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UNITED STATES
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 2, 1999.
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 January 30, 1999, the issuer had 10,866,620 outstanding shares of
Class A Common Stock, $2 par value.
_____________________
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2,
1999 MARCH 28,
(UNAUDITED) 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 35,906,455 $ 37,026,640
Marketable securities 20,566,735 18,333,323
Accounts receivable 70,990,385 74,549,520
Inventories 87,078,096 92,706,414
Prepaid expenses 6,150,824 6,885,828
Deferred taxes on income 7,179,000 7,277,000
------------ ------------
TOTAL CURRENT ASSETS 227,871,495 236,778,725
NOTES RECEIVABLE 3,889,199 6,539,412
OTHER ASSETS 1,685,991 1,703,110
PROPERTY AND EQUIPMENT
Land and improvements 33,223,362 33,098,220
Buildings 136,295,635 136,496,867
Equipment 139,773,105 138,663,310
------------ ------------
309,292,102 308,258,397
Less accumulated depreciation and amortization 154,199,388 147,146,529
------------ ------------
NET PROPERTY AND EQUIPMENT 155,092,714 161,111,868
------------ ------------
TOTAL ASSETS $388,539,399 $406,133,115
============ ============
-2-
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 3,000,000 $ 38,500,000
Accounts payable 88,124,897 81,690,574
Accrued payroll and benefits 15,504,570 13,447,559
Insurance reserves 15,061,870 15,799,160
Other accrued expenses 20,414,172 19,759,049
Current maturities of long-term debt and capital
lease obligation 8,099,416 6,544,777
------------ ------------
TOTAL CURRENT LIABILITIES 150,204,925 175,741,119
DEFERRED TAXES ON INCOME 1,994,500 3,750,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 5,034,200 4,784,200
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION 102,840,208 107,665,545
OTHER LONG-TERM LIABILITIES 5,301,936
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value
$2 a share; authorized 20,000,000 shares;
outstanding 10,877,219 and 11,443,985 shares 21,754,438 22,887,970
Additional paid-in capital 13,669,684 16,431,937
Retained earnings 87,739,508 74,872,344
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 123,163,630 114,192,251
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $388,539,399 $406,133,115
============ ============
-3-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THIRD QUARTER (16 WEEKS) ENDED
-------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
NET SALES $841,097,922 $766,769,552
COSTS AND EXPENSES
Cost of sales 752,471,276 689,095,592
Operating and administrative 70,626,982 69,313,767
Restructuring charge 5,301,936
Interest expense 2,529,188 3,617,766
Interest income (780,640) (525,028)
Gain on sale of property and equipment (54,927) (1,570,249)
------------ ------------
TOTAL COSTS AND EXPENSES 830,093,815 759,931,848
------------ ------------
EARNINGS BEFORE INCOME TAXES 11,004,107 6,837,704
INCOME TAXES 4,085,000 2,437,000
------------ ------------
NET EARNINGS $ 6,919,107 $ 4,400,704
============ ============
BASIC AND DILUTED NET EARNINGS PER
CLASS A SHARE $ 0.63 $ 0.38
============ ============
BASIC WEIGHTED AVERAGE CLASS A SHARES 10,989,089 11,697,780
============ ============
DILUTED WEIGHTED AVERAGE CLASS A SHARES 10,993,528 11,700,674
============ ============
DIVIDENDS DECLARED PER CLASS A SHARES $ 0.0125 $ 0.0125
============ ============
-4-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR TO DATE (40 WEEKS) ENDED
---------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
(UNAUDITED) (UNAUDITED)
-------------- --------------
NET SALES $2,044,622,088 $1,920,148,043
COSTS AND EXPENSES
Cost of sales 1,834,625,555 1,727,145,798
Operating and administrative 175,791,444 174,594,781
Restructuring charge 5,301,936
Interest expense 6,569,006 8,363,614
Interest income (2,109,912) (1,942,650)
Gain on sale of property and equipment (1,243,133) (3,670,577)
-------------- --------------
TOTAL COSTS AND EXPENSES 2,018,934,896 1,904,490,966
-------------- --------------
EARNINGS BEFORE INCOME TAXES 25,687,192 15,657,077
INCOME TAXES 9,325,000 5,612,000
-------------- --------------
NET EARNINGS $ 16,362,192 $ 10,045,077
============== ==============
BASIC AND DILUTED NET EARNINGS PER
CLASS A SHARE $ 1.45 $ 0.85
============== ==============
BASIC WEIGHTED AVERAGE CLASS A SHARES 11,249,659 11,850,749
============== ==============
DILUTED WEIGHTED AVERAGE CLASS A SHARES 11,254,098 11,853,643
============== ==============
DIVIDENDS DECLARED PER CLASS A SHARE $ 0.0375 $ 0.0375
============== ==============
-5-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------- ----------- -----------
BALANCE - MARCH 29, 1997 $24,065,700 $18,406,969 $64,784,905
CLASS A COMMON STOCK TRANSACTIONS
895,256 shares purchased (1,790,512) (4,769,484) (3,559,471)
306,391 shares issued 612,782 2,794,452
NET EARNINGS 14,233,981
CASH DIVIDENDS - $.05 PER SHARE (587,071)
----------- ----------- -----------
BALANCE - MARCH 28, 1998 $22,887,970 $16,431,937 $74,872,344
CLASS A COMMON STOCK TRANSACTIONS
761,427 shares purchased (1,522,854) (4,712,830) (3,074,872)
194,661 shares issued 389,322 1,950,577
NET EARNINGS 16,362,192
CASH DIVIDENDS - $.0375 PER SHARE (420,156)
----------- ----------- -----------
BALANCE JANUARY 2, 1999 $21,754,438 $13,669,684 $87,739,508
=========== =========== ===========
-6-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR TO DATE (40 WEEKS) ENDED
-------------------------------
JANUARY 2, JANUARY 3,
1999 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 16,362,192 $ 10,045,077
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 16,079,691 16,429,657
Postretirement benefits other than pensions 250,000 184,000
Deferred taxes on income 1,657,500 243,000
Restructuring charge 5,301,936
Gain on sale of property and equipment (1,243,133) (3,670,577)
Change in assets and liabilities:
Marketable securities (2,233,412) (4,555,451)
Accounts receivable 3,559,135 3,557,780
Inventories 5,628,318 (19,651,689)
Prepaid expenses 735,004 439,788
Accounts payable 6,434,323 (2,584,220)
Accrued payroll and benefits 2,057,011 (1,985,666)
Insurance reserves (737,290) 582,469
Other accrued expenses 655,123 2,948,907
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,191,398 1,983,075
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (13,245,533) (21,263,703)
Proceeds from the sale of property and equipment 4,428,129 14,707,184
Other 2,667,332 (1,099,847)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,150,072) (7,656,366)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable (35,500,000) (6,000,000)
Proceeds from long-term borrowings 14,852,254 28,684,569
Repayment of long-term debt and capital lease (18,122,952) (21,292,448)
Proceeds from sale of common stock 2,339,899 2,583,679
Common stock purchased (9,310,556) (6,962,055)
Dividends paid (420,156) (444,020)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (46,161,511) (3,430,275)
------------ ------------
-7-
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,120,185) (9,103,566)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,026,640 34,198,752
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THIRD QUARTER $ 35,906,455 $ 25,095,186
============ ============
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
The 1998 Annual Report on Form 10-K 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the March 28, 1998
presentation in order to conform to the January 2, 1999
presentation.
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 2, 1999 and the results of their
operations and the changes in cash flows for the periods ended
January 2, 1999 and January 3, 1998. These interim results are
not necessarily indicative of the results of the fiscal years as
a whole.
CONTINGENCIES
On August 21, 1996, the Attorney General for the State of
Michigan filed an action in Michigan circuit court against the
leading cigarette manufacturers operating in the United States,
twelve wholesalers and distributors of tobacco products in
Michigan (including three Company subsidiaries) and others
seeking certain injunctive relief, the reimbursement of
$4 billion in Medicaid and other expenditures incurred or to be
incurred by the State of Michigan to treat diseases allegedly
caused by cigarette smoking and punitive damages of $10 billion.
In July 1998, the court dismissed the claim for punitive
damages. On December 7, 1998, the State of Michigan and the
cigarette manufacturers settled the remaining claims and the case
was dismissed by the court without any payment by the Company or
its subsidiaries. Thirty actions have been filed in state courts
in Pennsylvania against the leading cigarette manufacturers operating
in the United States and certain wholesalers and distributors,
including a subsidiary of the Company. All of the Pennsylvania actions
were filed by individual plaintiffs pursuant to a special notice
procedure which does not include any formal complaint. In these
separate cases, the Company expects that the plaintiffs are seeking
-9-
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 are being vigorously defended. All but two of the
Pennsylvania actions have been dismissed without prejudice pursuant
to a Dismissal and Tolling Agreement under which the defendants have
agreed not to raise the defense of statute of limitations or laches if
an action is filed by a plaintiff before April 1, 1999. 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.
RESTRUCTURING CHARGE
On October 14, 1998, the Company's Board of Directors approved an
initiative to replace the Company's Plymouth distribution center
with a new multi-commodity distribution center in Northern Ohio.
The initiative includes the cessation of operations at the
Company's existing distribution center in Plymouth, Michigan by
April 2000 and would result in the displacement of approximately
300 associates in Plymouth and approximately 100 associates at
its Grand Rapids, Michigan distribution center. In connection
with the initiative, a $5,301,936 restructuring charge was
accrued as of January 2, 1999. The charge encompasses accruals
for contractual amounts to be paid under a collective bargaining
agreement, additional severance pay, and amounts due in
connection with withdrawal from the union pension plan.
RECENT AND SUBSEQUENT EVENTS
On December 3, 1998, the Company executed a letter of intent with
respect to the proposed purchase by the Company or one of its
subsidiaries of certain assets associated with the retail
grocery, pharmacy and transportation business of Glen's Market,
Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. ("Glen's").
Glen's operates 23 retail grocery stores, 4 pharmacies and a
distribution center located primarily in Northern Michigan. The
-10-
Company continues to negotiate with these companies toward
execution of a definitive asset purchase agreement with respect
to the purchase of this business.
On January 4, 1999, the Company, through its wholly-owned
subsidiary, Valuland, Inc. ("Valuland"), acquired certain assets
and assumed certain liabilities of Ashcraft's Market, Inc., an
operator of eight retail grocery stores located primarily in mid-
Michigan.
On January 13, 1999, the Company executed a letter of intent with
respect to the proposed purchase by Valuland of all of the
issued and outstanding shares of Family Fare, Inc., Family Fare
Management Services, Inc. and Family Fare Trucking, Inc. ("Family
Fare"). Family Fare is an operator of thirteen retail grocery
stores, a bakery, a warehouse facility and a transportation
business located primarily in Western Michigan. The Company continues
to negotiate with these companies and their shareholders toward
execution of a definitive stock purchase agreement with respect to
the purchase of this business.
Upon consummation, each of these acquisitions will be accounted
for as a purchase. Accordingly, the total purchase price of each
transaction will be allocated to assets acquired and liabilities
assumed based upon their relative fair market values. Cost in
excess of the fair market value of the net assets acquired or to
be acquired in each of these transactions (goodwill) has not been
determined. Consummation of the transactions with Family Fare
and Glen's are subject to a number of conditions to closing,
including the receipt of necessary governmental approvals. Both
transactions are expected to be completed during the fourth
quarter of Fiscal 1999 or the first quarter of Fiscal 2000.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items from the Company's
Consolidated Statements of Earnings as percentages of net sales:
-11-
THIRD QUARTER (16 WEEKS) ENDED YEAR TO DATE (40 WEEKS) ENDED
-------------------------------------------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross profit 10.5 10.1 10.3 10.0
Less:
Operating and administrative expenses 8.4 9.0 8.6 9.1
Restructuring charge .6 .3
Interest expense .3 .5 .3 .4
Interest income (.1) (.1) (.1) (.1)
Gain on sale of property
and equipment - (.2) (.1) (.2)
----- ----- ----- -----
TOTAL 9.2 9.2 9.0 9.2
----- ----- ----- -----
EARNINGS BEFORE INCOME TAXES 1.3 .9 1.3 .8
Income taxes .5 .3 .5 .3
----- ----- ----- -----
NET EARNINGS .8% .6% .8% .5%
===== ===== ===== =====
NET SALES
The following table sets forth the Company's net sales (in millions) by
segment:
THIRD QUARTER (16 WEEKS) ENDED YEAR TO DATE (40 WEEKS) ENDED
-------------------------------------------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Distribution:
Grocery store $573.9 $546.3 $1,384.3 $1,360.2
Convenience store 258.7 213.6 638.4 539.0
Insurance 3.8 3.8 11.8 11.8
-12-
Real estate and finance 2.6 3.1 8.0 9.1
Other 2.1 0.0 2.1 0.0
------ ------ -------- --------
TOTAL $841.1 $766.8 $2,044.6 $1,920.1
====== ====== ======== ========
Net sales for the quarter and year to date period ended January
2, 1999 increased $74.3 million and $124.5 million, respectively,
compared to the comparable periods in the prior year.
Sales to grocery store retailers for the quarter and year to date
period ended January 2, 1999 increased $27.6 million and $24.1
million, respectively, compared to the comparable periods in the
prior year. The third quarter increase is due primarily to
increased promotional activities whereby the Company has
committed a portion of earnings to the development of promotional
programs in conjunction with food manufacturers and increased
sales of pharmacy products. Other contributors to the third
quarter increase include the impact of an annual sale being held
later in the current fiscal year as well as incremental sales due
to customer remodels and the addition of new customers.
Sales to convenience store retailers for the quarter and year to
date period ended January 2, 1999 increased $45.1 million and
$99.4 million, respectively, compared to the comparable periods
in the prior year. The increases are primarily the result of
cigarette price increases imparted by manufacturers, as well as
volume increases in the Eastern Michigan region of the Company's
market. Through the second quarter, the Company had experienced
four cigarette price increases since January 1998 that aggregated
approximately 10%. During the third quarter of the current fiscal
year, the Company experienced another increase of approximately
33%. The addition of new customers late in the third quarter of
the prior year also had a positive impact on sales to convenience
store retailers.
Sales in the Insurance segment were comparable with prior periods.
Sales in the Real Estate and Finance segment for the quarter and
year to date period ended January 2, 1999 declined $.5 million
and $1.1 million, respectively, compared to the comparable
periods in the prior year. The declines are due primarily to a
reduction in rental income resulting from management's plan to
reduce the Company's real estate portfolio.
-13-
On December 3, 1998, the Company executed a letter of intent with
respect to the proposed purchase by the Company or one of its
subsidiaries of certain assets associated with the retail
grocery, pharmacy and transportation business of Glen's Market,
Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. ("Glen's").
Glen's operates 23 retail grocery stores, 4 pharmacies and a
distribution center located primarily in Northern Michigan. The
Company continues to negotiate with these companies toward
execution of a definitive asset purchase agreement with respect
to the purchase of this business.
On January 4, 1999, the Company, through its wholly-owned
subsidiary, Valuland, Inc. ("Valuland"), acquired certain assets
and assumed certain liabilities of Ashcraft's Market, Inc., an
operator of eight retail grocery stores located primarily in mid-
Michigan.
On January 13, 1999, the Company executed a letter of intent with
respect to the proposed purchase by Valuland of all of the
issued and outstanding shares of Family Fare, Inc., Family Fare
Management Services, Inc. and Family Fare Trucking, Inc. ("Family
Fare"). Family Fare is an operator of thirteen retail grocery stores,
a bakery, a warehouse facility and a transportation business located
primarily in Western Michigan. The Company continues to negotiate
with these companies and their shareholders toward execution of a
definitive stock purchase agreement with respect to the purchase of
this business.
Upon consummation, each of these acquisitions will be accounted
for as a purchase. Accordingly, the total purchase price of each
transaction will be allocated to assets acquired and liabilities
assumed based upon their relative fair market values. Cost in
excess of the fair market value of the net assets acquired or to
be acquired in each of these transactions (goodwill) has not been
determined. Consummation of the transactions with Family Fare
and Glen's are subject to a number of conditions to closing,
including the receipt of necessary governmental approvals. Both
transactions are expected to be completed during the fourth
quarter of Fiscal 1999 or the first quarter of Fiscal 2000.
Management expects net sales to increase in subsequent periods as
a result of these acquisitions.
GROSS PROFIT
Gross profit as a percentage of net sales for the quarter ended
January 2, 1999 was 10.5% compared to 10.1% for the quarter ended
January 3, 1998. Gross profit as a percentage of net sales for
-14-
the year to date period ended January 2, 1999 was 10.3% compared
to 10.0% for the year to date period ended January 3, 1998.
The increase in gross profit as a percentage of sales is due
primarily to the following factors:
1. During the third quarter, the Company liquidated certain
cigarette inventory quantities that were being accumulated in
excess of current needs to take advantage of the most recent
price increase occurring in November 1998.
2. The Company has enhanced existing inventory procurement
practices by purchasing inventories in excess of current needs
to take advantage of promotions offered by vendors.
3. Sales of perishable products with higher margins than most
other products have increased due to new business and
increased promotional activities.
The increases in gross profit as a percentage of sales indicated
above were offset to a certain degree by increases in sales of
cigarettes and pharmacy products for which gross profit margins
are lower.
Gross profit as a percentage of net sales for the quarter and
year to date periods ended January 2, 1999 in the insurance and
real estate and finance segments were comparable with prior
periods.
Management expects gross profit as a percentage of net sales to
increase in the next fiscal year and in subsequent periods as a
result of anticipated acquisitions of retail stores, for which
gross margins as a percentage of sales are typically higher than
in wholesale operations.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percentage of net
sales for the quarter ended January 2, 1999 were 8.4% compared to
9.0% for the quarter ended January 3, 1998. Operating and
administrative expenses as a percentage of net sales for the year
to date period ended January 2, 1999 were 8.6% compared to 9.1%
for the year to date period ended January 3, 1998.
The reduction in operating and administrative expenses as a
percentage of net sales is primarily the result of the increase
in net sales as discussed above, although the increase in net
sales had less of an impact over the 40 week period compared to
the 16 week period. Additionally, the Company has experienced
reductions in workers' compensation costs, reductions in loss
-15-
reserves in the insurance segment and a reduction in costs
associated with the planned discontinuance of the "Over-the-
Road" freight department.
Compensation associated with the Company's collective bargaining
labor force continues to be higher than the prior year. The
discontinuance of labor standards in the Company's grocery and
related product distribution warehouses during fiscal 1998
resulted in a decline in warehouse efficiency. In response, the
Company implemented an incentive program for all collective
bargaining associates to improve efficiency. While incentive
payments have been made in two warehouses, the ultimate success
of the program has yet to be determined. Under the existing
agreement, labor standards could be reestablished in March of
1999. The Company also implemented a management incentive plan
during the prior fiscal year. Payment under the plan requires a
targeted level of earnings and, accordingly, amounts have been
accrued as of January 2, 1999 that were not accrued as of January
3, 1998.
Management expects operating and administrative expenses to
increase next fiscal year and in subsequent periods as a
percentage of sales due to anticipated acquisitions of retail
stores, for which operating costs are typically higher as a
percentage of sales than in wholesale operations.
RESTRUCTURING CHARGE
On October 14, 1998, the Company's Board of Directors approved an
initiative to replace the Company's Plymouth distribution center
with a new multi-commodity distribution center in Northern Ohio.
The initiative includes the cessation of operations at the
Company's existing distribution center in Plymouth, Michigan by
April 2000 and would result in the displacement of approximately
300 associates in Plymouth and approximately 100 associates at
its Grand Rapids, Michigan distribution center. In connection
with the initiative, a $5,301,936 restructuring charge was
accrued as of January 2, 1999. The charge encompasses accruals
for contractual amounts to be paid under a collective bargaining
agreement, additional severance pay, and amounts due in
connection with withdrawal from the union pension plan.
INTEREST EXPENSE AND INCOME
Interest expense for the quarter and year to date period ended
January 2, 1999 was .3% of net sales compared to .5% and .4%.,
respectively, for the quarter and year to date periods ended
January 3, 1998. The decline was primarily attributable to lower
-16-
borrowing rates and lower average borrowings during the period
due to the sale of retail properties, lower inventory levels and
strong earnings performance, coupled with the increase in net
sales as discussed above. Interest income is comparable with
prior period levels.
Management expects interest expense to increase as average
borrowings increase in connection with planned acquisitions of
retail stores.
GAIN ON SALE OF PROPERTY AND EQUIPMENT
The Company recognized a net gain of approximately $1.2 million
on the sale of property and equipment during the year to date
period ended January 2, 1999. The net gain represents
approximately $1.9 million in gains on the sales of three retail
properties offset by losses of approximately $.7 million on the
disposal of certain technology-related equipment in connection
with the implementation of a logistics software package and on
the disposal of certain assets associated with the closing of
administrative offices in conjunction with the Company's
continuing efforts to centralize existing processes. Gains in
the third quarter ended January 2, 1999 were negligible.
NET EARNINGS
Net earnings for the quarter and year to date period ended
January 2, 1999 were $6.9 million and $16.4 million,
respectively, compared to $4.4 million and $10.0 million,
respectively, for the quarter and year to date period ended
January 3, 1998. The increase in net earnings is primarily
attributed to improvements in sales and gross profits in the
distribution segment. Net earnings performance in the insurance
and real estate and finance segments were comparable with prior
periods.
Year to date basic and diluted net earnings per Class A share
were $1.45 compared to $.85 for the comparable period in the
prior year. Return on average shareholders' equity was 13.79% for
the year to date period ended January 2, 1999 compared to 9.13%
for the year to date period ended January 3, 1998.
While management expects net earnings to continue to grow in its
distribution segment, that growth will be offset to a certain
degree by expected losses in the retail division during the early
stages of its operation.
-17-
YEAR 2000 READINESS DISCLOSURE
During Fiscal 1997, the Company began assessing the ability of
its computers and other systems to accurately process date and
time data in connection with the Year 2000. As a result of this
assessment, the Company developed a plan that addressed
internally developed systems, purchased systems, imbedded
processors and third party risks. The strategy for internally
developed systems has been to replace or convert non-compliant
systems or eliminate unnecessary systems. The Company is using
both internal resources as well as contracted consultants to
assist in accomplishing this task. The Company also has
completed an inventory of its purchased systems and imbedded
processors, has contacted or attempted to contact the related
vendors or manufacturers to determine their Year 2000 compliance,
and is in the process of replacing, converting or eliminating the
purchased systems that the Company has been informed or otherwise
has determined are not Year 2000 compliant. The Company
currently estimates that a small number of systems will have to
change as a result of non-compliant imbedded processors.
Finally, the Company has mailed inquiries to its customers,
suppliers and financial institutions relative to their Year 2000
compliance status. The Company continues to communicate Year 2000
issues to the Company's customers by conducting seminars and
distributing tool kits and other similar materials.
The Company estimates that it already has replaced or converted
approximately 85% to 90% of its non-compliant systems and that
all major systems will be Year 2000 ready by April 1999. The
Company has spent approximately $4.4 million during the past two
fiscal years and expects to incur an additional $1.6 million to
address the Year 2000 issues. The Company has delayed other non-
critical development and support initiatives as a result of these
expenditures. The Company believes that due to its current
efforts and future plans, the Year 2000 problem will not pose
significant operational problems for the Company's computer
systems. If such modifications and conversions to the Company's
systems are not completed timely, however, or if the Company's
customers, suppliers or financial institutions should fail to
adequately modify their computer systems, the Year 2000 problem
could have a material adverse impact on the Company's ability to
order and distribute product as well as operate its insurance,
retail and real estate and finance businesses. Management
believes the Company's greatest exposure exists with its
customers and suppliers and their inability to process business
transactions should they fail to adequately address the Year 2000
problem. As the Company completes its Year 2000 compliance
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efforts, the Company intends to develop contingency plans to
further address adverse consequences potentially arising from the
Year 2000.
This Year 2000 Readiness Disclosure is in part based upon and
repeats information provided to the Company by outside sources,
including its suppliers, customers, outside consultants and other
business partners and the manufacturers, vendors and licensors of
the Company's software, hardware and other systems and equipment.
Although the Company believes this outside information is
accurate, the Company is not the original source of this outside
information and has not independently verified the information.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operating activities and borrowings under a bank credit
agreement. At January 2, 1999, the Company had approximately
$68.2 million in additional bank borrowings available. Also, the
Company is permitted to sell unsecured notes under a note
offering with a total principal amount of $100,000,000. As of
January 2, 1999, approximately $14.4 million of these notes were
outstanding and the Company had approximately $47.7 million in
availability under this offering. Management believes that cash
flows from operating activities and the Company's ability to
issue notes and to borrow under the bank credit agreement will be
adequate for the Company's operating, investing and financing
activities. The Company has received a bank commitment letter
with respect to a secured loan to fund current and future
acquisitions, refinance existing debt and fund working capital
and other general corporate needs. Management expects the Company's
debt-to-equity ratio to increase as a result of management's plan to
acquire retail stores. The Company expects to pay a pre-payment
penalty of approximately $1.8 million in the fourth quarter in
connection with refinancing its existing debt.
Net cash provided by operating activities was approximately $51.2
million for the year to date period ended January 2, 1998,
compared to approximately $2.0 million for the year to date
period ended January 3, 1998. The increase in net cash flows
from operating activities is primarily the result of stronger
earnings, a reduction in cigarette inventories and accounts receivable
and an increase in accounts payable and accrued payroll and benefits.
Management expects cigarette inventories to return to historical
levels by the Company's fiscal year-end.
Net cash used in investing activities was approximately $6.2
million for the year to date period ended January 2, 1999
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compared to approximately $7.7 million for the year to date
period ended January 3, 1998. Capital expenditures for software
development have declined significantly. Management expects that
total capital expenditures will continue to show declines from
prior year levels. Additionally, the Company's collections of
amounts due on notes receivable from retail customers has
increased due to early payments by customers. Finally, three
retail properties were sold during the year to date period ended
January 2, 1999, which resulted in approximately $4.4 million in
proceeds.
Net cash used in financing activities of approximately $46.1
million is primarily attributable to reductions in amounts
borrowed under the Company's bank credit agreement due to strong
operating cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP is effective for the Company
on March 28, 1999, however, early adoption is permitted. The SOP
will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining
software for internal use. This SOP will be adopted on a
prospective basis and its effect on future operations has not
been determined.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report include forward-looking
statements that describe the Company's plans, strategies,
objectives, goals, expectations or projections. These forward-
looking statements are identifiable by words or phrases
indicating that the Company or management "expects,"
"anticipates," "projects," "plans" or "believes" that a
particular occurrence "may result" or "will likely result" or
that a particular event "may occur" or "will likely occur" in the
future, or similarly stated expectations. In addition to other
risks and uncertainties described in connection with the forward-
looking statements contained in this Report on Form 10-Q, there
are many important factors that could cause actual results to be
materially different from the Company's current expectations.
Anticipated future sales are subject to competitive pressures
from many sources. The Company's Distribution segment competes
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with numerous warehouse discount stores, supermarkets, pharmacies
and product manufacturers. The Company's Insurance segment is
subject to intense competition from numerous insurance agents and
insurance companies, especially in the property and casualty
insurance markets. Competitive pressures in these and other
business segments may result in unexpected reductions in sales
volumes, product prices or service fees. Additionally, future
sales will be dependent on the number of retail stores owned and
operated by the Company and competitive pressures in the retail
industry.
Operating and administrative expenses may be adversely affected
by unexpected costs associated with, among other factors: costs
associated with BASE (Business Automation Support Environment);
computer and other system modifications and upgrades to address
Year 2000 issues; unanticipated labor shortages, stoppages or
disputes; business acquisitions, including the Company's
acquisition of retail stores; business divestitures; the
transition of the business operations of recently acquired retail
stores; the defense, settlement or adverse judgments in
connection with current or future legal or administrative
proceedings; the cessation of operations at the Company's
existing distribution center in Plymouth, Michigan; the
discontinuance of the "Over-the-Road" freight department; and the
adoption of SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company's
future interest expense and income also may differ from current
expectations, depending upon: the amount of additional borrowings
necessary in connection with retail store acquisitions; cigarette
inventory levels; retail property sales; the volume of notes
receivable; and the amount of fees received on delinquent
accounts, among other factors.
The Company's estimated costs and completion dates for addressing
Year 2000 issues, as well as the estimated potential effects on
the Company's business operations arising from Year 2000 issues,
are based upon management's best estimates. These estimates were
derived using numerous assumptions with respect to future events.
Actual results could differ materially from those anticipated if
there are greater than expected disruptions or costs experienced
by the Company or its customers or suppliers in connection with
the Year 2000, including due to unanticipated delays in
correcting Year 2000 problems; increased costs of trained
personnel; increased costs associated with the Company's retail
store acquisitions; the interruption of electronic or telephonic
communications; the interruption in banking or commercial payment
systems; transportation delays; the failure of basic utilities;
-21-
or other similar events or factors. Accordingly, there can be no
guarantee that the Company's estimates will be achieved.
The foregoing is intended to provide meaningful cautionary
statements for purposes of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The foregoing
should not be construed as an exhaustive list of all economic,
competitive, governmental and technological factors that could
adversely affect the Company's expected consolidated financial
position, results of operations or liquidity. The Company
disclaims any obligation to update its forward-looking statements
to reflect subsequent events or circumstances.
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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
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 16, 1999 SPARTAN STORES, INC.
(Registrant)
By /S/CHARLES B. FOSNAUGH
Charles B. Fosnaugh
Vice President Development
(Principal Financial
Officer and duly authorized
signatory for Registrant)
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EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT
27 Financial Data Schedule