
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$60 million line of credit loan commitment, a long-term $60 million
revolving loan commitment and a long-term $20 million single facility loan
commitment. The Company believes the new credit facility along with
internally-generated funds will provide the Company with the financial
flexibility to meet future liquidity needs.
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 January 4, 1997, and the
results of their operations and the changes in cash flows for the periods
ended January 4, 1997, and December 30, 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 and other services costs are no longer included in the
selling price and volume incentive rebates have been discontinued.
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RESULTS OF OPERATIONS
NET SALES
Net sales, less any volume incentive rebates, decreased $30.2 million or
3.9% for the third quarter and decreased $29.6 million or 1.5% for the
first forty weeks of fiscal 1997 compared to the corresponding periods of
fiscal 1996. The decrease was due primarily to the implementation of the
cost-plus pricing program in which transportation and other service costs
are no longer included in the selling price. In addition, sales declined
as a result of the closing of one of the Company's subsidiaries,
Capistar, Inc., during the fourth quarter of fiscal 1996, the loss of a
customer of another subsidiary of the Company, J.F. Walker Company, Inc.,
and the consolidations of three J.F. Walker distribution centers. Food
inflation was negligible for the first forty weeks of fiscal 1997 and
Spartan continues to operate in a highly competitive retail market.
GROSS PROFIT
Gross profit in the Distribution segment as a percentage of net sales, less
any volume incentive rebates, decreased to 6.5% for the third quarter of
fiscal 1997 compared to 7.1% for the same period last year and decreased to
6.4% for the first forty 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 third quarter and the
first forty weeks of fiscal 1997 as compared to the same periods last year
was mitigated partially by the closing of Capistar and the consolidations
of three J.F. Walker distribution centers.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percentage of net sales, less
any volume incentive rebates, improved to 5.7% for the third quarter and
5.8% for the first forty weeks of fiscal 1997 compared to 6.4% for both the
third quarter and the first forty weeks of fiscal 1996. The reduction in
operating and administrative expenses was due primarily to the
implementation of the cost-plus pricing program, the closing of Capistar
and the consolidations of three J.F. Walker distribution centers. The
Company has experienced a reduction in operating and administrative
expenses of approximately $20 million for the first forty weeks of fiscal
1997 and anticipates a reduction of approximately $26 million for fiscal
1997 due to separately charging customers for transportation and other
service costs which are now netted against operating and administrative
expenses.
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NET EARNINGS
Net earnings increased by approximately $1.0 million or 34% and $3.0
million or 50% over the comparable third quarter and forty-week period last
year. Net earnings in the Distribution segment were $2.6 million for the
third quarter and $5.8 million for the first forty weeks of fiscal 1997
compared to $1.8 million and $3.2 million, respectively, for the same
periods of fiscal 1996. The improvement in net earnings in the
Distribution segment for both the third quarter and first forty weeks of
1997 compared to the same periods last year was due primarily to the
closing of Capistar and the consolidations of three J.F. Walker
distributions centers. Net earnings in the Insurance segment for the third
quarter and first forty weeks of fiscal 1997 were $.7 million and $1.7
million, respectively, which were approximately the same as the
corresponding periods last fiscal year. Net earnings in the Real Estate
and Finance segment were $.4 million for the third quarter and $1.5 million
for the first forty weeks of fiscal 1997 compared to $.3 million and $1.0
million, respectively, for the same periods last year. The improvement in
net earnings in the Real Estate and Finance segment for both the third
quarter and first forty weeks of fiscal 1997 compared to the same period
last year was due primarily to the rental of new facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity continue to be cash flows from
operating activities and borrowings under bank credit agreements. Cash
provided by operations for the first forty weeks of fiscal 1997 was $22.9
million compared with $24.3 million for the same period last year. The
decrease was due primarily to an increase in inventories and a decrease in
other accrued expenses offset partially by a reduction in refundable taxes
on income and an increase in accounts payable.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained in the report, the matters
discussed in this report include forward looking statements which involve
risk and uncertainties including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
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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 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
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10.18 Credit Agreement among Spartan Stores, Inc.
(as Borrower), Michigan National Bank
(as a Bank), Michigan National Bank (as
Agent), Old Kent Bank, NBD Bank, Harris
Trust and Savings Bank and National City
Bank of Columbus, dated December 23, 1996.
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: February 18, 1997 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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EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT
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10.18 Credit Agreement among Spartan Stores, Inc. (as
Borrower), Michigan National Bank (as a Bank),
Michigan National Bank (as Agent), Old Kent
Bank, NBD Bank, Harris Trust and Savings Bank
and National City Bank of Columbus, dated
December 23, 1996.
27 Financial Data Schedule