<PAGE>
PROSPECTUS
Filed pursuant to Rule 424(b)(1)
Registration No. 33-94496
3,500,000 CLASS A SHARES
SPARTAN STORES, INC.
CLASS A COMMON STOCK
$2 PAR VALUE
Spartan Stores, Inc. ("Spartan"), hereby offers for sale 3,500,000
shares of Class A Common Stock, $2 par value (the "Class A Shares"). At
June 21, 1997, 2,276,830 Class A Shares, as adjusted for the Stock Split
(as defined herein), remained unsold and were available for sale pursuant
to this Prospectus. Spartan hereby offers the Class A Shares to its retail
customers who are required to purchase and maintain a minimum investment in
the Class A Shares ("Shareholder-Customers"), to persons who apply to
become retail customers of Spartan, to employees of Spartan ("Associates"),
to persons designated from time to time by the Board of Directors of
Spartan ("Approved Holders"), and to certain other qualified holders.
Spartan offers the Class A Shares at a price the Board establishes from
time to time. For information regarding the factors considered in
determining the price of the Class A Shares, see "THE COMPANY."
Spartan has not established any minimum number of Class A Shares that
it must sell in this offering. Therefore, there can be no assurance that
Spartan will receive all of the proceeds described in this offering. In
addition, Spartan will not place any offering proceeds received in any
escrow, trust, or other arrangement pending the receipt of a minimum amount
of proceeds. See "PLAN OF DISTRIBUTION."
Prior to this offering, there has been no public market for the Class
A Shares. As a result of the restrictions on the transferability of the
Class A Shares, a public market will not likely develop after the sale of
all or any of the Class A Shares.
SEE "RISK FACTORS" FOR A SUMMARY OF CERTAIN FACTORS THAT PROSPECTIVE
INVESTORS SHOULD CONSIDER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC<F1> AND COMMISSIONS<F2> SPARTAN<F3>
---------- ---------------------- -----------
<S> <C> <C> <C>
Per Share. . . . . . . . . . . $11.30 0 $11.30
Total. . . . . . . . . . . . . $25,728,179 0 $25,728,179
<FN>
<F1> Spartan offers the Class A Shares at the price established from time
to time by the Board of Directors. As of the date of this Prospectus,
the price was $11.30 per share, as adjusted for the Stock Split (as
defined herein). The Board of Directors from time to time, and at
least annually, considers whether to change the price. The total
price to public and proceeds to Spartan are based on the number of
Class A Shares remaining unsold in this offering as of June 21, 1997.
<F2> Spartan offers the Class A Shares on a best-efforts basis directly for
its own account without paying any selling commission.
<F3> Before deducting expenses payable by Spartan estimated at $77,069.
</FN>
</TABLE>
THE DATE OF THIS PROSPECTUS IS JULY 17, 1997
<PAGE>
Spartan offers the Class A Shares when, as and if issued, and subject
to prior sale, withdrawal, cancellation or modification of this offering
without notice. The Board of Directors may reject any subscription for any
Class A Shares in whole or in part. Spartan expects to deliver stock
certificates within 30 days after payment by a subscriber.
Spartan will sell the Class A Shares directly. Spartan has not
engaged any broker or selling agent to offer and sell the Class A Shares.
No person has been authorized to give information or make any
representation in connection with this offering other than those contained
in this Prospectus. Spartan will not pay any commission to any person for
soliciting or otherwise obtaining investors. This is a best-efforts,
continuous offering to Shareholder-Customers, persons who apply to become
retail customers of Spartan, Associates of Spartan, Approved Holders and
certain other persons qualified to hold the Class A Shares.
AVAILABLE INFORMATION
Spartan has filed with the Securities and Exchange Commission ("SEC")
a registration statement under the Securities Act of 1933, as amended (the
"1933 Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto as permitted
by the rules and regulations of the SEC. For further information on
Spartan and the securities offered hereby, reference is made to the
registration statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference. Spartan is also subject
to the informational requirements of the Securities Exchange Act of 1934
and, in accordance therewith, files reports and other information with the
SEC. The registration statement, reports, and other information filed by
Spartan (including the exhibits and schedules filed therewith) may be
inspected without charge at the SEC's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of this material can
also be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC also
maintains a Web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding Spartan.
Spartan intends to furnish to its shareholders, after the close of
each year, an annual report relating to the operations of Spartan
containing financial statements audited and reported on by independent
public accountants, including an opinion expressed by such independent
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<PAGE>
public accountants. In addition, Spartan may furnish to its shareholders
such other reports as the Board of Directors may authorize from time to
time.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
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 Prospectus, the term "Spartan" refers to Spartan Stores, Inc. without
its subsidiaries, and the term "Company" refers to Spartan and its
subsidiaries. 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.
The Company's business is concentrated in Michigan. The Company is
the ninth largest wholesaler of grocery and related products in the United
States.
Initially, Spartan was formed as a cooperative. In 1973, Spartan
converted to a Michigan business corporation. As of May 31, 1997,
approximately 85 percent of Spartan's outstanding shares of common stock
were owned by persons actively engaged in the retail grocery business.
Spartan's customers are required by a customer agreement to purchase and
maintain an investment in Class A Shares and are referred to in this
Prospectus as "Shareholder-Customers."
In addition to a wide variety of grocery and related products, the
Company also offers its customers an array of services, including new store
site selection; market analysis; store planning and development; financing
programs for store development and remodeling; marketing, promotion and
advertising assistance; insurance; data processing; accounting and tax
preparation; human resources; coupon redemption; and product reclamation.
THE OFFERING
Common Stock Offered. . . . . . . . . . . 3,500,000 Shares of Class A
Common Stock, $2 par value
per share.
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<PAGE>
Offering Price. . . . . . . . . . . . . . The offering price in effect
at the time of purchase. At
the date of this Prospectus,
the offering price is $11.30
per share. The Board of
Directors may from time to
time change the offering
price.
Eligible Subscribers. . . . . . . . . . . Shareholder-Customers,
persons who apply to become
retail customers of Spartan,
Associates of Spartan,
Approved Holders, or certain
qualified holders.
Investment Considerations . . . . . . . . Each prospective investor
should carefully consider
the summary of certain
factors set forth in "RISK
FACTORS."
Use of Net Proceeds . . . . . . . . . . . To increase working capital
and for other general
corporate purposes.
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary information below presents a summary of selected
consolidated financial information of the Company and has been derived from
and should be read in conjunction with consolidated financial statements
and related notes as of March 29, 1997 and March 30, 1996, and for each of
the three years in the period ended March 29, 1997, audited by Deloitte &
Touche LLP, independent auditors, appearing elsewhere in this Prospectus.
The following data also should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: FOR THE YEAR ENDED
--------------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994<F1> 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales<F2> $2,475,025 $2,554,688 $2,526,128 $2,194,754 $2,062,719
Volume Incentive
Rebates<F3> $ 15,577 $ 17,584 $ 17,626 $ 17,710
Costs and Expenses<F2> $2,459,641 $2,571,279 $2,494,446 $2,165,938 $2,035,966
Earnings (Loss) Before
Taxes on Income<F4> $ 15,384 $ (32,168) $ 14,098 $ 11,190 $ 9,043
Net Earnings (Loss)<F4><F5> $ 9,703 $ (21,668) $ 9,030 $ 7,105 $ 3,241
Net Earnings (Loss)
Per Share <F4><F5><F6> $ .80 $ (1.74) $ .74 $ .61 $ .28
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF
--------------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994<F1> 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 <F4><F6> $ 8.91 $ 8.23 $ 10.03 $ 9.36 $ 8.82
Return on Average
Shareholders' Equity<F4> 9.26% (17.66%) 7.52% 6.41% 3.02%
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<PAGE>
Cash Dividends $ 606 $ 623 $ 613 $ 591 $ 596
Dividends Paid Per
Share<F6> $ .05 $ .05 $ .05 $ .05 $ .05
Shares Outstanding<F6> 12,033 12,460 12,544 12,093 12,232
<FN>
<F1> 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.
(footnotes continued on following page)
(continuation of footnotes)
<F2> 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.
<F3> As of February 1996, Spartan no longer pays any volume incentive
rebates. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION."
<F4> During the year ended March 30, 1996, the Company incurred
restructuring, reorganization, and other charges amounting to
$46,439,743.
<F5> 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 $.20 per share for the year ending March 27, 1993,
as adjusted for the Stock Split.
<F6> As adjusted to reflect the results of a ten-for-one stock split
pursuant to a share dividend paid on July 15, 1997 to shareholders
of record on May 31, 1997 (the "Stock Split").
</FN>
</TABLE>
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
THE COMPANY
The Company distributes grocery and related products to retail stores
located in Michigan, Illinois, Indiana, Kentucky, Ohio, Pennsylvania,
Tennessee, and West Virginia (the owners or operators of these stores are
referred to herein 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 addition to its principal business segment of grocery product
distribution, the Company operates in two other reportable business
segments: insurance sales and underwriting; and real estate and finance.
In 1917, a group of independent food retailers incorporated the Grand
Rapids Wholesale Grocery Company. The retailers sought 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.
Spartan was incorporated as a cooperative, and in 1973 converted to a
Michigan business corporation.
On May 31, 1997, Spartan had approximately 402 record shareholders of
Class A Shares, of whom 232 were Customers (the "Shareholder-Customers").
In the aggregate, Shareholder-Customers owned 10,278,250 Class A Shares, as
adjusted for the Stock Split, or approximately 85 percent of the total
outstanding. The remaining shareholders of Spartan are former retail
grocery customers, persons who were issued shares of common stock in
certain business acquisitions, the Spartan Stores, Inc. Pension Plan, and
Associates of the Company.
Spartan is authorized to sell its shares of common stock to Customers
of Spartan, Associates, and Approved Holders. In addition, pursuant to the
Bylaws, Spartan may issue Class A Shares in connection with the acquisition
of businesses, assets, or capital stock of another corporation (the persons
to whom such shares are issued are referred to as "Qualified Holders"). 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.
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Certain subsidiaries of Spartan distribute grocery products to
convenience stores or independent grocers or operate cash and carry
outlets. These subsidiaries do not require their respective customers to
maintain an investment in the capital stock of Spartan or the respective
subsidiary. See "BUSINESS-General."
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.
To become a Shareholder-Customer, a retail grocer must agree to make
the Required Investment. To satisfy the Required Investment policy in
effect as of the date of this Prospectus, each Shareholder-Customer must
purchase 1,000 Class A Shares at the current Trading Value (see discussion
below) for each corporation, partnership or other entity which is
affiliated with the retail grocer and which owns one or more Approved
Stores (defined below).
In addition, to satisfy the Required Investment, on or before the date
five years from the date that Spartan accepts a store as an approved
location for the sale of Spartan products (an "Approved Store"), each
Shareholder-Customer also must own Class A Shares (including the 1,000
Class A Shares described above) with an aggregate Trading Value equal to
$10,000 plus one-and-one-half times the Shareholder-Customer's average
weekly purchases from Spartan during Spartan's prior fiscal year
attributable to each Approved Store, up to a maximum Required Investment
for each Approved Store of $125,000.
The price at which Shareholder-Customers must acquire Class A Shares
from Spartan is the "Trading Value." 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.
Effective June 22, 1997, the Trading Value was established at $113 per
share. This Trading Value was adjusted to $11.30 per share in connection
with the Stock Split.
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 which equals the Shareholder-Customer's Required Investment
as of the date the Shareholder-Customer ceased purchasing from Spartan.
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<PAGE>
Payment for such redeemed Class A Shares is made in six equal installments
over a five-year period.
A Shareholder-Customer may elect to accumulate stock in excess of the
Required Investment. As of March 29, 1997, Shareholder-Customers owned in
the aggregate 8,910,000 Class A Shares in excess of their aggregate
Required Investments, as adjusted for the Stock Split. It is Spartan's
policy (but not a contractual obligation) also to redeem for cash at the
current Trading Value any Class A Shares owned by a Shareholder-Customer
with an aggregate Trading Value in excess of the Shareholder-Customer's
Required Investment, or, if the Shareholder-Customer no longer purchases
grocery and related products from Spartan, in excess of the Shareholder-
Customer's Required Investment as of the date the Shareholder-Customer
ceased purchasing products from Spartan. See "RISK FACTORS--Redemption
Policy" and "DESCRIPTION OF CAPITAL STOCK--Redemption Policy."
In addition to Class A Shares sold to satisfy the applicable Required
Investment, Spartan offers all Shareholder-Customers, Associates, Approved
Holders and Qualified Holders 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.
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.
RISK FACTORS
In addition to general risks of investments and economic conditions,
prospective investors should carefully consider the following factors
before purchasing any Class A Shares offered hereby.
This Prospectus contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. Reference is made in particular to the description of the
Company's plans and objectives for future operations, assumptions
underlying such plans and objectives and other forward-looking statements
included in "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
and "BUSINESS" in this Prospectus. Such statements are based on
management's current expectations and are subject to a number of factors
and uncertainties which could cause actual results to differ materially
from those described in the forward-looking statements. Factors which
could cause such results to differ materially from those described in the
forward-looking statements include those set forth in the risk factors
below, in addition 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 SEC.
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<PAGE>
COMPETITION
The grocery and convenience store industries are characterized by
intense competition and low profit margins. 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, wholesale membership clubs,
convenience stores, shop-at-home services, restaurants and fast food
businesses. In addition, the Company considers competitors of its
Customers to be competitors of the Company, since the Company's long term
success depends upon the success of its Customers. There can be no
assurance that the Company or its Customers will be able to compete
successfully in the future. See "BUSINESS--Competition."
The Company operates an insurance agency and insurance company. The
insurance industry also is highly competitive. Many competitors may have
far greater financial and other resources than those of the Company. There
can be no assurance that the Company will be able to compete effectively in
the insurance industry.
STATE ECONOMIC CONDITIONS
The Company's business operations are dependent upon the sale of
groceries and related products to its Customers. Most of these Customers
are located in Michigan, Illinois, Indiana, Kentucky, Ohio, Pennsylvania,
Tennessee, and West Virginia. Adverse economic conditions, a reduction in
the populations or the loss of purchasing power by residents in these
states could correspondingly reduce the amount of groceries purchased in
these states, which could adversely affect the Company's net sales and
profitability.
ENERGY MATTERS
The Company's trucking operations are extensive. A shortage or
substantial increase in the cost of diesel fuel could materially and
adversely affect deliveries of grocery and related products and, thus,
materially and adversely affect the Company's net sales and profitability.
PROFITS AND SHAREHOLDERS' EQUITY
There can be no assurance that the Company will consistently earn
profits and increase its shareholders' equity. The value of the Class A
Shares may be adversely affected by poor operating results due, in part, to
circumstances beyond the Company's control, the loss of Customers and other
problems associated with the Company's business operations.
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<PAGE>
DIVIDENDS
For at least 20 years, the Board of Directors has declared, and
Spartan has paid, a regular quarterly dividend. There can be no assurance
that Spartan's profitability or general business conditions will enable the
Board to continue to declare, and Spartan to continue to pay, dividends on
such a regular basis or at historical levels.
REDEMPTION POLICY
The Board of Directors has adopted a policy to redeem, if possible,
upon a Shareholder-Customer's request the shares of Class A Common Stock
held by a Shareholder-Customer that are in excess of the Shareholder-
Customer's Required Investment, and to redeem shares held by a former
Shareholder-Customer, upon certain terms and conditions. See "DESCRIPTION
OF CAPITAL STOCK--Redemption Policy." The policy does not create or
evidence any obligation on Spartan's behalf. The Board of Directors may at
any time, without notice, revise or terminate the policy based on Spartan's
financial condition, general market conditions, any requirement of or
limitation imposed by law or any agreement by which Spartan is bound, or
for any other reason deemed sufficient by the Board.
Spartan may at any time, in its sole discretion, call for redemption
any Class A Shares which are beneficially owned by any person who is not at
the time of the redemption either: (i) a Shareholder-Customer who continues
to purchase from Spartan grocery and grocery related products, (ii) an
Associate who continues to be employed by the Company, (iii) an Approved
Holder, or (iv) a Qualified Holder.
VALUE OF CLASS A SHARES
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 was established at $113 per share. This Trading Value was
adjusted to $11.30 in connection with the Stock Split.
The price for each Class A Share is the Trading Value in effect on the
date of the purchase. In addition, the Trading Value is the price at which
Spartan will acquire Class A Shares from a Shareholder-Customer pursuant to
Spartan's options to purchase or redeem or its redemption policy. See
"DESCRIPTION OF CAPITAL STOCK." Although the Board has annually increased
the Trading Value in recent years, there can be no assurance that such
increases will continue or that the Trading Value will not decrease.
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<PAGE>
RESTRICTIONS ON TRANSFER
A holder may transfer Class A Shares only to an Approved Holder or a
Shareholder-Customer who continues to purchase from Spartan grocery and
related products. As of the date of this Prospectus, the Board has
designated as Approved Holders (i) any shareholder or other equity owners
of any Shareholder-Customer who owns 5 percent or more of the equity
interests in the Shareholder-Customer; (ii) a member of the Board of
Directors of Spartan; and (iii) any spouse of an Associate, any biological
or adopted child of an Associates, if the child is 21 years of age or
younger, and any trust created by an 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. In addition, upon any proposed transfer of Class A
Shares, Spartan has an option to purchase the Class A Shares that are
subject to the proposed transfer. See "DESCRIPTION OF CAPITAL STOCK."
NO MINIMUM OFFERING
Spartan offers the Class A Shares on a "best efforts," continuous
basis. Spartan has not established a minimum number of Class A Shares that
must be subscribed before effecting any sales. There is no assurance that
Spartan will sell all of the Class A Shares that are the subject of this
offering.
ABSENCE OF A PUBLIC TRADING MARKET
Prior to this Offering, there has been no public 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. Furthermore, only limited classes of
persons are eligible to hold Class A Shares. Thus, any purchaser of Class
A Shares who desires to sell the shares may not be able to do so.
CONFLICTS OF INTEREST
Except for Ms. Johnson and Messrs. Buick, Carton, and Meyer, the
members of the Board of Directors of Spartan have ownership interests in
businesses which are Shareholder-Customers. The various relationships
between Spartan and its shareholders and Customers create conflicts of
interest for such members of the Board. Each such member owes fiduciary
obligations to Spartan and all its shareholders in his capacity as a
director. The interests of Spartan may differ from the interests of
Shareholder-Customers. Affiliates of directors purchase products and
services at prices and on terms, including certain discounts and rebates,
offered to other Shareholder-Customers. See "CERTAIN TRANSACTIONS."
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CLASS B SHARES ELIGIBLE FOR FUTURE SALE
Spartan is authorized to issue 5,000,000 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 Prospectus, no Class
B Shares are outstanding. However, the Board of Directors without
shareholders' approval could issue Class B Shares with voting or conversion
rights that could adversely affect the voting power of the holders of Class
A Common Stock.
USE OF PROCEEDS
Spartan expects to use the proceeds from the sale of Class A Shares
for general working capital purposes and from time to time to redeem from
shareholders their Class A Shares.
DIVIDEND POLICY
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 $0.0125 per share, as adjusted for the Stock Split.
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.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
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 as of March 29, 1997
and March 30, 1996, and for each of the three years in the period ended
March 29, 1997, audited by Deloitte & Touche LLP, independent auditors,
appearing elsewhere in this Prospectus. The following data should also be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
-13-
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
INCOME STATEMENT DATA: FOR THE YEAR ENDED
--------------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994<F1> 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales<F2> $2,475,025 $2,554,688 $2,526,128 $2,194,754 $2,062,719
Volume Incentive
Rebates<F3> $ 15,577 $ 17,584 $ 17,626 $ 17,710
Costs and Expenses<F2> $2,459,641 $2,571,279 $2,494,446 $2,165,938 $2,035,966
Earnings (Loss) Before
Taxes on Income<F4> $ 15,384 $ (32,168) $ 14,098 $ 11,190 $ 9,043
Net Earnings (Loss)<F4><F5> $ 9,703 $ (21,668) $ 9,030 $ 7,105 $ 3,241
Net Earnings (Loss)
Per Share <F4><F5><F6> $ .80 $ (1.74) $ .74 $ .61 $ .28
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF
--------------------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25, MARCH 26, MARCH 27,
1997 1996 1995 1994<F1> 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 <F4><F6> $ 8.91 $ 8.23 $ 10.03 $ 9.36 $ 8.82
Return on Average
Shareholders' Equity<F4> 9.26% (17.66%) 7.52% 6.41% 3.02%
-14-
<PAGE>
Cash Dividends $ 606 $ 623 $ 613 $ 591 $ 596
Dividends Paid Per
Share<F6> $ .05 $ .05 $ .05 $ .05 $ .05
Shares Outstanding<F6> 12,033 12,460 12,544 12,093 12,232
<FN>
<F1> 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.
<F2> 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.
<F3> 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 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.
<F4> During the year ended March 30, 1996, the Company incurred
restructuring, reorganization, and other charges amounting to
$46,439,743.
<F5> 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 $.20 per share for the year ending March 27, 1993,
as adjusted for the Stock Split.
<F6> As adjusted to reflect the results of the Stock Split.
</FN>
</TABLE>
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<PAGE>
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
(52 WEEKS) (53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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)
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<PAGE>
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%
- ---------------------------------------------------------------------------
</TABLE>
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 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.
-17-
<PAGE>
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
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.
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<PAGE>
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.
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
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<PAGE>
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.
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.
-20-
<PAGE>
CAPITAL STRUCTURE
The following table summarizes the capital structure for the last two
fiscal years:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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 Trading Value was adjusted to $11.30 per
share in connection with the Stock Split.
The Company paid quarterly dividends of $.0125 per share, as adjusted
for the Stock Split, 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 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.
-21-
<PAGE>
BUSINESS
GENERAL
Spartan and its subsidiaries distribute grocery and related products
to retail locations in Michigan, Illinois, Indiana, Kentucky, Ohio,
Pennsylvania, Tennessee, and West Virginia.
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, Associates and Approved Holders. In addition, pursuant to the
Bylaws, Spartan may issue 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.
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. Distribution operations
include product sales to independently owned and operated food stores and
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<PAGE>
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 in the
notes to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
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
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 Shareholder-Customers gain an
important 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
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 over 1,800
"Spartan" private label items. Spartan ships the products from Spartan's
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<PAGE>
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 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 operations 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
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 asset 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
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<PAGE>
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 print, 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.
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. These
services include: recruiting; interviewing and staffing
assistance; benefit program planning; handbook preparation,
design, and printing; labor relations assistance; personnel
recordkeeping; 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.
-25-
<PAGE>
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.
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 ending 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
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<PAGE>
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.
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.).
-27-
<PAGE>
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. The following table
reflects the number of shareholders who were Shareholder-Customers
("active" Shareholder-Customers), the number of stores owned by the active
Shareholder-Customers, and the average purchases per store served during
the past five years:
<TABLE>
<CAPTION>
END OF NUMBER OF NUMBER OF SHAREHOLDER- AVERAGE PURCHASES
FISCAL ACTIVE SHAREHOLDER- CUSTOMER STORES PER SHAREHOLDER-
YEAR CUSTOMERS AT YEAR END SERVED AT YEAR END CUSTOMER STORE
------ --------------------- ------------------ --------------
<S> <C> <C> <C> <C>
1997 232 444 $3,910,170
1996 259 465 3,767,745
1995 273 450 3,363,538
1994 277 465 3,271,400
1993 277 469 3,224,935
</TABLE>
-28-
<PAGE>
As the above illustrates, the number of active Shareholder-Customers
and the number of stores supplied by Spartan over the last five years has
remained relatively stable. However, a large number of Shareholder-
Customers have expanded or remodeled existing stores or built new stores.
Management believes that during this same period the average size of the
stores operated by its Shareholder-Customers has increased significantly.
According to industry sources, the trend by Shareholder-Customers to
expand the size of stores, or to build larger stores to replace smaller
stores, follows a national trend in food retailing toward larger store
sizes. 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.
The following table reflects the diversity in the Shareholder-Customer
base of Spartan as of March 29, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDER-
NUMBER OF CUSTOMERS OPERATING
STORES OPERATED THE NUMBER OF STORES
--------------- --------------------
<S> <C> <C>
1 182
2 24
3 5
4 0
5 or more 21
</TABLE>
-29-
<PAGE>
CUSTOMER AGREEMENTS
To become a Shareholder-Customer, a retail store must submit to
Spartan, among other documents, a completed Stock Subscription Agreement,
together with the initial payment for Class A Shares to satisfy the
Required Investment, and a Customer Agreement. The following summarizes
only the Stock Subscription Agreement and Customer Agreement. The summary
is qualified in its entirety by reference to the Stock Subscription
Agreement and the Customer Agreement, copies of which are available from
Spartan. Spartan encourages each applicant to review the Stock
Subscription and Customer Agreements carefully before applying, and to
obtain the advice of counsel.
In the Stock Subscription Agreement, the Shareholder-Customer agrees
to acquire from time to time and hold an investment in Class A Shares
sufficient to comply with the Required Investment. In addition, the
Shareholder-Customer agrees to be bound by the transfer restrictions and
the options to purchase the Class A Shares granted to Spartan as set forth
in Spartan's Bylaws. The terms of the Stock Subscription Agreement apply
to all Class A Shares held by the Shareholder-Customer, whenever acquired.
In the Customer Agreement, Spartan agrees to use its best efforts to
supply the Shareholder-Customer with the Shareholder-Customer's
requirements for resale at Approved Stores. A Shareholder-Customer may
sell grocery and related products supplied by Spartan only at Approved
Stores. A Shareholder-Customer may add a new retail store location as an
Approved Store only upon Spartan's approval.
The Shareholder-Customer agrees to comply with the rules, regulations
and policies applicable to Spartan's Customers as may be established from
time to time by Spartan (the "Policy Manual"). Among other matters, the
Policy Manual contains Spartan's policies on the Required Investment,
Trading Value, Volume Incentive Rebates, and stock redemptions. In its
discretion, Spartan may revise or terminate any portion of the Policy
Manual at any time, provided that Spartan must give the Shareholder-
Customer reasonable notice of any revision which imposes any new or changed
obligation on the Shareholder-Customer.
The Shareholder-Customer agrees that its purchases of the grocery and
related products and services will be in accordance with Spartan's Standard
Terms and Conditions of Sale, which Spartan may amend from time to time.
Among other matters, the Standard Terms and Conditions of Sale set forth
the terms of payment, order procedures, procedures for price and rebate
changes, delivery terms, inspection and acceptance practices and warranties
and limitations on warranties.
The Customer Agreement grants to the Shareholder-Customer the
nonexclusive, nontransferable right to use all Spartan trademarks, trade
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<PAGE>
names, designs, logos, slogans, trade dress, product configurations,
container configurations and other identifications (the "Trademarks"). The
Shareholder-Customer may use the Trademarks to advertise and promote the
sale of products at Approved Stores.
Either Spartan or the Shareholder-Customer may terminate the Customer
Agreement at any time with or without cause by giving the other party not
less than 30 days prior written notice. Upon a default by a Shareholder-
Customer, as described below, Spartan may terminate the Customer Agreement
upon written notice to the Shareholder-Customer. In addition, the Customer
Agreement will automatically terminate, without notice, if: (i) the
Shareholder-Customer for a continuous 30-day period fails to order any
merchandise from Spartan, unless the failure to order for the period
results from a cause beyond the Shareholder-Customer's control; (ii) the
Shareholder-Customer is adjudicated bankrupt, or a petition is filed by or
against the Shareholder-Customer under any federal or state bankruptcy laws
relating to the relief of debtors for reorganization, arrangement or other
similar relief permitted thereby, or the Shareholder-Customer makes a
general assignment for the benefit of creditors; (iii) a receiver, trustee,
or similar officer is appointed with respect to any of the Shareholder-
Customer's properties or businesses, or the Shareholder-Customer's interest
in the Customer Agreement is attached, executed or levied upon, seized,
garnished, or appropriated by a legal process, unless the appointment of
the officer is vacated or discharged, or the effect of the legal process is
otherwise released, within 10 days; or (iv) any act or event of the type
described in the above subsection occurs which relates to, involves, or
affects the interest of one or more persons having a 50 percent or greater
ownership interest in a Shareholder-Customer which is a corporation,
partnership or other legal entity.
The Shareholder-Customer will be in default under the Customer
Agreement if the Shareholder-Customer fails to pay when due any amount owed
Spartan or to perform any obligation, default of which cannot be cured,
under the Customer Agreement, Spartan's Bylaws, the Policy Manual, or the
Stock Subscription Agreement. The Shareholder-Customer will also be in
default if it fails to perform any other obligation under the Customer
Agreement or under Spartan's Bylaws, the Policy Manual, or the Stock
Subscription Agreement, and the failure continues for 10 days following
receipt of notice from Spartan specifying the failure.
In October 1990, Spartan adopted the use of the Stock Subscription and
Customer Agreements summarized above. Spartan uses these agreements for
all new Shareholder-Customers. All Shareholder-Customers that are
beneficially owned by members of the Board of Directors have signed the new
Stock Subscription and Customer Agreements. Beginning in February 1991,
Spartan requested all of its current Shareholder-Customers to sign and
return the Stock Subscription and Customer Agreements. As of May 31, 1997,
only approximately 2 percent of Spartan's Shareholder-Customers have not
-31-
<PAGE>
signed the Stock Subscription and Customer Agreements. These Shareholder-
Customers accounted for less than 2 percent of the Company's net sales in
fiscal year 1997. Shareholder-Customers who have not signed the new
agreements conduct business with Spartan pursuant to various agreements
entered into prior to 1990. In the opinion of management, the continued
operations under the older agreements with those Shareholder-Customers who
have not signed the new agreements will not adversely affect the Company's
business.
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 outstanding receivables. Bad debt expenses have not
been material to the Company's operations.
PROPERTIES
Spartan owns approximately 1,300,000 square feet of warehouse,
distribution, and office space located on 211 acres in Grand Rapids,
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;
-32-
<PAGE>
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
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,
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<PAGE>
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 totaling approximately 53,000 square
feet of space.
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.
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
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<PAGE>
2001. The Company considers its relations with all Associates to be
satisfactory, and has not had any work stoppages in the last five years.
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, as 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.
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<PAGE>
MANAGEMENT
The names, ages and principal occupations of directors and
executive officers of Spartan as of July 15, 1997, are set forth below.
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST 5 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)
Glen A. Catt (49) Director since 1988; President and
Chief Executive Officer, Glen's
Markets, Inc. (retail grocery
chain)
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<PAGE>
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST 5 YEARS
------------ ---------------------------
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 (age 56) Director since 1997; 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)
James B. Meyer (51) President and Chief Executive
Officer of Spartan since July
1997; Director since August
1996; Treasurer since July
1994; President and Chief
Operating Officer from August
1996 to July 1997; 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
-37-
<PAGE>
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST 5 YEARS
------------ ---------------------------
Charles B. Fosnaugh (47) Senior Vice President Business
Development and Finance since
September 1996; Senior Vice
President Business Development
from 1994 to September 1996;
Vice President, Business
Development from 1990 to 1994;
President, Market Development
Corporation since 1990;
President, Valuland Inc. since
1990
Dennis J. Otto (47) Vice President Sales and Marketing
since July 1996; Vice
President Retail Marketing and
Operations from 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)
Mr. Patrick M. Quinn retired from Spartan on July 15, 1997. Mr. Quinn
served as a director and as Chief Executive Officer of Spartan from 1985
until his retirement and as President of Spartan from 1985 to 1996.
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,
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<PAGE>
1997, the Board of Directors established the number of directors of Spartan
at 12. The terms of Messrs. Boyd, Carton, DeYoung and Koop expire in 1998;
Messrs. Buick, Hill, Prevo and VanGilder expire in 1999; and Messrs. Catt,
Feldpausch and Meyer and Ms. Johnson expire in 2000. 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.
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 for the fiscal
year ended March 29, 1997.
<TABLE>
SUMMARY COMPENSATION TABLE
--------------------------
<CAPTION>
LONG-
TERM
COMPEN-
SATION
AWARDS
-----------
NUMBER OF
SECURITIES ALL OTHER
NAME AND ANNUAL COMPENSATION UNDERLYING COMPEN-
PRINCIPAL FISCAL ------------------- OPTIONS SATION
POSITION YEAR SALARY BONUS<F1> <F2> <F3>
---------- ------ ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Patrick M. Quinn<F4> 1997 $373,150 $ 37,497 4,000 $108,833
(Chief Executive Officer) 1996 353,658 75,000 4,000 107,317
1995 341,949 61,250 4,000 106,393
James B. Meyer 1997 $308,250 $ 24,500 4,000 $ 6,348
(President and Chief 1996 231,995 37,375 2,000 4,832
Operating Officer) 1995 213,060 32,200 2,000 3,908
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<PAGE>
Charles B. Fosnaugh 1997 $190,640 $ 18,688 2,000 $ 5,921
(Senior Vice President 1996 182,940 37,375 2,000 4,405
Business Development 1995 159,860 30,100 1,000 3,481
and Finance)
Dennis J. Otto 1997 $132,000 $ 9,000 1,000 $ 6,478
(Vice President 1996 113,375 19,350 1,000 4,052
Sales and Marketing) 1995 101,005 15,050 1,000 4,038
David deS. Couch 1997 $120,330 $ 7,500 1,000 $ 6,824
(Vice President 1996 101,975 15,000 0 3,934
Information Technology) 1995 92,110 12,900 0 3,010
<FN>
__________________
<F1> Includes bonus amounts elected under the 1991 Stock Bonus Plan,
plus an amount equal to 30 percent of such bonus amounts to be
received in Class A Shares.
<F2> 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. The number of
securities underlying options has been adjusted to reflect the
effects of the Stock Split.
<F3> 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' matching contributions under
its Savings Plus Plan; and (iii) 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:
(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
<F4> Mr. Quinn retired from Spartan on July 15, 1997.
</FN>
</TABLE>
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<PAGE>
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.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR <F1><F2>
------------------------------------------
<CAPTION>
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%
---- ------- ---------- ----- ------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Patrick M. Quinn<F3> 4,000 44% $10.50 5/2006 $26,414 $66,937
James B. Meyer 2,000 22 10.50 5/2006 13,207 33,469
Charles B. Fosnaugh 2,000 22 10.50 5/2006 13,207 33,469
Dennis J. Otto 1,000 11 10.50 5/2006 6,603 16,734
David deS. Couch 0 N/A N/A N/A N/A N/A
<FN>
__________________
<F1> The per share exercise price of each option equals the Trading Value
of the Class A Shares effective as of June 23, 1996, as adjusted for
the Stock Split. 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.
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<PAGE>
<F2> The number of securities underlying options granted and the exercise
price per share have been adjusted to reflect the effects of the Stock
Split.
<F3> Mr. Quinn retired from Spartan on July 15, 1997.
</FN>
</TABLE>
<TABLE>
FISCAL YEAR-END OPTION VALUES
-----------------------------
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END<F1> FISCAL YEAR-END<F2>
------------------- -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick M. Quinn<F3> 20,000 0 $22,000 $0
James B. Meyer 10,000 0 11,000 0
Charles B. Fosnaugh 7,000 0 6,000 0
Dennis J. Otto 2,000 0 500 0
David deS. Couch 0 0 0 0
<FN>
________________
<F1> The numbers of securities underlying options have been adjusted to
reflect the effects of the Stock Split.
<F2> Represents the difference between the exercise price of the options
for the Class A Shares and the Trading Value per share at fiscal year-
end, which was $10.50 per share as adjusted for the Stock Split.
<F3> Mr. Quinn retired from Spartan on July 15, 1997.
</FN>
</TABLE>
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.
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<PAGE>
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 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 the
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 and has
been 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.
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<PAGE>
<TABLE>
PENSION PLAN TABLE
------------------
<CAPTION>
AVERAGE
REMUNERATION YEARS OF BENEFIT SERVICE
- ------------ --------------------------------------------------------------
5 10 15 20 25
- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
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 Pension Plan. Credited years of service of the named executive
officers under the Spartan Pension Plan as of March 29, 1997, are:
<TABLE>
<CAPTION>
CREDITED YEARS OF SERVICE
-------------------------
<S> <C> <C>
Patrick M. Quinn 12
James B. Meyer 24
Charles B. Fosnaugh 7
Dennis J. Otto 7
David deS. Couch 11
</TABLE>
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
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<PAGE>
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, 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 TRANSACTIONS."
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
Spartan's Restated Articles of Incorporation (the "Articles") provide
that a director of Spartan will not be personally liable to the Company for
monetary damages for a breach of fiduciary duty as a director, with the
exception of: liability for a breach of a director's duty of loyalty to
the Company or its shareholders; liability for acts or omissions not in
good faith or that involved intentional misconduct or knowing violation of
law; liability for certain unlawful dividends, distributions or loans;
liability in connection with a transaction from which the director derived
an improper personal benefit; and liability in connection with an action or
omission occurring prior to the date the limitation of liability provision
became effective.
Michigan law permits, and Spartan's Articles require, indemnification
of Spartan's directors and executive officers in a variety of
circumstances, which may include liabilities under the Federal Securities
Act of 1933, as amended. The Articles require Spartan to indemnify any
director or executive officer who is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding by
reason of the fact that he or she is or was a director or executive
officer, or is or was serving at the request of Spartan in another
-45-
<PAGE>
capacity, to the fullest extent permitted by law. Spartan may further
indemnify any director or executive officer, and may indemnify any person
who is not a director or an executive officer, as authorized by any Bylaw,
resolution of the Board, or contractual agreement authorized by the Board.
Pursuant to this authority, Spartan's Bylaws provide that Spartan will
indemnify directors, executive officers, and other officers of Spartan to
the extent that an indemnified person is successful on the merits or
otherwise in the defense of the action. Spartan will indemnify the
indemnified party against actual and reasonable expenses (including
attorneys' fees) incurred in connection with the action. Prior to a final
determination of a proceeding, Spartan may reimburse an indemnified party
for reasonable expenses incurred by the indemnified party, if certain
procedures are followed. In addition, upon request, a court may order
Spartan to indemnify a director, officer, employee or agent if it
determines that the person is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not
the applicable standard of conduct set forth in the Bylaws has been met.
In addition, the Bylaws permit Spartan to grant other rights to a
person seeking indemnification or advancement of expenses. Further,
Spartan may purchase and maintain insurance for a director, officer,
employee or agent of Spartan against any liability asserted against the
individual.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Spartan's directors (except Ms. Johnson and Messrs. Buick, Carton and
Meyer) 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
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<PAGE>
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.
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
$2,890,700, 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 May
1997, Spartan guaranteed a loan by a Related Entity to purchase new stores
in the principal amount of $6,807,000 for a term of 15 years. 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.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
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 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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP <F1><F2> PERCENT OF CLASS
- ------------------------ ----------------------------- ----------------
<S> <C> <C>
Donald J. Koop 592,890 4.9%
Parker T. Feldpausch 508,390 4.2
Russell H. VanGilder, Jr. 507,410 4.2
Glen A. Catt 370,470 3.1
Dan R. Prevo 258,820 2.2
Daniel L. Deering 250,190 2.1
Ronald A. DeYoung 224,130 1.9
Martin P. Hill 222,240 1.8
Roger L. Boyd 169,310 1.4
Patrick M. Quinn <F3><F4> 51,630 <F*>
James B. Meyer <F4> 23,770 <F*>
Charles B. Fosnaugh <F4> 15,940 <F*>
Dennis J. Otto <F4> 4,000 <F*>
David deS. Couch <F4> 1,390 <F*>
All Directors and Executive
Officers as a group <F4> 3,200,580 26.56%
<FN>
_______________________________
<F*> Less than one percent.
<F1> The number of securities underlying options have been adjusted to
reflect the effects of the Stock Split.
<F2> 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 "Election of Directors"
above. Messrs. Quinn and Meyer and the named executive officers
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<PAGE>
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.
<F3> Mr. Quinn retired from Spartan on July 15, 1997.
<F4> 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 24,000
Mr. Meyer 14,000
Mr. Fosnaugh 9,000
Mr. Otto 3,000
Mr. Couch 1,000
All executive officers as a group 51,000
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
As of May 31, 1997, the authorized capital stock of Spartan consisted
of 2,000,000 Class A Shares and 500,000 shares of Class B Common Stock
(each a "Class B Share"). At Spartan's Annual Meeting of Shareholders on
July 15, 1997, the shareholders approved an amendment to the Articles
to increase the number of authorized Class A Shares from 2,000,000
shares to 20,000,000 shares and the number of authorized Class B Shares
from 500,000 shares to 5,000,000 shares. The amendment also decreased the
par value per Class A Share from $20 per share to $2 per share. The
purpose of this proposed amendment was to provide additional shares for
future issuance, including shares issued as a share dividend pursuant to
the Stock Split.
The following description of Spartan's capital stock is qualified by
reference to Spartan's Articles and Bylaws, copies of which are included as
exhibits to the Registration Statement of which this Prospectus is a part.
As of May 31, 1997, Spartan had outstanding 12,043,540 Class A Shares,
as adjusted for the Stock Split, held by approximately 402 record holders
of the Company's Class A shares. As of the date of this Prospectus,
Spartan has not issued any Class B Shares. The Board of Directors may at
any time, and from time to time, provide for the issuance of Class B Shares
in one or more series, each with such a designation and, relative to the
Class A Shares and to other series of the Class B Shares, such voting,
distribution, dividend liquidation, conversion, participation, redemption
and other rights, preferences, limitations and restrictions, if any, as
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<PAGE>
will be stated in the resolution or resolutions providing for the issuance
of the Class B Shares. Except as provided in the resolution or resolutions
providing for the issuance of shares, all Class B Shares and any series
thereof will be identical. Class A Shares, or Class B Shares or any series
thereof, may be issued as a share dividend in respect of shares of another
class or series as the Board of Directors may determine from time to time,
or as otherwise permitted by statute.
VOTING
Each outstanding Class A Share entitles its holder to one vote.
Except as otherwise required by law, or pursuant to the resolution or
resolutions providing for the issuance of Class B Shares, Class A Shares
and Class B Shares vote together as a single class and, except for the
election of directors and certain extraordinary matters, the vote required
to approve any corporate action is a majority of the votes cast at a
meeting at which a quorum is present. Directors will be elected by a
plurality of the votes cast at a meeting at which a quorum is present.
Extraordinary matters, such as amendments to the Articles, mergers, share
exchanges, sales of assets, and dissolution, must be approved by the
holders of a majority of the Class A Shares and all other voting groups
entitled to vote thereon.
The Articles divide the Board of Directors into three classes,
each class serving a three-year term, so that each year the terms of
approximately one-third of the directors expire and approximately one-third
of the directors are elected for a new three-year term.
Under Michigan law, Class A Shares and Class B Shares will vote as
separate voting groups on any amendment to the Articles or any merger or
share exchange to which Spartan is a party if the resolution or resolutions
providing for the issuance of the Class B Shares provides for such a vote
or if the amendment, merger or share exchange (i) would change the
aggregate number of authorized shares of the class, (ii) would alter or
change the powers, preferences, or special rights of the shares of the
class or other classes so as to affect the class adversely, or (iii) in the
case of a share exchange, if the class or series thereof is included in the
exchange.
There are no preemptive rights to subscribe to shares of Spartan's
capital stock.
DIVIDENDS AND OTHER DISTRIBUTIONS
The holders of Class A Shares will be entitled to receive, to the
extent permitted by law, such dividends and distributions as may be
declared from time to time by the Board of Directors, but subject to any
preferential, participation and other rights of holders of Class B Shares
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<PAGE>
provided in the resolution or resolutions providing for the issuance of
such Class B Shares. Certain loan agreements that Spartan has signed
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.
In the event of the voluntary or involuntary liquidation, dissolution
or winding up of Spartan, the holders of the Class A Shares will be
entitled to receive all of the remaining assets of Spartan ratably in
proportion to the number of Class A Shares held by them, but subject to any
preferential, participation or other rights of holders of Class B Shares
provided in the resolution or resolutions providing for the issuance of
Class B Shares.
RESTRICTIONS ON ORIGINAL ISSUE AND TRANSFER; OPTIONS TO PURCHASE
Prior to June 1990, Spartan's Bylaws permitted Spartan to issue shares
of Common Stock only to retail food dealers and to the owner or owners of
any type of business in payment of all or part of the purchase price in
connection with the acquisition of the business. In June 1990, the
shareholders approved an amendment to the Bylaws to authorize Spartan to
issue its shares of capital stock only to: (i) Shareholder-Customers;
(ii) Associates; (iii) Qualified Holders; or (iv) Approved Holders. The
Board may not revoke the authorization as an Approved Holder of any person
who owns any shares of capital stock of Spartan at the time of the
attempted revocation. 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.
No sale, gift or other transfer by a shareholder of any Class A Shares
of Spartan's capital stock, or any transfer of any such Class A Shares by
operation of law, will be permitted by, or be effective with respect to,
Spartan if the transferee would be at the time of transfer any person other
than (i) a Shareholder-Customer who continues to purchase from Spartan
grocery and other related products or (ii) an Approved Holder.
Spartan has the option to purchase any Class A Shares which a
shareholder proposes to sell, give or otherwise transfer or which are to be
transferred by operation of law. Any shareholder proposing to effect a
transfer is required to notify Spartan of the proposed transfer, the
proposed terms and conditions thereof and the identity of the person to
receive an interest in the Class A Shares. The option is exercisable for
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<PAGE>
60 days following Spartan's receipt of notice of the transfer. If Spartan
does not exercise its option to purchase any of the Class A Shares which
are the subject of a proposed transfer, then for a period of 90 days
following the expiration of Spartan's option, the transferring shareholder
may transfer the Class A Shares to the person or persons identified in the
written notice required to be given to Spartan, if: (i) after the transfer,
the selling shareholder complies with any applicable Required Investment,
(ii) the transferee agrees in a writing acceptable to Spartan to be bound
by the Bylaws, and (iii) the transferee is a Shareholder-Customer who
continues to purchase from Spartan grocery and other related products or is
an Approved Holder.
In its discretion, Spartan will have the option at any time to redeem
any Class A Shares of its capital stock which are beneficially owned by any
person who is not at the time of the redemption: (i) a Shareholder-Customer
who continues to purchase from Spartan grocery and related products,
(ii) an Associate who continues to be employed by the Company, (iii) an
Approved Holder, or (iv) a Qualified Holder.
REDEMPTION POLICY
Spartan's policy is to redeem, if possible, upon a shareholder's
request, any Class A Shares held by the shareholder on the terms described
below. Spartan's policy does not create or evidence any obligation on
behalf of Spartan. Moreover, Spartan's Board of Directors, at its sole
discretion, may at any time and from time to time revise or terminate the
policy based on Spartan's financial condition, general market conditions,
any requirement of or limitation imposed by law or any agreement by which
Spartan is bound, or for any other reason deemed appropriate by the Board.
PURCHASE PRICE AND TERMS
The following describes the price and terms that will apply to
Spartan's purchase of any Class A Shares pursuant to its options to
purchase and redeem the Shares and its redemption policy (subject to
revision or termination of the policy) described above:
(i) If at the time of the purchase the shareholder is a
Shareholder-Customer, Spartan will purchase for cash at the
Trading Value in effect on the date of the purchase, no later
than 60 days following the date Spartan elects to purchase the
Class A Shares or the date the shareholder requests Spartan to
redeem the stock, any Class A Shares beneficially owned by the
shareholder in excess of the Required Investment which is
applicable to the Shareholder-Customer or, if the Shareholder-
Customer no longer purchases grocery and related products from
Spartan, the Required Investment which was applicable to the
Shareholder-Customer at the time the Shareholder-Customer ceased
purchasing the products from Spartan;
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<PAGE>
(ii) If at the time of the purchase the shareholder is a
Shareholder-Customer, Spartan will purchase the Class A Shares
which constitute the Required Investment which is applicable to
the Shareholder-Customer, or if the Shareholder-Customer no
longer purchases grocery and related products from Spartan, the
Required Investment which was applicable to the Shareholder-
Customer at the time the Shareholder-Customer ceased purchasing
the products from Spartan in the six equal installments described
in paragraph (iv) below ("Installments);
(iii) For any shareholder who at the time of the purchase is
not and has not been subject to any Required Investment, the
Company will purchase the shareholder's Class A Shares in
Installments, unless the shareholder and Spartan agree to other
terms;
(iv) The closing on the first Installment will occur at the
date and time as to which Spartan and the selling shareholder
mutually agree, but no later than 60 days following the date
Spartan exercises its option to purchase the stock from the
shareholder or the date the shareholder requests Spartan to
redeem the stock. The closing on the second Installment will
occur on the anniversary date following the closing of the first
Installment. The closing on each subsequent Installment will
occur on each corresponding anniversary date thereafter. The
price for each Share to be acquired in each Installment will be
the Trading Value in effect at the date of the closing on the
Installment; and
(v) For the redemption of a Shareholder-Customer's Required
Investment, no later than 30 days after the Shareholder-
Customer's request to redeem, the Shareholder-Customer may elect
to require Spartan to redeem at the Trading Value in effect at
the date of redemption all of the Class A Shares with an
aggregate Trading Value which equals the Shareholder-Customer's
Required Investment on the following terms. Spartan will pay in
cash to the Shareholder-Customer an amount equal to one-sixth of
the purchase price for the Class A Shares. In addition, Spartan
will execute and deliver to the Shareholder-Customer an unsecured
promissory note for the balance of the redemption price. The
note will be payable in no more than five equal annual
Installments of principal, commencing one year from the date of
the note. Interest will accrue thereon at the rate of interest 1
percent below the prime rate from time to time in effect until
maturity as announced by Michigan National Bank, or such other
lending institution as Spartan may select from time to time, and
will be payable quarterly. Spartan may prepay the note at any
time, in whole or in part, without penalty.
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CERTAIN PROVISIONS OF THE MICHIGAN BUSINESS CORPORATION ACT
Chapter 7A of the Michigan Business Corporation Act (the "Fair Price
Act") establishes supermajority and fair price provisions for certain
"business combinations." The provisions of the Fair Price Act apply to any
Michigan corporation that: (i) has one hundred or more beneficial owners
of its common stock; and (ii) did not have any beneficial owner of 10
percent or more of a class of common stock at the time the Fair Price Act
became effective. Spartan satisfies these requirements. Thus, the Fair
Price Act applies to Spartan.
The Fair Price Act provides that a supermajority vote of 90 percent of
the shareholders and no less than two-thirds of the votes of noninterested
shareholders must approve a "business combination." The Fair Price Act
defines a "business combination" to encompass any merger, consolidation,
share exchange, sale of assets, stock issue, liquidation or
reclassification of securities involving an "interested shareholder" or
certain "affiliates." An "interested shareholder" is generally any person
who beneficially owns 10 percent or more of the outstanding voting shares
of the corporation. An "affiliate" is a person who directly or indirectly
controls, is controlled by, or is under common control with a specified
person.
The supermajority vote required by the Fair Price Act does not apply
to "business combinations" that satisfy certain conditions. These
conditions include, among others, that: (i) the purchase price to be paid
for the shares of the corporation is at least equal to the highest of
either (a) the market value of the shares or (b) the highest per share
price paid by the interested shareholder within the preceding two-year
period or in the transaction in which the shareholder became an interested
shareholder, whichever is higher; (ii) once becoming an interested
shareholder, the person does not become the beneficial owner of any
additional shares of the corporation except as part of the transaction
which resulted in the interested shareholder becoming an interested
shareholder or by virtue of proportionate stock splits or stock dividends;
(iii) once becoming an interested shareholder, the person does not receive
the benefit, directly or indirectly, except proportionately as a
shareholder, of any loans, advances, guarantees, pledges or other financial
assistance provided by the corporation or any of its subsidiaries; and
(iv) there has been at least five years between the date the person became
an "interested shareholder" and the date the business combination is
consummated.
The requirements of the Fair Price Act do not apply to "business
combinations" with an interested shareholder that the board of directors
has approved or exempted, specifically, generally or generally by types,
from the requirements of the Fair Price Act by resolution prior to the time
that the interested shareholder first became an interested shareholder.
-54-
<PAGE>
The Fair Price Act would cease to apply to Spartan if its Articles
were amended to elect not to be covered by Chapter 7A. Such an amendment
would require the same votes for approval as the Fair Price Act requires
for approval of a business combination with an interested shareholder.
Chapter 7B of the Michigan Business Corporation Act regulates the
acquisition of "control shares" of Michigan corporations (the "Control
Share Act"). The Control Share Act applies to Michigan corporations having
one hundred or more shareholders of record, more than 10 percent of whom
are residents of Michigan. Spartan also satisfies these requirements.
Thus, the Control Share Act applies to Spartan.
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by a person or entity which, when combined with other shares held by
that person or entity, would give the acquiror voting power at or above any
of the following thresholds: 20 percent, 33 1/3 percent, or a majority.
Under the Control Share Act, an acquiror may not vote shares acquired in a
"control share acquisition" unless a majority of both the corporation's
shareholders and the corporation's disinterested shareholders vote to
confer voting rights on the "control shares." The acquiring person,
officers of the target corporation, and directors of the target corporation
who are also employees of the corporation are precluded from voting on
whether the control shares shall be accorded voting rights. The Control
Share Act does not affect the voting rights of shares owned by an acquiring
person prior to the control share acquisition. In some cases, if control
shares are accorded full voting rights as prescribed in Chapter 7B, the
Control Share Act confers dissenters' rights upon all of a corporation's
shareholders except the acquiring person.
By an amendment to its Articles of Incorporation or Bylaws electing
not to be covered, either Spartan's Board of Directors or its shareholders
could "opt out" of Chapter 7B and cause the Control Share Act to be
inapplicable to "control share acquisitions" occurring thereafter, for as
long as the amendment continued in effect. The Board currently has no
plans to effect such an amendment, nor is it aware of any other plans or
proposals to do so.
The foregoing discussion concerning the provisions of the Michigan
Business Corporation Act is qualified in its entirety by reference to such
Michigan Business Corporation Act provisions.
OTHER MATTERS
The Articles authorize Spartan's Board to determine the preferences,
limitations, and voting, dividend, distribution, liquidation, conversion,
participation, redemption and other rights of any series of Class B Shares
before issuance of the shares. The potential to issue shares pursuant to
-55-
<PAGE>
the authorization, together with the restrictions on transfer of the
Class A Shares, may discourage or preclude certain transactions, whether or
not beneficial to shareholders, and could discourage certain types of
tactics that involve an actual or threatened acquisition or change in
control of Spartan.
Spartan has no present intention to issue any of its authorized
Class B Shares. However, any issuance of Class B Shares in the future
could adversely affect the rights of the holders of Class A Shares.
PLAN OF DISTRIBUTION
Spartan offers the Class A Shares through its own efforts using
salaried employees without payment of any commission. The offering price
of the Class A Shares is the Trading Value established from time to time by
the Board of Directors. At the date of this Prospectus, the Trading Value
was $11.30 per Class A Share, as adjusted for the Stock Split. Each new
Shareholder-Customer must purchase at least 1000 Class A Shares. See "RISK
FACTORS--Value of Class A Shares."
There is no minimum number of Class A Shares that must be sold to
complete this offering. Spartan offers the Class A Shares on a "best
efforts," continuous basis to Shareholder-Customers, persons who apply to
become Customers of Spartan, Associates of Spartan, Approved Holders, and
Qualified Holders. Thus, Spartan will not place any offering proceeds
received in any escrow, trust or other arrangement pending the receipt of a
minimum amount of proceeds. There is no assurance that all Class A Shares
will be sold.
LEGAL MATTERS
The validity of the Class A Shares offered hereby is being passed upon
for Spartan by Warner Norcross & Judd LLP, 900 Old Kent Building, 111 Lyon
Street, N.W., Grand Rapids, Michigan 49503-2489. Alex J. DeYonker, General
Counsel and Assistant Secretary of the Company, is a partner of Warner
Norcross & Judd LLP.
EXPERTS
The Consolidated Financial Statements of the Company as of March 29,
1997 and March 30, 1996, and for each of the three years in the period
ended March 29, 1997, included in this Prospectus and the related financial
statement schedules included elsewhere in the Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the Registration Statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
-56-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF SPARTAN
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of March 29, 1997 and March 30,
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for each of the three
years in the period ended March 29, 1997 . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended March 29, 1997 . . . . . . F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 29, 1997 . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . F-7
-57-
<PAGE>
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
(July 15, 1997 as to the first paragraph in the Shareholders' Equity note)
F-1
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 29, MARCH 30,
ASSETS 1997 1996
- ------ ------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (continued)
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 29, MARCH 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- ------------------------------------ ------------ ------------
<S> <C> <C>
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 $2
a share; authorized 20,000,000 shares;
outstanding 12,032,850 and 12,460,480 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
============ ============
</TABLE>
F-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
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 $ .80 $ (1.74) $ .74
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
CLASS A ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL EARNINGS
------------ --------------- --------
<S> <C> <C> <C> <C>
Balance March 27, 1994 $24,185,800 $12,329,472 $76,660,900
Class A common
stock transactions 587,030 shares purchased (1,174,060) (2,414,428) (1,839,471)
1,038,620 shares issued 2,077,240 7,557,966
Net earnings 9,029,901
Cash dividends $.05 per share (612,588)
- --------------------------------------------------------------------------------------------------------------
Balance March 25, 1995 25,088,980 17,473,010 83,238,742
Class A common
stock transactions 760,460 shares purchased (1,520,920) (3,165,335) (2,904,751)
676,450 shares issued 1,352,900 5,314,797
Net loss (21,667,595)
Cash dividends $.05 per share (623,117)
- --------------------------------------------------------------------------------------------------------------
Balance March 30, 1996 24,920,960 19,622,472 58,043,279
Class A common
stock transactions 801,410 shares purchased (1,602,820) (4,367,053) (2,355,162)
373,780 shares issued 747,560 3,151,550
Net earnings 9,702,725
Cash dividends $.05 per share (605,937)
- --------------------------------------------------------------------------------------------------------------
Balance March 29, 1997 $24,065,700 $18,406,969 $64,784,905
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
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)
------------ ------------ ------------
F-6
<PAGE>
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
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
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.
F-8
<PAGE>
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.
F-9
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
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.
F-10
<PAGE>
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 12,136,710, 12,438,660 and 12,208,470
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.
F-11
<PAGE>
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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
------------ ------------
<S> <C> <C>
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
F-15
<PAGE>
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
============ ============
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
At March 29, 1997, long-term debt is due as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH,
------------------
<S> <C> <C>
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
============
</TABLE>
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.
F-17
<PAGE>
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:
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---------- ----------
<S> <C> <C> <C>
Buildings $7,300,000 $7,300,000
Less accumulated amortization 6,268,838 5,974,220
---------- ----------
Net buildings $1,031,162 $1,325,780
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
USED IN
YEAR ENDING MARCH, OPERATIONS
------------------ ----------
<S> <C> <C>
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
==========
</TABLE>
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDING USED IN SUBLEASED
MARCH, OPERATIONS TO OTHERS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C>
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
========== =========== ===========
</TABLE>
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:
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
----------- -----------
<S> <C> <C> <C>
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
=========== ===========
</TABLE>
Future minimum receivables under operating leases in effect at March 29,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OWNED LEASED
MARCH, PROPERTY PROPERTY TOTAL
----------- ------------ ----------- ------------
<S> <C> <C> <C>
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
============ =========== ============
</TABLE>
F-21
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
The following table sets forth the Company's defined benefit pension plans'
funded status and the amounts recognized in the Company's financial
statements:
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
------------ ------------
<S> <C> <C>
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)
============ ============
</TABLE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
F-23
<PAGE>
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:
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
Postretirement health care expense consisted of the following components:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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.
F-25
<PAGE>
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:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30, MARCH 25,
1997 1996 1995
---------- ------------ -----------
<S> <C> <C> <C>
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
========== ============ ===========
</TABLE>
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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%
==== ===== ====
</TABLE>
F-26
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest $8,916,115 $10,085,527 $8,812,658
Income taxes 2,185,507 4,755,049 6,108,123
</TABLE>
SHAREHOLDERS' EQUITY
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 was subject to approval of the
amendment by the Company's shareholders. The amendment was approved by
the shareholders on July 15, 1997. Accordingly, share and per share
amounts have been restated throughout the consolidated financial
statements.
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
5,000,000 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
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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
8,910,000 shares outstanding in excess of the maximum requirement.
The Company has a shareholder approved stock option plan covering 500,000
shares of the Company's Class A common stock. The plan provides for
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 39,000 shares were
outstanding and had been granted at $8.40 to $10.50 per share.
The Company has a shareholder-approved stock bonus plan covering 500,000
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, 424,710
shares remained unissued under the plan.
An associate stock purchase plan approved by the shareholders covers 500,000
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, 484,010 shares remained unissued under
the plan.
BUSINESS SEGMENT INFORMATION
The Company's distribution operations include product sales to
independently owned and operated food stores and convenience stores as well
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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.
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":
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
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%
============== ============== ==============
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
F-31
<PAGE>
===========================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OR PROJECTIONS OF FUTURE PERFORMANCE OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND ANY SUCH OTHER INFORMATION, PROJECTIONS,
OR REPRESENTATIONS IF GIVEN OR MADE MUST NOT BE RELIED UPON AS HAVING BEEN
SO AUTHORIZED.
THE DELIVERY OF THIS PROSPECTUS OR ANY SALE HEREUNDER AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
_______________________________
TABLE OF CONTENTS
PAGE
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SELECTED CONSOLIDATED FINANCIAL INFORMATION. . . . . . . . . . . . . . . 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 13
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXECUTIVE COMPENSATION AND OTHER BENEFITS. . . . . . . . . . . . . . . . 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . 37
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 39
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 40
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 45
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . 46
===========================================================================
===========================================================================
3,500,000 Shares
Class A Common Stock
_______
PROSPECTUS
_______
SPARTAN STORES, INC.
July 17, 1997
===========================================================================
