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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended March 28, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________________ to
____________________
Commission File Number: 33-41791
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-0593940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
850 76TH STREET, S.W.
P.O. BOX 8700
GRAND RAPIDS, MICHIGAN 49518
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 23, 1998, was $97,827,219.
The number of shares of the registrant's Class A Common Stock, $2 par
value, outstanding at May 23, 1998, was 11,458,540 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Spartan Stores, Inc., and its subsidiaries, distribute grocery
and related products to retail stores located in Michigan, Illinois,
Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, Georgia, and West
Virginia. As used in this Report on Form 10-K, the term "Spartan" refers
to Spartan Stores, Inc., without its subsidiaries, and the term "Company"
refers to Spartan and its subsidiaries. The owners or operators of the
retail stores served by the Company are referred to as "Customers."
Grocery store Customers served by the Company range from single
stores to supermarket chains with as many as 25 stores. In addition,
Spartan's subsidiaries distribute candy, tobacco, and other grocery
products to approximately 9,600 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. These 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" brand name, which is widely recognized
in Michigan. Spartan was incorporated as a cooperative, but in 1973
converted to a Michigan, for-profit business corporation. The Company
expanded its presence in convenience store wholesaling through its
acquisitions of L & L/Jiroch Distributing Company ("L & L/Jiroch") in 1987
and J.F. Walker Company, Inc. ("J.F. Walker") in 1993.
Spartan is authorized to sell shares of its common stock to
Customers of Spartan, employees of the Company ("Associates"), and other
persons designated by the Board of Directors from time to time ("Approved
Holders"). In addition, pursuant to the Bylaws, Spartan may issue shares
of its Class A Common Stock, $2 par value ("Class A Shares"), in connection
with the acquisition of businesses, assets, or capital stock of another
corporation. The Board of Directors has 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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The Company operates on a 52-53 week fiscal year, with the fiscal
year ending on the last Saturday in March. The principal executive offices
of Spartan are located at 850 76th Street, S.W., P.O. Box 8700, Grand
Rapids, Michigan 49518. Spartan's telephone number is (616) 878-2000.
DESCRIPTION OF BUSINESS
GENERAL
The Company operates in three reportable business segments:
distribution; insurance sales and underwriting; and real estate and
finance. The Company's largest business segment, distribution, includes
the distribution of grocery and related products. The distribution
operations include product sales to independently owned and operated food
stores and convenience stores as well as services directly related to the
operation of those stores. Insurance sales and underwriting includes
commission and premium income generated by sales to Customers and others.
Real estate and finance represents revenues from financing and real estate
activities with Customers and others. Spartan's seven subsidiaries
distribute products or provide support, insurance, and services to
Customers and fulfill other functions for the Company.
Financial information on the business segments is set forth under
the caption "Business Segment Information" in the notes to the Consolidated
Financial Statements of the Company set forth in Item 8 of this Report on
Form 10-K.
BUSINESS STRATEGY
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. 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 its Customers. Management of the Company believes that by
providing grocery retailers with a broad array of products and services,
those retailers should be better able to grow and compete at the retail
level. This growth and success of its Customers at the retail level
should, in turn, enable the Company to grow and prosper as well.
In addition, Spartan believes that Customers who are also
shareholders of Spartan ("Shareholder-Customers") gain an important
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competitive advantage by access to the "Spartan" name and image. The
"Spartan" name and logo are widely recognized by consumers in Michigan and
other parts of the Midwest who have come to associate the "Spartan" name
with service, selection, and quality in their grocery shopping. A majority
of all stores supplied by Spartan display the "Spartan" name and logo.
DISTRIBUTION
GENERAL
Spartan is a full-service distributor of grocery and related
products, and provides its Customers with a selection of over 40,000 items,
including dry grocery, produce, dairy products, meat, frozen food, seafood,
floral, general merchandise, tobacco, and health and beauty care items.
Spartan supplies its Customers with both nationally advertised products and
with over 2,000 highly recognized "Spartan" brand private label items.
Spartan ships the products from its main warehouse and distribution center
in Grand Rapids, Michigan, and from a warehouse in Plymouth, Michigan. To
supply its Customers, Spartan operates a fleet of approximately 167
tractors, 273 conventional trailers, and 154 refrigerated trailers,
substantially all of which are leased by the Company. Deliveries by
Spartan can occur as often as daily for large stores, or as infrequently as
weekly for smaller stores.
Several subsidiaries of the Company operate and are included in
the distribution business segment. L & L/Jiroch and J.F. Walker are
wholesale distributors of confections, tobacco products, specialty foods,
and other grocery products to approximately 4,900 convenience stores and
other retail locations in Michigan, Illinois, Indiana, Kentucky, Ohio,
Pennsylvania, Georgia, Tennessee, and West Virginia. United Wholesale
Grocery Company ("United Wholesale") operates 13 cash and carry outlets in
Michigan and Ohio serving approximately 4,700 convenience stores. In 1996,
Capistar, Inc., a subsidiary wholesale distributor of grocery and other
products, closed its wholesale operation and sold its warehouse located in
Lansing, Michigan.
In February 1996, Spartan introduced a cost-plus pricing program
for its products. 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 that the program will reflect accurately the different costs in
warehousing and distributing various commodities and will 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
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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; and (iii) a transportation charge based on a
transportation pricing schedule that reflects Spartan's general
transportation expenses.
Spartan, itself and through its subsidiaries, provides Customers
with a broad spectrum of additional services that the Company believes make
it possible for its Customers to compete with large competitors, such as
the integrated supermarket chains. Customers decide individually which
services to use and are charged fees for the services used. Substantially
all of the Company's Customers use one or more of its value-added services.
SITE IDENTIFICATION AND MARKET ANALYSIS. The Company assists
Customers in identifying potential new store locations. Once the Company
or a Customer has identified a potential site, the Company will undertake
or commission an independent site feasibility analysis of the location,
which includes a study of the demographics of the general area, the
supermarket competitors located in the primary and secondary trading areas,
and the volume a new store should expect to achieve at the location, as
well as the creation of financial projections.
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, and
product display. In addition, services available from the Company include
engineering support, contracting assistance, layout strategy, design,
equipment procurement, 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 financial
projections, business valuations, and store divestitures and acquisitions.
MARKETING, PROMOTION, AND ADVERTISING ASSISTANCE. The Company offers
its Customers the services of its in-house advertising department, which
include developing marketing strategies, designing and producing signs and
flyers, and coordinating print and media advertising campaigns. Customers
may use the Company's print shop to print signs, flyers, and other items.
In addition, the Company offers Customers the opportunity to participate in
printed, radio, and television advertising programs conducted in most major
media markets in the Company's distribution area.
TECHNOLOGY AND 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. Other than the core
ordering tools, virtually all products are provided as optional services.
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Products and services provided include administrative systems; information
technology; consulting, support, and training; hardware and software
resale; marketing and database services; networking and communications
implementation and support; office automation tools; and point-of-sale
systems.
ACCOUNTING AND TAX PREPARATION SERVICES. The Company provides a wide
array of accounting services to Customers ranging from preparing monthly
and annual financial reports to preparing tax returns.
HUMAN RESOURCE SERVICES. The Company offers an extensive variety of
human resource services to its Customers. The services include:
recruiting; interviewing and staffing assistance; benefit program planning;
handbook preparation, design, and printing; labor relations assistance;
personnel record keeping; training; and employee development. The services
listed above, as well as many others, are provided on an individual basis
and are tailored to meet the needs of each Customer.
COUPON REDEMPTION AND PRODUCT RECLAMATION. The Company provides
coupon redemption services, making it possible for retailers to send all
consumer value coupons directly to the Company for processing of refunds
from manufacturers. In addition, the Company operates a 20,300 square-foot
product reclamation center in Charlotte, Michigan 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, respectively. 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
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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 28, 1998, the Company had 50 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 Shareholder-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 2 percent. Maturity dates
on the loans range from 1998 to 2005. As of the fiscal years ended March
1998, 1997, and 1996, the Company had outstanding loans to Shareholder-
Customers totaling $8,009,167, $9,771,108 and $11,663,457, respectively.
Over the last 15 years, the Company has not experienced significant
aggregate losses on loans to Shareholder-Customers. Impaired loans totaled
approximately $480,000 at March 28, 1998, including the current portion,
with related allowances of $290,000. The estimated fair market value of
the loans approximates the net carrying value at March 28, 1998.
Market Development Corporation ("Market Development"), a
subsidiary of Spartan, owns 21 retail grocery store facilities that are
leased to Customers and other retailers and owns one vacant retail grocery
store facility that is on the market for sale. Market Development also
owns four vacant sites of which it intends to sell two and to develop two.
Market Development leases 11 other sites that are subleased to Customers.
Spartan has guaranteed payment of indebtedness to financial
institutions aggregating $19,200,000 at March 28, 1998, on behalf of
certain Customers. Market Development also has guaranteed three leases by
Customers, two of which expire in 2012 with combined annual rental payments
of $444,500 and one of which expires in 2017 with annual rental payments of
$217,500. The Company charges an annual fee for each loan guarantee and
lease guarantee and requires each Customer receiving a guarantee to commit
to minimum purchase requirements.
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
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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 nine-state market area of Michigan, Georgia, 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 SUPERVALU, INC., Fleming Companies, Inc.,
Roundy's, Inc., and Nash Finch Company, and convenience store wholesalers
including EBY Brown Company, McLane Company, Inc., and S. Abraham and
Sons, Inc.
In addition, Customers compete with supermarket chains, including
Meijer, Inc.; The Great Atlantic and Pacific Tea Company (A&P); Super K
(Kmart Corporation); and The Kroger Company. Customers also compete with
members-only shopping and discount clubs. Among the largest such clubs
that compete with Customers are Sam's Club (a unit of Wal*Mart Stores,
Inc.) and Costco Companies, Inc.
According to industry sources, the market share of groceries
sold by Shareholder-Customers is approximately 24 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 serve its Customers.
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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, state and local laws
and regulations governing its businesses.
SHAREHOLDER-CUSTOMERS
At March 28, 1998, Spartan was the primary supplier to 450 retail
food stores operated by 236 Shareholder-Customers. The average purchases
per store was $3,876,414 during fiscal year 1998. 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 ANNUAL PURCHASES
FISCAL ACTIVE SHAREHOLDER- CUSTOMER STORES PER SHAREHOLDER-
YEAR CUSTOMERS AT YEAR END SERVED AT YEAR END CUSTOMER STORE
------ --------------------- ------------------ --------------
<S> <C> <C> <C> <C>
1998 236 450 $3,876,414
1997 232 444 3,910,170
1996 259 465 3,767,745
1995 273 450 3,363,538
1994 277 465 3,271,400
</TABLE>
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.
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 several years, the average weekly purchases
by Shareholder-Customers has increased. In addition, Spartan's largest
Shareholder-Customers grew substantially. The Company has assisted its top
ten Customers in increasing net store space by 629,000 square feet since
the beginning of fiscal 1996.
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The following table reflects the diversity in the Shareholder-
Customer base of Spartan as of March 28, 1998:
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<CAPTION>
NUMBER OF SHAREHOLDER-
NUMBER OF CUSTOMERS OPERATING
STORES OPERATED THE NUMBER OF STORES PERCENT OF SALES
--------------- -------------------- ----------------
<S> <C> <C> <C>
1 187 23.0%
2 23 10.8%
3 6 4.4%
4 or more 20 61.8%
</TABLE>
Spartan supplies a diverse group of independent store operators,
ranging from single stores to supermarket chains with as many as 25 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 1998, but
no single Shareholder-Customer accounted for more than 8 percent
of Spartan's total net sales. In the last five years, no Shareholder-
Customer who was among the 10 largest Shareholder-Customers has terminated
all of its business with Spartan to associate with another distributor.
ASSOCIATES
As of March 28, 1998, the Company employed approximately 2,900
Associates, of which approximately 1,030 were represented by several
unions. Spartan's warehouse and transportation Associates are represented
by different Teamsters Union locals, with contracts expiring in 2000 and
2001. A majority of United Wholesale's Associates also are represented by
various unions, with contract expirations varying by location. Associates
of L & L/Jiroch and J.F. Walker are not represented by a union. The
Company considers its relations with all Associates to be satisfactory, and
has not had any work stoppages in the last five years.
REQUIRED INVESTMENT POLICY
The Board of Directors of Spartan has adopted a policy which
requires Shareholder-Customers to purchase and hold a minimum investment
(the "Required Investment") in the Class A Shares. From time to time, the
Board may change the Required Investment and other terms of the Required
Investment policy.
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If a Shareholder-Customer no longer purchases grocery and related
products from Spartan, it is Spartan's policy (but not a contractual
obligation) to redeem, at the Shareholder-Customer's request, that number
of Class A Shares then held by the Shareholder-Customer with an aggregate
Trading Value (see below) which equals the Shareholder-Customer's Required
Investment as of the date the Shareholder-Customer ceased purchasing from
Spartan. Payment for such redeemed Class A Shares is made in six equal
installments over a five-year period.
In addition to Class A Shares sold to Shareholder-Customers to
satisfy the applicable Required Investment, Spartan offers all Shareholder-
Customers the opportunity to purchase Class A Shares at any time and from
time to time. Spartan sells Class A Shares at the Trading Value in effect
at the time of the sale.
TRADING VALUE
The price at which Shareholder-Customers must acquire Class A
Shares from Spartan is the "Trading Value." The Board of Directors
customarily establishes the Trading Value once a year in its sole and
absolute discretion, based on the Company's financial condition, the
results of its operations, operating trends, market conditions, the state
of the economy, and such other factors as the Board deems appropriate. No
specific formula is used to set the Trading Value. Any change adopted by
the Board becomes effective upon acceptance of the Trading Value by the
Michigan Corporation, Securities and Land Development Bureau. Effective
June 21, 1998, the Trading Value was established at $12.30 per share.
During the fiscal years ended March 1998, 1997 and 1996, the Trading Value
was $11.30, $10.50 and $10.00 per share, respectively, as adjusted for the
ten-for-one stock split pursuant to a share dividend paid on July 15, 1997
(the "Stock Split").
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 weeks' sales. The Company
believes that it adequately monitors its outstanding receivables. Bad debt
expenses have not been material to the Company's operations.
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ITEM 2. PROPERTIES
Spartan owns approximately 1,307,000 square feet of warehouse,
distribution, and office space located on 211 acres in Grand Rapids,
Michigan. Spartan supplies primarily its Western Michigan Customers from
this main warehouse and distribution center. The center is located within
one mile of U.S. 131, a main artery that links Grand Rapids with Kalamazoo
on the south and connects with Interstate 96, one of the major east-west
arteries serving Western Michigan and leading east into the Detroit area.
Approximately 72 acres of the 211-acre complex in Grand Rapids are
presently vacant land.
The main warehouse and distribution center in Grand Rapids
includes a general merchandise warehouse of approximately 233,000 square
feet; refrigerated space of approximately 327,000 square feet; dry grocery
space of approximately 585,000 square feet; general office space, including
a print shop, of approximately 107,000 square feet; and transportation and
salvage buildings of approximately 55,000 square feet. Spartan leases a
403,000 square-foot warehouse, garage, and office complex in Plymouth,
Michigan, a western suburb of Detroit. This warehouse is used to supply
its Customers located in the greater Detroit area and in Eastern Michigan.
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
that 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 leases approximately 107,700 square feet of space also located
in Wyoming, Michigan. The lease on this facility expires December 31,
1998, and L & L/Jiroch has no plans to extend the lease. In 1998, L & L/
Jiroch subleased approximately 56,000 square feet of this leased space to
an unaffiliated third party. The remainder of the space was subleased to
Spartan.
Market Development owns approximately 688,000 square feet in 10
shopping centers and an additional 484,000 square feet in 11 free-standing
locations, all of which it leases to Customers and other retailers. This
leased space consists of approximately 913,200 square feet of grocery
retail space and approximately 258,800 square feet of other retail space.
The 10 leased shopping centers (the "Shopping Centers") are 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);
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Kentwood, Michigan (78,000 square feet of retail space); Ludington,
Michigan (43,000 square feet of retail space); Sterling Heights, Michigan
(98,700 square feet of retail space); Stevensville, Michigan (62,000 square
feet of retail space); and Three Rivers, Michigan (67,000 square feet of
retail space). 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 Plymouth, Indiana, and in Jackson, Milford Township and
Macomb Township, Michigan. Market Development plans to sell the vacant
land in Plymouth, Indiana, and Jackson, Michigan. The vacant land in
Milford and Macomb Townships will be co-developed with outside developers
to build a supermarket at each location for a Shareholder-Customer.
Market Development owns 21 retail grocery store facilities
(including those leased in the Shopping Centers) that are leased to
Customers and other retailers, with terms expiring from 1998 to 2016.
Aggregate lease rental income received for the grocery stores was
$6,959,000, $6,496,000 and $6,599,000 in fiscal years 1998, 1997 and 1996,
respectively. Market Development owns one vacant retail grocery store
facility located in Goshen, Indiana, which is on the market to be sold.
In addition, Market Development leases 11 sites for sublease to
Customers. Under this program, Market Development has leased approximately
418,000 square feet of real estate with lease terms expiring from 1998 to
2016. Aggregate lease rental income received pursuant to the subleases was
$2,697,000, $2,471,000 and $1,765,000 in fiscal years 1998, 1997 and 1996,
respectively. Site lease rental expenses were $2,524,000, $2,361,000 and
$1,644,000 for fiscal years 1998, 1997 and 1996, respectively. All stores
that are leased or subleased to Customers are in all material respects
operating according to required lease terms.
J.F. Walker leases 11 locations totaling approximately 68,500
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 three locations totaling
approximately 172,500 square feet of warehouse and distribution space.
During fiscal year 1998, J.F. Walker purchased the formerly leased
Louisville, Kentucky distribution center, which resulted in an increase of
approximately 75,000 square feet of owned space, and eliminated another
leased site.
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 12 and leases one of these retail
outlets, which have a total of approximately 236,000 square feet.
-12-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On December 12, 1997, the Company agreed to accept a mediation
award to settle a lawsuit involving alleged racial harassment incidents
that took place several years ago in one of the Company's warehouses.
Under the mediation decision, the Company agreed to pay $1.3 million in
damages, which was paid January 8, 1998.
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. During fiscal
year 1998, three actions were filed in state courts in Tennessee and
twenty-two actions were filed in state courts in Pennsylvania against the
leading cigarette manufacturers operating in the United States and certain
wholesalers and distributors, including a subsidiary of the Company. In
fiscal 1999, one additional action has been filed in Pennsylvania. In the
three Tennessee actions, one action was filed as a class action on behalf
of the individual plaintiffs, one action was filed on behalf of the State
of Tennessee and its taxpayers, and one action was filed by an individual
plaintiff. All of the Pennsylvania actions were filed by individual
plaintiffs. 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 are
being vigorously defended. The Tennessee class action and individual
plaintiff action already have been dismissed and a dismissal order is
pending with respect to the action on behalf of the State of Tennessee and
its taxpayers. All but one of the Pennsylvania actions have been dismissed
without prejudice pursuant to a Dismissal and Tolling Agreement under which
the defendants have agreed not to raise the defenses of statute of
limitations or laches if an action is filed by a plaintiff before April 1,
1999. One of the cigarette manufacturers named as a defendant in each
action has agreed to indemnify the Company's subsidiaries from damages
arising out of these actions. Management believes that the ultimate
outcome of these actions should not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
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.
-13-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
There is and has been no established public trading market for
Spartan's securities, including the Class A Shares. Spartan does not
expect an active market for the Class A Shares to develop. In addition,
although Spartan has a policy to redeem Class A Shares under certain
circumstances, Spartan is not obligated to do so. Only limited classes of
persons are eligible to hold Class A Shares.
A holder may transfer the Class A Shares only to: (i) a
Shareholder-Customer who continues to purchase from Spartan grocery and
related products; (ii) an Associate; (iii) a Qualified Holder; or (iv) an
Approved Holder. A "Qualified Holder" is a person to whom Spartan issues
Class A Shares in connection with the acquisition of businesses, assets, or
capital stock of another corporation. The Board of Directors has
designated as Approved Holders (i) any shareholder or other equity owner of
any Shareholder-Customer who owns 5 percent or more of the equity interests
in the Shareholder-Customer; (ii) any member of the Board of Directors of
Spartan; or (iii) any spouse of an Associate, any biological or adopted
child of an Associate, if the child is 21 years of age or younger, or any
trust created by the Associate or his or her spouse which is established
for the benefit of the Associate or the spouse or any such child of the
Associate.
The Board of Directors from time to time, usually on an annual
basis, establishes the Trading Value for the Class A Shares. The Board
determines the Trading Value, in its sole and absolute discretion, based on
the Company's financial condition, results of operations, operating trends,
market conditions, the state of the economy, and such other factors as the
Board deems appropriate. Any change adopted by the Board becomes effective
upon acceptance of the Trading Value by the Michigan Corporation,
Securities and Land Development Bureau. Effective June 22, 1997, the
Trading Value was established at $113 per share. On May 28, 1997, the
Board of Directors authorized a ten-for-one stock split pursuant to a share
dividend payable to shareholders of record on May 31, 1997 (the "Stock
Split"), and approved an amendment to the Articles of Incorporation to
increase the authorized capital stock from 2,000,000 to 20,000,000 Class A
Shares and from 500,000 to 5,000,000 Class B Shares (as defined below).
-14-
<PAGE>
The amendment also reduced the par value of the Class A Shares from $20 per
share to $2 per share. On July 15, 1997, the Company consummated the Stock
Split and reduced the Trading Value from $113 per share to $11.30 per
share. However, effective June 21, 1998, the Trading Value has been
established at $12.30 per share.
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 Report, no Class B Shares
are outstanding.
HOLDERS
As of May 23, 1998, there were approximately 463 record holders
of the Company's Class A Shares. There were no holders of the Company's
Class B Shares.
DIVIDENDS
For at least 20 years, the Board of Directors has declared, and
Spartan has paid, a regular quarterly dividend. The amount of such
quarterly dividends for each of the three fiscal years in the period ended
March 28, 1998, 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 28, 1998,
under the most restrictive of these agreements, Spartan had approximately
$19,100,000 available for the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information presented below
as of and for the years ended March 28, 1998, March 29, 1997, March 30,
1996, March 25, 1995, and March 26, 1994, has been derived from
consolidated financial statements, and should be read in conjunction with
the consolidated financial statements and related notes, for each of the
three years in the period ended March 28, 1998, audited by Deloitte &
Touche LLP, independent certified public accountants, appearing elsewhere
in this Report. The following data also should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Report.
-15-
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
INCOME STATEMENT DATA: FOR THE YEAR ENDED
--------------------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30, MARCH 25, MARCH 26,
1998 1997 1996 1995 1994<F1>
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $2,489,249 $2,475,025 $2,554,688 $2,526,128 $2,194,754
Volume Incentive
Rebates<F2> $ 0 0 $ 15,577 $ 17,584 $ 17,626
Costs and Expenses $2,467,006 $2,459,641 $2,571,279 $2,494,446 $2,165,938
Earnings (Loss) Before
Taxes on Income<F3> $ 22,243 $ 15,384 $ (32,168) $ 14,098 $ 11,190
Net Earnings (Loss)<F3> $ 14,234 $ 9,703 $ (21,668) $ 9,030 $ 7,105
Basic and Diluted
Net Earnings (Loss)
Per Share<F3><F4> $ 1.21 $ .80 $ (1.74) $ .74 $ .61
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF
--------------------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30, MARCH 25, MARCH 26,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 61,682 $ 59,669 $ 69,284 $ 64,381 $ 50,439
Total Assets $ 406,133 $ 403,731 $ 387,451 $ 386,141 $ 373,286
Long-Term Debt and
Capital Lease
Obligations $ 107,666 $ 125,776 $ 124,372 $ 106,794 $ 69,468
Shareholders' Equity $ 114,192 $ 107,258 $ 102,587 $ 125,801 $ 113,176
Book Value Per
Class A Share<F3><F4> $ 9.98 $ 8.91 $ 8.23 $ 10.03 $ 9.36
-16-
<PAGE>
Return on Average
Shareholders' Equity<F3> 12.86% 9.26% (17.66%) 7.52% 6.41%
Cash Dividends $ 587 $ 606 $ 623 $ 613 $ 591
Dividends Paid Per
Share<F4> $ .05 $ .05 $ .05 $ .05 $ .05
Shares Outstanding<F4> 11,444 12,033 12,460 12,544 12,093
<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.
<F2> Until February 1996, Spartan's policy was to pay volume incentive
rebates to its Shareholder-Customers based upon each store's order
size from Spartan. Prior to June 14, 1995, volume incentive rebates
were paid approximately 50 percent in cash on a quarterly basis. At
Spartan's fiscal year end, the Shareholder-Customers would receive
Class A Shares at the Trading Value then in effect in exchange for the
remaining approximately 50 percent of the volume incentive rebate. On
June 14, 1995, the Board of Directors changed the rebate policy to pay
volume incentive rebates on a quarterly basis approximately 75 percent
in cash, and at the fiscal year end, the Shareholder-Customer received
Class A Shares at the Trading Value then in effect in exchange for the
remaining 25 percent of the rebate. As of February 1996, Spartan no
longer pays any volume incentive rebates.
<F3> During the year ended March 30, 1996, the Company incurred
restructuring, reorganization, and other charges amounting to
$46,439,743.
<F4> Per share amounts have been restated to reflect a ten-for-one stock
split pursuant to a share dividend paid to shareholders on July 15,
1997.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items from the Company's
Consolidated Statements of Operations as percentages of net sales, less
any volume incentive rebates:
-17-
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------
YEAR ENDED
----------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
----------------------------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Gross profit 10.2 9.6 9.6
Less:
Operating and administrative expenses 9.2 8.8 8.8
Restructuring, reorganization and
other charges 1.8
Interest expense .4 .4 .4
Interest income (.1) (.1) (.1)
Gain on sale of property and equipment (.2) (.1) -
- ----------------------------------------------------------------------------------------------
Total 9.3 9.0 10.9
- ----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes .9 .6 (1.3)
Income taxes (benefit) .3 .2 (.4)
- ----------------------------------------------------------------------------------------------
Net earnings (loss) .6% .4% (.9%)
- ----------------------------------------------------------------------------------------------
</TABLE>
NET SALES
Net sales for the fiscal year ended March 28, 1998 increased
$14.2 million compared to the fiscal year ended March 29, 1997. Net sales
for the fiscal year ended March 29, 1997 decreased $64.1 million compared
to the fiscal year ended March 30, 1996. However, after adjustment for the
closing of the Company's Capistar facility and for fiscal 1996 having 53
weeks of operations compared to 52 weeks in 1997, net sales were slightly
higher in 1997 compared to 1996.
Sales in the Distribution segment for the fiscal year ended March
28, 1998 increased approximately $15.0 million, with $5.1 million of this
increase resulting from sales to grocery store retailers and $9.9 million
resulting from sales to convenience store retailers. The increase in sales
to grocery store retailers is due primarily to increases in sales of
pharmacy products and in services provided to customers, offset by declines
in sales of groceries and related products, excluding produce. Sales of
groceries and related products have declined due to highly competitive
market conditions, primarily in the Eastern Michigan region, as
-18-
<PAGE>
competitors' supermarkets continue to increase square footage.
Additionally, some of the Company's customers have increased purchases of
these types of products directly from manufacturers and have reduced
existing shelf space due to the continued success of discount stores that
carry these products. Like unit sales of grocery and other related products
to grocery store retailers declined by approximately 2% in 1998 compared to
1997. Offsetting this decline somewhat were increases in sales of produce
to new customers as well as existing customers as grocery retailers attempt
to differentiate themselves from larger competitor supermarkets and
discount stores with larger selections of fresh produce. Management
anticipates that in the fiscal year ended March 27, 1999 the Company will
experience a continued decline of approximately 1% in sales to grocery
store retailers.
The increase in sales to convenience store retailers is primarily
the result of the acquisition by a subsidiary of the Company in November
1997, of certain inventory, accounts receivable and customer lists of
another convenience store distribution company. Also, the Company has
experienced general increases in convenience store purchases and increases
in the prices of cigarettes. These increases were partially offset by the
loss of two customers and intense pricing pressures from member-only
warehouse discount stores.
Distribution segment sales decreased 3.3% in fiscal 1997 due
primarily to the factors mentioned above, the loss of one customer in the
convenience store market, and the decision to cease business with certain
low-margin customers in connection with the consolidation of certain
distribution centers at one of the Company's subsidiaries.
Sales in the Insurance segment for the fiscal year ended March
28, 1998 declined approximately $.7 million or 4.1% from levels experienced
in the fiscal year ended March 29, 1997. The decline reflects increased
competitive pressures in the property and casualty insurance markets.
While the Company has been successful in retaining existing accounts, it
has reduced premiums and accepted lower commissions to accomplish the
retention. Insurance segment sales increased 3.0% in the fiscal year
ended March 29, 1997, primarily as a result of increased volume.
Sales in the Real Estate and Finance segment during the fiscal
year ended March 28, 1998, which excludes the gains on the sales of real
property, were comparable to sales experienced during the fiscal year ended
March 29, 1997. Sales during the fiscal year ended March 29, 1997
increased by $3.6 million over sales experienced during the fiscal year
ended March 30, 1996, due primarily to an increase in property rentals.
GROSS PROFIT
Gross profit as a percentage of net sales for the fiscal year
ended March 28, 1998 increased to 10.2% from 9.6% in fiscal years ended
-19-
<PAGE>
March 29, 1997 and March 30, 1996. The improvement in gross profit for the
fiscal year ended March 28, 1998 can be attributed to several factors,
including enhanced inventory procurement practices as the Company purchases
inventories in excess of current needs to take advantage of promotions
offered by vendors. Also, the Company has experienced some improvements in
gross profit from the sale of cigarette inventories purchased prior to recent
price increases. Finally, during the third quarter, the Company revised the
methodology in which it administers its Cost-Plus pricing policy to compute
amounts billed based on acquisition cost before considering any promotional
allowance. Management expects gross profit during fiscal year 1999 to
continue to be positively impacted by rising cigarette prices as the Company
sells cigarette inventories purchased at lower costs.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percentage of net
sales for the fiscal years ended March 28, 1998, March 29, 1997, and March
30, 1996 were 9.2%, 8.8% and 8.8%, respectively. Several factors
contributed to the increase in operating and administrative expenses during
fiscal 1998.
The Company has incurred significant Information Technology costs
to address Year 2000 issues. The Company is upgrading and replacing
existing software. Additionally, the Company is currently communicating
with its customers, suppliers and financial institutions to assess their
plans for Year 2000 and how they may impact the Company. The Company has
spent approximately $2.5 million during the past two fiscal years and expects
to incur an additional $3.5 million over the next two fiscal years to
address the Year 2000 issues. The Company believes that due to its current
efforts and future plans to upgrade and replace existing software, the Year
2000 problem will not pose significant operational problems for the
Company's computer systems. If such modifications and conversions to
software are not completed timely, however, or if the Company's customers,
suppliers or financial institutions should fail to adequately modify their
computer systems, the Year 2000 problem could have a material adverse
impact on the Company's ability to order and distribute product
efficiently.
Software amortization expense increased by approximately $1.4
million when comparing the fiscal year ended March 28, 1998 to the fiscal
year ended March 29, 1997, primarily as a result of the capitalization of
several projects associated with BASE (Business Automation Support
Environment). Management has committed significant funds to process
improvement initiatives primarily in the technology area in an attempt to
increase the overall efficiency of operations and to enhance the level of
service that the Company provides to its retail customers.
Late in the second quarter of fiscal 1998, the Company
discontinued the use of labor standards in the grocery and related product
-20-
<PAGE>
distribution warehouses in accordance with a renegotiated labor contract.
As a result of this discontinuance, warehouse efficiency declined
initially. However, management has seen improvements and expects further
improvements through the use of an incentive program for union employees
and discussions with union representatives. During January 1998, the
Company paid approximately $1.3 million in settlement of certain employee
claims of alleged racial harassment in one of the Company's warehouses.
During the fiscal year ended March 28, 1998, the Company
implemented an incentive compensation program for management Associates,
resulting in a charge of approximately $1.2 million compared to
approximately $.3 million in the prior fiscal year. The amount to be paid
under this management incentive program is determined based on consolidated
earnings, customer satisfaction survey results and individual performance
evaluations. Payments are made on an annual basis and require the
achievement of a targeted level of consolidated earnings.
Operating and administrative expenses remained unchanged as a
percentage of sales comparing 1997 to 1996.
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,
known as BASE. 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.
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.
-21-
<PAGE>
GAIN ON SALE OF PROPERTY AND EQUIPMENT
The gain on sale of property and equipment of $3.9 million for
the fiscal year ended March 28, 1998 was due primarily to the sale of nine
retail properties. The sales of retail properties were completed in
conjunction with a plan to reduce the Company's debt and real estate
portfolio to prior historical levels. The gain on sale of property and
equipment of $1.7 million reported for the fiscal year ended March 29, 1997
was due primarily to the sale of retail properties and the sale of a
distribution facility. There were no significant transactions in 1996.
Management expects to complete the sale of additional retail properties
during the fiscal year ended March 27, 1999.
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 the fiscal year ended March 28, 1998 were $28.0
million, increasing by $7.9 million or 39.3% compared to the previous year.
Operating earnings for the fiscal year ended March 29, 1997 were $20.1
million, compared with an operating loss for fiscal 1996 of $27.6 million.
Excluding the restructuring charge in fiscal 1996, operating earnings in
fiscal 1997 increased by 6.6 percent.
Distribution segment operating earnings for the fiscal year ended
March 28, 1998 were $18.8 million, increasing by $4.6 million or 32.4
percent, due primarily to improvements in gross profit. Distribution
segment operating earnings, before the restructuring, reorganization and
other charges reported in 1996, decreased $.8 million in fiscal 1997 due
primarily to the 1997 fiscal year comprising 52 weeks compared to 53 weeks
in fiscal 1996 and the closing of the Capistar facility.
Insurance segment operating earnings for the fiscal year ended
March 28, 1998 were $3.6 million, decreasing by $.3 million or 8.3%. The
reduction in net earnings was primarily the result of the decline in sales
due to competitive market conditions in the property and casualty insurance
industry. Management anticipates a further decrease in earnings in the
Insurance segment continuing into the next fiscal year as the Company
continues to respond to competitive pressures through the reduction in
premiums. Insurance segment operating earnings for the fiscal year ended
March 29, 1997 increased by $1.0 million or 34.5%, due primarily to a
reduction in incurred losses and loss reserves.
Real Estate and Finance segment operating earnings for the fiscal
year ended March 28, 1998 were $5.7 million, increasing by $3.7 million or
185.0%, due primarily to gains from the sales of real estate holdings. Real
Estate and Finance segment operating earnings for the fiscal year ended
March 29, 1997 were $2.0 million, increasing by $1.0 million or 100.0%, due
-22-
<PAGE>
to the sale of retail and wholesale properties. Sales of real estate
during the fiscal years ended March 28, 1998 and March 29, 1997 have
reduced the Company's real estate portfolio to historical levels.
Accordingly, management expects Real Estate and Finance segment operating
earnings to return to historical levels in fiscal 1999.
INTEREST EXPENSE AND INCOME
Interest expense for the fiscal year ended March 28, 1998
increased by approximately $1.2 million over the fiscal year ended March
29, 1997. Interest expense for fiscal 1997 was relatively stable when
compared to the fiscal year ended March 30, 1996. The increase in interest
expense during 1998 was caused by additional borrowings under the Company's
bank credit agreement, due primarily to higher cigarette inventories
and, to a lesser extent, the development of retail properties. During fiscal
1997 a major construction effort related to the development of retail
properties in the Eastern Michigan region required interest incurred during
the construction period to be capitalized as part of the cost of the projects
rather than expensed. Management expects interest expense to decline as a
percentage of sales in future periods due to the anticipated reduction in
certain cigarette inventories and the sale of additional real property.
Interest income declined by approximately $.3 million in the
fiscal year ended March 28, 1998 and declined by approximately $.5 million
in the fiscal year ended March 29, 1997. The reduction in interest income
in both periods was due primarily to a decrease in notes receivable. In
addition, finance fees earned on past due accounts decreased as a result of
a reduction in past due accounts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operating activities and borrowings under a bank credit agreement. At March
28, 1998, the Company had approximately $30.2 million in additional bank
borrowings available. Also, the Company is permitted to sell unsecured
notes under a note offering with a total principal amount of $100,000,000.
As of March 28, 1998, approximately $14.1 million of these notes were
outstanding and the Company had approximately $50.1 million in availability
under this offering. Management believes that cash flows from operating
activities and the Company's ability to issue notes under the note offering
and 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 $29.6 million in fiscal 1998,
fueled by strong operating earnings, increased trade payables and the
refund of income taxes of approximately $3.5 million, offset by the
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<PAGE>
increase in cigarette inventories. Cash provided by operations was $16.4
million in fiscal 1997 and $42.9 million in fiscal 1996. The decrease in
cash provided by operations in fiscal 1997 compared to fiscal 1996 was due
primarily to an increase in inventory levels to take advantage of
promotions offered by vendors.
Cash used in investing activities was $3.2 million in fiscal
1998, compared to $35.8 million in fiscal 1997 and $49.5 million in fiscal
1996. During fiscal 1998 approximately nine retail properties were sold
generating $14.9 million in cash proceeds. Total purchases of property
and equipment have declined over the three year period and are expected to
continue to decline in future periods due to the completion of many of the
BASE projects. Management expects that total capital expenditures in the
fiscal year ended March 27, 1999 will be approximately $21.0 million.
Cash used in financing activities was $23.6 million in fiscal
1998, compared to cash provided by financing activities of $13.8 million in
fiscal 1997 and $21.3 million in fiscal 1996. Proceeds from the sale of
retail properties coupled with strong cash flows from operations allowed
the Company to reduce its reliance on long-term borrowings, resulting in an
improved long-term debt-to-equity ratio of .94:1 at March 28, 1998 compared
to 1.17:1 at March 29, 1997.
CAPITAL STRUCTURE
The following table summarizes the Company's capital structure
for the last two fiscal years:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average short-term borrowing during the year $ 29,800,000 10.5% $ 19,965,799 7.1%
Long-term debt at year-end 112,444,327 39.7 130,609,321 46.4
Present value at year-end:
Capital leases 1,765,995 .6 2,359,074 .8
Operating leases:
Used in operations 8,885,000 3.1 5,321,587 1.9
Subleased to others 16,281,652 5.8 15,936,923 5.7
- ------------------------------------------------------------------------------------------------------------
Total debt capital 169,176,974 59.7 174,192,704 61.9
Shareholders' equity 114,192,251 40.3 107,257,574 38.1
- ------------------------------------------------------------------------------------------------------------
Total capitalization $283,369,225 100.0% $281,450,278 100.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
The Trading Value of the Class A Shares customarily 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 $11.30 per share at March 28, 1998. On June 17, 1998, the
Company received notice from the Bureau that $12.30 per share had been
accepted as the new Trading Value effective June 21, 1998.
The Company paid quarterly dividends of $.0125 per share for each
of the past three fiscal years. Dividends were $587,071 for the fiscal
year ended March 28, 1998. 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.
On July 15, 1997, the Articles of Incorporation of the Company
were amended to increase the authorized capital stock from 2,000,000 to
20,000,000 shares of Class A common stock and from 500,000 to 5,000,000
shares of Class B common stock. The amendment also reduced the par value
of the Class A common stock from $20 per share to $2 per share. On July 15,
1997, the Company also consummated a ten-for-one stock split pursuant to a
share dividend payable to shareholders of record on May 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The SOP
is effective for the Company on March 28, 1999, however, early adoption is
permitted. The SOP will require the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining
software for internal use. This SOP will be adopted on a prospective basis
and its effect on future operations has not been determined.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report include forward-looking
statements that describe the Company's plans, strategies, objectives,
goals, expectations or projections. These forward-looking statements are
identifiable by words or phrases indicating that the Company or management
"expects," "anticipates," "projects," "plans" or "believes" that a
particular occurrence "may result" or "will likely result" or that a
particular event "may occur" or "will likely occur" in the future, or
similarly stated expectations. In addition to other risks and
uncertainties described in connection with the forward-looking statements
-25-
<PAGE>
contained in this Report on Form 10-K, there are many important factors
that could cause actual results to be materially different from the
Company's current expectations.
Anticipated future sales are subject to competitive pressures
from many sources. The Company's Distribution segment competes with
numerous warehouse discount stores, supermarkets, pharmacies and product
manufacturers. The Company's Insurance segment is subject to intense
competition from numerous insurance agents and insurance companies,
especially in the property and casualty insurance markets. Competitive
pressures in these and other business segments may result in unexpected
reductions in sales volumes, product prices or service fees.
Operating and administrative expenses may be adversely affected
by unexpected costs associated with, among other factors: improvement
initiatives related to BASE (Business Automation Support Environment);
software modifications and upgrades to address Year 2000 issues;
unanticipated labor shortages, stoppages or disputes; business acquisitions
or divestitures; and the defense, settlement or adverse judgments in
connection with current or future legal or administrative proceedings. The
Company's future interest expense and income also may differ from current
expectations, depending upon: cigarette inventory reductions; retail
property sales; the volume of notes receivable; and the amount of fees
received on delinquent accounts, among other factors.
The foregoing is intended to provide meaningful cautionary
statements for purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The foregoing should not be
construed as an exhaustive list of all economic, competitive, governmental
and technological factors that could adversely affect the Company's
expected consolidated financial position, results of operations or
liquidity. The Company disclaims any obligation to update its forward-
looking statements to reflect subsequent events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
-26-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Spartan Stores, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of
Spartan Stores, Inc. and subsidiaries as of March 28, 1998 and March
29, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended March 28, 1998. 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 28, 1998, and March 29,
1997, and the results of their operations and their cash flows for
each of the three years in the period ended March 28, 1998, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Grand Rapids, Michigan
June 10, 1998
-27-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 28, MARCH 29,
ASSETS 1998 1997
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 37,026,640 $ 34,198,752
Marketable securities 18,333,323 17,605,880
Accounts receivable 70,083,223 67,045,013
Refundable taxes on income 4,466,297 6,127,753
Inventories 92,706,414 85,209,192
Prepaid expenses 6,885,828 6,863,225
Deferred taxes on income 7,277,000 5,751,000
------------ ------------
TOTAL CURRENT ASSETS 236,778,725 222,800,815
OTHER ASSETS
Notes receivable 6,539,412 6,353,405
Other 1,703,110 1,568,893
------------ ------------
TOTAL OTHER ASSETS 8,242,522 7,922,298
PROPERTY AND EQUIPMENT
Land and improvements 33,098,220 36,391,244
Buildings 136,496,867 138,569,686
Equipment 138,663,310 134,035,643
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 308,258,397 308,996,573
Less accumulated depreciation and amortization 147,146,529 135,988,572
------------ ------------
NET PROPERTY AND EQUIPMENT 161,111,868 173,008,001
------------ ------------
TOTAL ASSETS $406,133,115 $403,731,114
============ ============
</TABLE>
See notes to consolidated financial statements.
-28-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 28, MARCH 29,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 38,500,000 $ 33,500,000
Accounts payable 81,690,574 78,130,484
Rebates due to customers 215,025 2,581,674
Accrued payroll and benefits 13,447,559 11,815,711
Insurance reserves 15,799,160 17,172,342
Other accrued expenses 18,899,635 12,739,253
Current maturities of long-term debt 5,890,177 6,598,927
Current obligation under capital lease 654,600 593,078
------------ ------------
TOTAL CURRENT LIABILITIES 175,096,730 163,131,469
DEFERRED GAINS ON SALES OF PROPERTY AND EQUIPMENT 644,389 213,198
DEFERRED TAXES ON INCOME 3,750,000 2,807,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,784,200 4,545,483
LONG-TERM DEBT 106,554,150 124,010,394
LONG-TERM OBLIGATION UNDER CAPITAL LEASE 1,111,395 1,765,996
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value $2 a share;
authorized 20,000,000 shares; outstanding 11,443,985
and 12,032,850 22,887,970 24,065,700
Additional paid-in capital 16,431,937 18,406,969
Retained earnings 74,872,344 64,784,905
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 114,192,251 107,257,574
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $406,133,115 $403,731,114
============ ============
</TABLE>
-29-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES $2,489,249,469 $2,475,025,242 $2,554,687,929
LESS VOLUME INCENTIVE REBATES 15,576,939
-------------- -------------- --------------
2,489,249,469 2,475,025,242 2,539,110,990
COSTS AND EXPENSES
Cost of sales 2,234,164,773 2,238,364,428 2,295,129,609
Operating and administrative 229,137,439 216,890,506 223,817,233
Restructuring, reorganization and
other charges 46,439,743
Interest expense 10,934,034 9,700,440 9,600,177
Interest income (3,324,089) (3,609,410) (4,111,032)
(Gain) loss on sale of
property and equipment (3,905,669) (1,704,447) 402,855
-------------- -------------- --------------
TOTAL COSTS AND EXPENSES 2,467,006,488 2,459,641,517 2,571,278,585
-------------- -------------- --------------
EARNINGS (LOSS) BEFORE INCOME
TAXES (BENEFIT) 22,242,981 15,383,725 (32,167,595)
INCOME TAXES (BENEFIT) 8,009,000 5,681,000 (10,500,000)
-------------- -------------- --------------
NET EARNINGS (LOSS) $ 14,233,981 $ 9,702,725 $ (21,667,595)
============== ============== ==============
BASIC AND DILUTED
NET EARNINGS (LOSS)
PER CLASS A SHARE $ 1.21 $ .80 $ (1.74)
============== ============== ==============
-30-
<PAGE>
BASIC WEIGHTED AVERAGE
CLASS A SHARES 11,785,263 12,136,708 12,438,659
============== ============== ==============
DILUTED WEIGHTED AVERAGE
CLASS A SHARES 11,788,723 12,140,470 12,442,159
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
-31-
<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 26, 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
Class A common
stock transactions 895,256 shares purchased (1,790,512) (4,769,484) (3,559,471)
306,391 shares issued 612,782 2,794,452
Net earnings 14,233,981
Cash dividends $.05 per share (587,071)
- ---------------------------------------------------------------------------------------------------------------
-32-
<PAGE>
Balance March 28, 1998 $22,887,970 $16,431,937 $74,872,344
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-33-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 14,233,981 $ 9,702,725 $(21,667,595)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 21,639,466 20,175,210 19,224,433
Rebates paid in common stock 4,000,121
Restructuring, reorganization and other charges 41,344,222
Postretirement benefits other than pensions 238,717 444,000 107,306
Deferred taxes on income (583,000) 4,035,000 1,194,000
(Gain) loss on sale of property and equipment (3,905,669) (1,704,447) 402,855
Change in assets and liabilities:
Marketable securities (727,443) (1,554,272) (2,806,890)
Accounts receivable (3,038,210) 1,399,563 6,358,071
Refundable taxes on income 1,661,456 4,147,084 (10,173,305)
Inventories (7,497,222) (6,549,385) 10,330,922
Prepaid expenses (22,603) (3,795,069) 99,410
Accounts payable 3,560,090 (6,738,104) (6,146,663)
Rebates due to customers (2,366,649) 1,215,900 (570,867)
Accrued payroll and benefits 1,631,848 1,138,090 183,184
Insurance reserves (1,373,182) (1,312,318) (635,043)
Other accrued expenses 6,160,382 (4,196,900) 1,633,999
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,611,962 16,407,077 42,878,160
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (23,997,384) (46,237,512) (47,968,624)
Proceeds from the sale of property and
equipment 20,743,170 7,805,730 2,083,122
Other (27,517) 2,624,384 (3,610,725)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,226,697) (35,807,398) (49,496,227)
------------ ------------ ------------
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<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable 5,000,000 18,500,000 10,056,580
Proceeds from long-term borrowings 9,212,619 37,274,127 34,871,387
Repayment of long-term debt (29,877,613) (36,357,074) (17,587,293)
Reduction of obligation under capital lease (593,079) (582,136) (541,235)
Proceeds from sale of common stock 3,407,234 3,899,110 2,667,576
Common stock purchased (10,119,467) (8,325,035) (7,591,006)
Dividends paid (587,071) (605,937) (623,117)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (23,557,377) 13,803,055 21,252,892
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,827,888 (5,597,266) 14,634,825
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 34,198,752 39,796,018 25,161,193
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 37,026,640 $ 34,198,752 $ 39,796,018
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-35-
<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 28, 1998 and March 29, 1997 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
Financial instruments include cash and cash equivalents, marketable
securities, accounts and notes receivable, accounts payable, notes payable and
long-term debt reported in the Consolidated Balance Sheets. The carrying
amounts for cash and cash equivalents, accounts receivable, accounts payable
and notes receivable approximate fair value at March 28, 1998 and March 29,
1997 because of the short-term nature of these financial instruments.
At March 28, 1998, the estimated fair value of marketable securities exceeded
cost by $24,235. As of March 29, 1997, costs of marketable securities
exceeded fair value by $103,956.
-36-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
At March 28, 1998 and March 29, 1997 the estimated fair value of the Company's
long-term debt (including current maturities) exceeded the carrying value by
approximately $763,000 and $860,000, respectively. The estimated fair
value was based on anticipated rates available to the Company for debt with
similar terms and maturities. The estimated fair value of notes
payable included in current liabilities as of March 28, 1998 and March 29,
1997 approximated the carrying value.
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.
ACCOUNTS RECEIVABLE
Accounts receivable include the current portion of notes receivable of
$2,709,152 in 1998 and $3,772,303 in 1997 and are shown net of allowances
for credit losses of $1,810,000 in 1998 and $3,160,000 in 1997.
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 $45,400,000 and $45,000,000 higher at March 28, 1998 and
March 29, 1997, respectively. During 1998, 1997 and 1996, 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 1998 and 1997 by $51,000 and
$441,000, 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.
-37-
<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 $18,267,488 and $15,522,845 at March 28, 1998 and
March 29, 1997, 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 sales and leaseback of certain real property and transportation
equipment have been deferred and are being amortized as a reduction of rent
expense over the lives of the leases.
-38-
<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
Basic Earnings Per Share ("EPS") excludes dilution and is computed by
dividing net earnings by the weighted-average number of common shares
outstanding for the period. Diluted EPS assumes the issuance of common
stock for options outstanding under the Company's stock option plan.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS NO. 130 establishes standards
for the reporting and presentation of comprehensive income and its
components. SFAS No. 131 establishes standards for defining operating
segments and the reporting of certain information regarding operating
segments. Because these statements only impact how financial information
is disclosed in interim and annual reports, the adoption will have no
impact on the Company's financial condition or results of operations. Both
accounting standards are effective for the Company's fiscal year ended
March 27, 1999.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP is effective for
the Company on March 28, 1999, however, early adoption is permitted. The
SOP will require the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining software for
internal use. This SOP will be adopted on a prospective basis and its
effect on future operations has not been determined.
-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 presentation in order
to conform to the 1998 presentation.
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 28, 1998 and March 29, 1997 are shown below.
Unrealized gains and losses as of March 28, 1998 and March 29, 1997 were
not material.
-40-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1998
------------------------------
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 $ 7,158,325 $ 7,173,804
Debt securities issued by
foreign governments,
corporations and agencies 11,150,763 11,159,519
----------- -----------
$18,309,088 $18,333,323
=========== ===========
</TABLE>
<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>
The amortized cost and estimated fair values of investments as of March 28,
1998, by contractual maturity, are shown below:
-41-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 5,454,812 $ 5,451,764
Due after one year
through five years 9,062,186 9,049,219
Due after five years
through ten years 3,792,090 3,832,340
----------- -----------
$18,309,088 $18,333,323
=========== ===========
</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 two percent.
Maturity dates range to 2004 at March 28, 1998. Impaired notes total
approximately $480,000 at March 28, 1998 and $2,400,000 at March 29, 1997,
including the current portion. The allowance for credit losses on accounts
receivable at March 28, 1998 and March 29, 1997 includes $290,000 and
$1,600,000, respectively, relating to impaired notes.
NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured $150 million credit agreement. This agreement
is segregated into a short-term $70 million line of credit, a long-term $60
million revolving loan and a long-term $20 million single facility loan.
The short-term $70 million line of credit provides for the issuance of
letters of credit of which approximately $18,500,000 were outstanding and
unused as of March 28, 1998. Notes payable included in current liabilities
represent borrowings under the short-term line of credit. The line of
-42-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
credit agreement requires the payment of interest at a negotiated rate at
the date of the borrowing. The weighted average rates for 1998 and 1997
were 6.25% and 6.04%, respectively. The unused portion of the available
lines of credit aggregates $30,199,500 at March 28, 1998.
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
------------ ------------
<S> <C> <C>
9.3% Senior notes, unsecured, due
December, 2004, annual principal
payments of $2,000,000 due
December 1 $ 14,000,000 $ 16,000,000
9.11% Senior notes, unsecured, due
December, 1999, annual principal
payments of $1,500,000 due
December 1 3,000,000 4,500,000
7.27% Senior notes, unsecured, due
February, 2003, annual principal
payments of $2,000,000 due
February 1 10,000,000 12,000,000
Bank credit agreement, unsecured, interest
rate negotiated daily, monthly and
quarterly. Due December 23, 1999 62,800,000 79,000,000
Variable Rate Promissory Notes, unsecured,
due March 31, 1999, interest payable
quarterly at 1% below the prime rate 14,056,389 12,599,410
Other 8,587,938 6,509,911
------------ ------------
112,444,327 130,609,321
Less current portion 5,890,177 6,598,927
------------ ------------
Total long-term debt $106,554,150 $124,010,394
============ ============
</TABLE>
-43-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
At March 28, 1998, long-term debt is due as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH,
------------------
<S> <C> <C>
1999 $ 5,890,177
2000 86,754,985
2001 4,249,357
2002 4,270,023
2003 4,290,995
Later 6,988,790
------------
$112,444,327
============
</TABLE>
Certain loan agreements contain covenants which include restrictions on
additional indebtedness, payment of cash dividends (restricted to an
additional $19,143,542 at March 28, 1998) 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 28,
1998, the Company may still issue $50,155,025 of the notes.
COMMITMENTS AND CONTINGENCIES
The Company has guaranteed payment of indebtedness to financial
institutions aggregating $19.2 million at March 28, 1998 on behalf of
certain customers. Additionally, the Company has guaranteed three leases by
customers, two of which expire in 2012 with combined annual rentals of
$444,500, and one of which expires in 2017 with an annual rental of $217,500.
-44-
<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. During fiscal
year 1998, three actions were filed in state courts in Tennessee and
twenty-two actions were filed in state courts in Pennsylvania against the
leading cigarette manufacturers operating in the United States and certain
wholesalers and distributors, including a subsidiary of the Company. In
the three Tennessee actions, one action was filed as a class action on
behalf of the individual plaintiffs, one action was filed on behalf of the
State of Tennessee and its taxpayers, and one action was filed by an
individual plaintiff. All of the Pennsylvania actions were filed by
individual plaintiffs. 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 are
being vigorously defended. The Tennessee class action and individual
plaintiff action already have been dismissed and a dismissal order is
pending with respect to the action on behalf of the State of Tennessee and
its taxpayers. All but one of the Pennsylvania actions have been dismissed
without prejudice pursuant to a Dismissal and Tolling Agreement under which
the defendants have agreed not to raise the defense of statute of
limitations or laches if an action is filed by a plaintiff before April 1,
1999. One of the cigarette manufacturers named as a defendant in each
action has agreed to indemnify the Company's subsidiaries from damages
arising out of these actions. Management believes that the ultimate
outcome of these actions should not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
Various other lawsuits and claims, arising in the ordinary course of
business, are pending or have been asserted against the Company. While the
ultimate effect of such actions cannot be predicted with certainty,
management believes that their outcome will not result in a material
adverse effect on the consolidated financial position, operating results or
liquidity of the Company.
-45-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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 a capital lease and
included in property and equipment:
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
---------- ----------
<S> <C> <C> <C>
Buildings $7,300,000 $7,300,000
Less accumulated amortization 6,563,456 6,268,838
---------- ----------
Net buildings $ 736,544 $1,031,162
========== ==========
</TABLE>
Amortization of property under the capital lease was $294,618, in 1998, 1997,
and 1996.
Future minimum obligations under the capital lease in effect at March 28, 1998
are as follows:
<TABLE>
<CAPTION>
USED IN
YEAR ENDING MARCH, OPERATIONS
------------------ ----------
<S> <C> <C>
1999 $ 793,872
2000 793,872
2001 396,937
----------
Total future minimum obligations 1,984,681
Less interest 218,686
----------
Present value of net future minimum obligations 1,765,995
Less current portion 654,600
----------
Long-term obligations $1,111,395
==========
</TABLE>
-46-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Future minimum obligations under operating leases in effect at March 28,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING USED IN SUBLEASED
MARCH, OPERATIONS TO OTHERS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1999 $4,240,778 $ 2,302,432 $ 6,543,210
2000 3,180,687 2,302,432 5,483,119
2001 1,640,042 2,240,752 3,880,794
2002 476,062 2,164,462 2,640,524
2003 157,276 1,927,381 2,084,657
Later 13,236 12,800,852 12,814,088
---------- ----------- -----------
Total future minimum
obligations $9,708,081 $23,738,311 $33,446,392
========== =========== ===========
</TABLE>
Rental expense under those leases which are classified as operating leases
amounted to $8,400,000, $9,690,000 and $11,030,000 in 1998, 1997 and 1996,
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:
-47-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
----------- -----------
<S> <C> <C> <C>
Land and improvements $15,100,926 $18,618,760
Buildings 58,116,191 57,836,784
----------- -----------
73,217,117 76,455,544
Less accumulated depreciation 15,341,306 16,100,102
----------- -----------
Net land and buildings $57,875,811 $60,355,442
=========== ===========
</TABLE>
Future minimum rentals under operating leases in effect at March 28,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OWNED LEASED
MARCH, PROPERTY PROPERTY TOTAL
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1999 $ 7,809,742 $ 2,414,519 $ 10,224,261
2000 7,457,199 2,414,519 9,871,718
2001 7,295,041 2,347,868 9,642,909
2002 7,038,908 2,268,747 9,307,655
2003 6,833,393 2,022,037 8,855,430
Later 65,843,717 13,465,411 79,309,128
------------ ----------- ------------
Total future minimum
rentals $102,278,000 $24,933,101 $127,211,101
============ =========== ============
</TABLE>
-48-
<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>
1998 1997 1996
<S> <C> <C> <C>
Weighted average discount rate 7.00% 7.50% 7.00%
Rate of increase in future compensation levels 4.75% 4.75% 4.75%
Long-term rate of return on assets 9.00% 9.00% 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:
-49-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
------------ ------------
<S> <C> <C>
Date of actuarial valuation March 31, 1997 March 31, 1996
Actuarial present value of accumulated
benefit obligations:
Vested $ 36,177,656 $ 30,832,302
Total 37,688,772 32,077,675
------------ ------------
Projected benefit obligation (52,553,318) (44,707,977)
Plan assets at fair value 50,929,661 38,952,059
------------ ------------
Projected benefit obligation in excess of
plan assets (1,623,657) (5,755,918)
Unrecognized net (gain) loss (3,152,866) 1,324,133
Unrecognized prior service cost 1,827,109 1,954,044
Initial net credit at April 1, 1987 being
amortized over 19 years 42,373 47,670
------------ ------------
Pension liability ($ 2,907,041) $ (2,430,071)
============ ============
</TABLE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 2,014,359 $ 2,214,766 $ 1,644,379
Interest cost 3,335,534 3,121,058 2,747,457
Actual return on plan assets (11,785,386) (3,579,463) (5,583,071)
Net amortization and deferral 8,642,024 1,011,568 3,132,667
----------- ----------- -----------
Net pension expense $ 2,206,531 $ 2,767,929 $ 1,941,432
=========== =========== ===========
</TABLE>
-50-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
Subsequent to March 28, 1998, the Company's non-contributory defined
benefit pension plan was amended to become a cash-balance non-contributory
defined benefit pension plan.
Matching contributions made by the Company to salary reduction defined
contribution pension plans aggregated $1,600,000, $1,371,000 and $1,188,000
in 1998, 1997 and 1996, 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 $4,932,000 in 1998,
$4,740,000 in 1997 and $5,025,000 in 1996.
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.
This benefit is in the form of a credit against the monthly insurance premium.
The balance of the premium is paid by the retiree. From April 1, 1992 through
December 31, 1997 the Company supplemented the retiree portion of the premium
which was reflected in the computation of the postretirement benefit
liability. Effective January 1, 1998, the Company began charging retirees for
100% of the retiree portion of the medical cost resulting in the prior service
cost adjustment.
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:
-51-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
----------- ----------
<S> <C> <C>
Retired participants $ 2,153,593 $2,215,302
Other fully eligible participants 862,913 994,641
Other active participants 1,822,379 2,585,826
----------- ----------
Accumulated postretirement benefit
obligation 4,838,885 5,795,769
Prior service cost 1,383,039
Unrecognized (gain) loss (1,437,724) 1,250,286
----------- ----------
Postretirement benefit liability $ 4,784,200 $4,545,483
=========== ==========
</TABLE>
Postretirement health care expense consisted of the following components:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Service cost-benefits earned during the period $170,911 $294,630
Interest cost on the accumulated postretirement
benefit obligation 311,168 393,971
Net amortization and deferral (30,766) 50,532
-------- --------
Periodic postretirement benefit cost $451,313 $739,133
======== ========
</TABLE>
The Company continues to fund these benefits as incurred. Payment of these
benefits was $212,596, $295,133 and $463,194 in 1998, 1997 and 1996,
respectively.
-52-
<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
28, 1998 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 2% and the periodic postretirement
benefit cost by 1.3%.
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.0% in 1998 and 1997,
respectively.
TAXES ON INCOME
The income tax provision (benefit) is summarized as follows:
<TABLE>
<CAPTION>
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Currently payable (refundable) $8,592,000 $1,646,000 $(11,694,000)
Net deferred (583,000) 4,035,000 1,194,000
---------- ---------- ------------
$8,009,000 $5,681,000 $(10,500,000)
========== ========== ============
</TABLE>
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% (34.0)%
Amortization of goodwill .1 2.4 4.5
Research and development credit (2.5)
Other .9 (.5) (.6)
---- ---- -----
Effective income tax rate 36.0% 36.9% (32.6)%
==== ==== =====
</TABLE>
-53-
<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 28, 1998 and March 29, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Employee benefits $ 5,598,245 $ 5,159,341
Depreciation 1,119,330 2,618,504
Inventory 1,231,200 1,485,413
Accounts receivable 630,000 962,500
Lease transactions 494,000 637,000
Insurance reserves 557,165 787,266
Research & development credit 2,729,909
All other 441,710 1,108,098
----------- -----------
Total deferred tax assets 12,801,559 12,758,122
----------- -----------
Deferred tax liabilities:
Depreciation 7,053,895 8,217,630
Inventory 1,040,199 415,577
All other 1,180,465 1,180,915
----------- -----------
Total deferred tax liabilities 9,274,559 9,814,122
----------- -----------
Net deferred tax asset $ 3,527,000 $ 2,944,000
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest $11,264,484 $8,916,115 $10,085,527
Income taxes 3,618,017 2,185,507 4,755,049
</TABLE>
-54-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
During 1998, the Company entered into a $2,500,000 note payable for the
purchase of a distribution center.
SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the Board of Directors
may at any time, and from time to time, provide for the issuance of up to
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 28, 1998, 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 prior to February 4, 1996
issued common stock in partial 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 28,
1998, there were 8,362,000 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
the granting of incentive stock options as well as non-qualified stock
options to corporate officers. The Company accounts for stock option grants
in accordance with Accounting Principles Bulletin Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
stock option grants since the options have exercise prices equal to the
Trading Value. Options must be exercised within ten years of the date of
grant. The authorization to grant options under the plan terminates on
October 31, 2001.
-55-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
The Company's stock option grants vest immediately. If compensation cost for
stock option grants had been determined based on the fair value at the grant
dates consistent with the method prescribed by SFAS No. 123, the Company's net
earnings (loss) and earnings per share would have been adjusted to the pro
forma amounts indicated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Net earnings (loss) as reported $14,233,981 $9,702,725 $(21,667,595)
Net earnings (loss)
Pro forma 14,111,065 9,622,161 (21,705,869)
Basic & diluted earnings (loss) per share -
as reported $ 1.21 $ .80 $ (1.74)
Basic & diluted earnings (loss)
Per share - Pro forma $ 1.20 $ .79 $ (1.75)
</TABLE>
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield .11% .12% .13%
Expected volatility 7.60% 5.04% 7.51%
Risk-free interest rate 6.88% 6.82% 6.36%
Expected life of option 10 yrs. 10 yrs. 10 yrs.
</TABLE>
-56-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
WEIGHTED FAIR VALUE
SHARES AVERAGE OF OPTIONS
UNDER OPTION EXERCISE PRICE GRANTED
------------ -------------- ----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING AT MARCH 25, 1995 30,000 $ 8.83
Granted 13,000 10.00 $4.53
------- ------ -----
OPTIONS OUTSTANDING AT MARCH 30, 1996 43,000 $ 9.19
Granted 13,000 10.50 $5.00
Terminated (17,000) 9.50
------- ------ -----
OPTIONS OUTSTANDING AT MARCH 29, 1997 39,000 $ 9.49
Granted 12,000 11.30 $5.43
Exercised (24,000) 9.72
------- ------ -----
OPTIONS OUTSTANDING AT MARCH 28, 1998 27,000 $10.09
------- ------
OPTIONS EXERCISABLE AT MARCH 28, 1998 27,000 $10.09
------- ------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE (YRS.)
--------------- ----------- -----------------------
<S> <C> <C> <C>
$ 8.40 3,000 4.1
8.80 3,000 5.2
9.30 3,000 6.1
10.00 5,000 7.1
10.50 5,000 8.1
11.30 8,000 9.2
------------ ------ ---
$8.40-$11.30 27,000 7.26
</TABLE>
-57-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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 28, 1998, 410,690
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 28, 1998, 479,157 shares remained unissued
under the plan.
On May 28, 1997, the Board of Directors approved an Amendment to the
Articles of Incorporation to increase the authorized capital stock from
2,000,000 to 20,000,000 shares of Class A common stock and 500,000 to
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 amendment also
reduced the par value of the Class A common stock from $20 per share to $2
per share. Accordingly, share and per share amounts have been restated
throughout the consolidated financial statements.
BUSINESS SEGMENT INFORMATION
The Company's distribution operations include product sales to
independently owned and operated food stores and convenience stores as well
as services directly related to the operation of these stores. Revenue is
recognized when the product is shipped.
The Insurance segment includes operations as a general line insurance
agency, third party claims administration (TPA) and insurance underwriting.
Commissions are recognized as of the policy billing dates, which
approximate effective dates of the applicable policies. TPA revenues are
recognized as services are performed and underwriting revenues are
recognized over the life of the policies.
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.
-58-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
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>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES
Distribution $2,461,405,939 $2,446,409,470 $2,530,111,284
98.88% 98.84% 99.04%
Insurance 15,943,559 16,620,923 16,135,365
.64% .67% .63%
Real estate and finance 11,899,971 11,994,849 8,441,280
.48% .49% .33%
Total $2,489,249,469 $2,475,025,242 $2,554,687,929
============== ============== ==============
100.0% 100.0% 100.0%
============== ============== ==============
OPERATING EARNINGS (LOSS)
Distribution $ 18,758,166 $ 14,205,200 $ (31,464,572)
Insurance 3,592,234 3,881,823 2,890,739
Real estate and finance 5,678,637 2,005,782 984,581
-------------- -------------- --------------
Total operating earnings (loss) 28,029,037 20,092,805 (27,589,252)
Interest (net) (5,786,056) (4,709,080) (4,578,343)
-------------- -------------- --------------
Earnings (loss) before taxes
on income $ 22,242,981 $ 15,383,725 $ (32,167,595)
============== ============== ==============
</TABLE>
-59-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPARTAN STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS IDENTIFIED TO SEGMENTS
Distribution $338,042,665 $323,743,990 $345,649,449
Insurance 29,832,607 28,723,527 26,405,013
Real estate and finance 66,320,011 74,302,366 55,128,402
Less eliminations (28,062,168) (23,038,769) (39,731,451)
------------ ------------ ------------
Total $406,133,115 $403,731,114 $387,451,413
============ ============ ============
DEPRECIATION AND AMORTIZATION
Distribution $ 18,902,042 $ 17,722,415 $ 17,182,016
Insurance 153,137 181,905 258,686
Real estate and finance 2,584,287 2,270,890 1,783,731
------------ ------------ ------------
Total $ 21,639,466 $ 20,175,210 $ 19,224,433
============ ============ ============
CAPITAL EXPENDITURES
Distribution $ 20,482,773 $ 22,478,047 $ 38,858,158
Insurance 425,136 126,596 201,677
Real estate and finance 3,089,475 23,632,869 8,908,789
------------ ------------ ------------
Total $ 23,997,384 $ 46,237,512 $ 47,968,624
============ ============ ============
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-60-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and principal occupations of directors, nominees
for director, and executive officers of Spartan as of June 13, 1998, are
set forth below.
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
Donald J. Koop (61) Chairman of the Board since 1989
and director since 1985;
Chairman of the Board, Family
Fare Inc. (retail grocery
chain)
Russell H. VanGilder, Jr. (64) 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 (51) 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 (65) 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 (57) Director since 1995; Chairman of
the Board, Pine View Golf Club,
Inc., and Turfside, Inc. (golf
course and restaurant)
Glen A. Catt (50) 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 FIVE YEARS
Ronald A. DeYoung (64) Director since 1974; President,
Great Day, Inc. (retail grocery
chain)
Parker T. Feldpausch (66) Director since 1990; President,
G & R Felpausch Co. (retail
grocery chain)
Martin P. Hill (53) Director since 1996; President,
Harding & Hill, Inc. (retail
grocery chain); Director,
Secretary and Treasurer,
Harding's Markets - West, Inc.
(retail grocery chain)
Dan R. Prevo (48) Director since 1996; President,
Prevo's Family Market, Inc.
(retail grocery chain)
James B. Meyer (52) Chief Executive Officer since July
1997; President and director
since August 1996; Chief
Operating Officer from August
1996 to July 1997; Treasurer
since 1994; Senior Vice
President Corporate Support
Services from June 1994 to
August 1996; Chief Financial
Officer and Assistant Secretary
from October 1990 to August
1996; Senior Vice President
from 1981 to 1994
Charles B. Fosnaugh (48) Vice President Development since
April 1998; Senior Vice
President Business Development
and Finance from September
1996 to April 1998; Senior Vice
President Business Development
from July 1994 to September
1996; Vice President Business
Development from 1990 to 1994;
President, Market Development
Corporation since 1990;
President, Valuland Inc. since
1992
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<PAGE>
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
David deS. Couch (47) Vice President Information
Technology since May 1996;
Director of Management
Information Services from
December 1991 to May 1996
Michael D. Frank (46) Vice President Logistics since
July 1997; Vice President
Distribution, Associated
Wholesale Grocers, Inc. from
1987 to July 1997 (supermarket
cooperative)
J. Kevin Schlosser (48) Vice President Sales since
September 1997; Director of
Team Sales, RJR Nabisco Food
Groups, Inc. from
September 1985 to September
1997 (tobacco and food company)
Alex J. DeYonker (48) General Counsel and Assistant
Secretary since May 1995;
partner of Warner Norcross &
Judd LLP since 1988 (law firm)
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. Ms. Dorothy A. Johnson resigned
from the Board of Directors on February 26, 1998. 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 expire
in 2000. The election of directors will be held at the Annual Meeting of
Shareholders currently scheduled to be held on September 24, 1998.
Nominees for election to the Board of Directors are Messrs. Boyd, Carton,
DeYoung, and Koop. 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
that act.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table sets forth the cash and non-cash compensation
earned during the fiscal years ended March 28, 1998 (52 weeks), March 29,
1997 (52 weeks) and March 30, 1996 (53 weeks) by the persons who served as
the Chief Executive Officer of Spartan during the last completed fiscal
year, and the four most highly compensated executive officers (other than
the Chief Executive Officer) of Spartan at the end of the last completed
fiscal year.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
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>
James B. Meyer 1998 $350,494 $106,712 4,000 $6,348
(President and Chief 1997 308,250 24,500 2,000 6,348
Executive Officer) 1996 231,995 37,375 2,000 4,832
Patrick M. Quinn <F4> 1998 $206,910 $0 4,000 $40,905
(Former Chief Executive 1997 373,150 37,497 4,000 108,833
Officer) 1996 353,658 75,000 4,000 107,317
Charles B. Fosnaugh 1998 $195,330 $52,555 2,000 $5,921
(Vice President 1997 190,640 18,688 2,000 5,921
Development) 1996 182,940 37,375 2,000 4,405
Dennis J. Otto <F5> 1998 $142,410 $0 1,000 $149,134
(Former Vice President 1997 132,000 9,000 1,000 6,478
Sales and Marketing) 1996 113,375 19,350 1,000 4,052
David deS. Couch 1998 $127,214 $35,602 1,000 $6,027
(Vice President 1997 120,330 7,500 100 6,824
Information Technology) 1996 101,975 15,000 0 3,934
Michael D. Frank 1998 $88,920 $35,847 0 $3,009
(Vice President Logistics) 1997 N/A N/A N/A N/A
1996 N/A N/A N/A N/A
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<PAGE>
<FN>
- ------------------
<F1> The amounts listed in this column include bonus amounts elected
under the 1991 Stock Bonus Plan, as amended, plus an amount equal
to 30 percent of such bonus amounts to be received in Class A
Shares. The amounts listed in this column also include cash
bonuses accrued in fiscal year 1998 and paid in the following
year pursuant to the Company's Annual Incentive Plan.
<F2> All reported awards were under the 1991 Stock Option Plan, as
amended (the "1991 Stock Option Plan"), and have been adjusted to
reflect the results of the Stock Split. These awards have vested
and are exercisable at the date of grant.
<F3> The compensation listed in this column for fiscal year 1998
consists of: (i) amounts paid by Spartan for split dollar and
term life insurance; (ii) Spartan's matching contributions under
its Savings Plus Plan; and (iii) amounts paid or accrued in
connection with retirement or termination of employment.
Supplemental Executive Retirement Plan. The amounts included for
each such factor for fiscal year 1998 are:
(i) (ii) (iii)
------ ------ -------
Mr. Meyer $1,598 $4,750 $0
Mr. Quinn 2,611 4,250 34,044
Mr. Fosnaugh 1,171 4,750 0
Mr. Otto 1,808 4,256 143,070
Mr. Couch 2,074 3,953 0
Mr. Frank 3,009 0 0
<F4> Mr. Quinn retired from Spartan on July 15, 1998.
<F5> Mr. Otto resigned from Spartan on May 25, 1998.
</FN>
</TABLE>
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 28, 1998, to the named
executive officers and the unexercised options held by them as of the end
of the fiscal year.
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<PAGE>
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR <F1>
<CAPTION>
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------
PERCENT POTENTIAL
NUMBER OF TOTAL REALIZABLE VALUE AT
OF OPTIONS ASSUMED ANNUAL
SECURITIES GRANTED TO RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE EXPIRA- APPRECIATION
OPTIONS IN FISCAL PRICE PER TION FOR OPTION TERM
NAME GRANTED YEAR SHARE DATE 5% 10%
---- ------- --------- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
James B. Meyer 4,000 33.33% $11.30 5/2007 $28,428 $72,036
Patrick M. Quinn 4,000 33.33 11.30 5/2007 28,428 72,036
Charles B. Fosnaugh 2,000 16.66 11.30 5/2007 14,214 36,018
Dennis J. Otto 1,000 8.33 11.30 5/2007 7,107 18,009
David deS. Couch 1,000 8.33 11.30 5/2007 7,107 18,009
Michael D. Frank 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 22, 1997, as adjusted for
the Stock Split. 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 are exercisable at the date of grant. 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.
</FN>
</TABLE>
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<PAGE>
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF SHARES FISCAL YEAR-END FISCAL YEAR-END <F1>
ACQUIRED VALUE --------------- --------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James B. Meyer 0 $ 0 14,000 0 $ 19,000 $ 0
Patrick M. Quinn 20,000 38,000 0 0 0 0
Charles B. Fosnaugh 0 0 9,000 0 11,600 0
Dennis J. Otto <F2> 0 0 3,000 0 2,100 0
David deS. Couch 0 0 1,000 0 0 0
Michael D. Frank 0 0 0 0 0 0
<FN>
- ----------------
<F1> Represents the difference between the exercise price of the options
for the Class A Shares and the Trading Value of $11.30 per share at
fiscal year-end.
<F2> All options held by Mr. Otto were exercised upon his resignation from
Spartan on May 25, 1998.
</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 Mr. Meyer, Spartan has not entered into any employment agreement
with any officer.
On August 14, 1996, the Board of Directors appointed Mr. Meyer
President and Chief Operating Officer of Spartan, and as of that date Mr.
Meyer entered into an employment agreement with Spartan. Under the
employment agreement, Mr. Meyer's annual base salary is to be 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
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<PAGE>
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 exer-
cisable for 90 days after the date of severance, all risks of forfeiture appli-
cable 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
Prior to April 1, 1998, the noncontributory, defined benefit plans of
Spartan (the "Pension Plan") provided benefits to Associates upon retirement
determined primarily by average final compensation. Effective as of April 1,
1998, the benefit formula was redesigned, utilizing a cash balance approach
which does not provide benefits determined primarily by average final
compensation.
PENSION PLAN BEFORE APRIL 1, 1998
The following table illustrates estimated annual benefits payable
under 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 nonqualified deferred compensation
to participants, including benefits that would otherwise be denied participants
by reason of certain limitations on qualified defined benefit plans and the
Internal Revenue Code of 1986, as amended.
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.
<TABLE>
PENSION PLAN TABLE
<CAPTION>
AVERAGE
REMUNERATION YEARS OF BENEFIT SERVICE
- ---------------- ---------------------------------------------------------------------------------
5 10 15 20 25 30
- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$100,000 $ 8,300 $16,600 $ 24,890 $ 33,190 $ 41,400 $ 49,790
200,000 17,550 35,100 52,640 70,190 87,740 105,290
300,000 26,800 53,600 80,390 107,190 133,990 160,790
400,000 36,050 72,100 108,140 144,190 180,240 216,290
500,000 45,300 90,600 135,890 181,190 226,490 271,790
</TABLE>
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<PAGE>
The compensation shown under the heading "Annual Compensation" in
the Summary Compensation Table on page 52 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 28, 1998,
are:
<TABLE>
<CAPTION>
CREDITED YEARS OF SERVICE
-------------------------
<S> <C> <C>
James B. Meyer 25
Patrick M. Quinn 13
Charles B. Fosnaugh 8
Dennis J. Otto 8
David deS. Couch 12
Michael D. Frank -
</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. For benefits accrued as of March 31, 1998, the
annual benefit is equal to the sum of (i) 1.2 percent of the participant's
annual compensation plus 0.65 percent of the participant's average
compensation in excess of the amount which would be used to compute Social
Security benefits, multiplied by the participant's years of benefit service
(up to 30 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 30 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.)
PENSION PLAN AS OF APRIL 1, 1998
Effective as of April 1, 1998, the Pension Plan benefit formula was
redesigned, utilizing a cash balance approach. Under the new cash balance
formula, principal credits are added annually to a participant's "account."
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<PAGE>
There are two types of principal credits -- basic credits and transition
credits. The basic credit equals a percentage of the participant's
compensation based upon a participant's years of vested service at the
beginning of each calendar year in accordance with the following table:
<TABLE>
YEARS OF VESTED SERVICE
AS OF JANUARY 1 PERCENTAGE OF PARTICIPANT'S COMPENSATION
<S> <C> <C>
0 - 5 4%
6 - 10 5
11 - 15 6
16 - 20 7
21 - 25 8
26 or more 9
</TABLE>
In addition to the basic credit, a participant may be eligible to
receive a transition credit equal to a percentage of the participant's
compensation based upon the participant's age on the first day of the
calendar year as follows:
<TABLE>
PARTICIPANT'S AGE AS OF
JANUARY 1 PERCENTAGE OF PARTICIPANT'S COMPENSATION
<S> <C> <C>
Under 35 0%
35 - 39 2
40 - 44 4
45 - 49 6
50 - 54 8
55 and over 10
</TABLE>
Transition credits will be available for the 1998 - 2007 calendar
years. However, if a participant has fewer than ten years of benefit service
as of December 31, 1997, the participant is eligible for transition credits
only for the number of calendar years equal to the participant's complete years
of benefit service as of December 31, 1997.
In addition to the principal credits, interest credits are also added
annually to a participant's "account" based upon the participant's account
balance as of the last day of the immediately preceding calendar year. The
interest rate used for this purpose is the average of 30-year Treasury constant
maturities yields over the 12 months ending in November of the prior calendar
year.
Upon termination of employment, a participant will be entitled to
his or her vested accrued benefit which can be distributed either in a monthly
annuity or in a lump sum. If distributed in a lump sum, the participant's
benefit generally will be equal to the participant's account balance. For
persons who are participants prior to April 1, 1998, the Pension Plan provides
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that the retirement benefit will not be less than the benefit accrued as of
March 31, 1998.
As of March 28, 1998, the estimated benefit payable upon retirement
at normal retirement age (age 65) for Messrs. Meyer, Fosnaugh, and Couch is
expected to be $3,250,000, $1,050,000, and $870,000, respectively. Messrs.
Quinn and Otto terminated employment with Spartan either before or shortly
after the April 1, 1998 effective date of the cash balance redesign of the
Pension Plan. As a result, they do not have a new cash balance benefit.
However, Messrs. Quinn and Otto remain eligible for benefits under the Pension
Plan in accordance with the formula in effect prior to April 1, 1998. Mr.
Frank is not yet a participant in 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 each meeting of the Board or a
committee of the Board. 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 "Item 13 - Certain Relationships and Related
Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of the Class A Shares as of May 23, 1998 of (i) each
of the directors and nominees for director of Spartan, (ii) each of the
named executive officers of Spartan, and (iii) all directors and executive
officers of Spartan as a group. As of May 23, 1998, Family Fare Inc. is
the only person known to the Company to be the beneficial owner of more
than five percent of the Class A Shares. Mr. Donald J. Koop, Chairman of
the Board of Spartan, also serves as Chairman of the Board of Family Fare
Inc.
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP <F1> PERCENT OF CLASS
- ------------------------ ------------------------- ----------------
<S> <C> <C>
Donald J. Koop 592,890 5.17%
Parker T. Feldpausch 508,390 4.44
Russell H. VanGilder, Jr. 507,410 4.43
Martin P. Hill 330,090 2.88
Dan R. Prevo 259,104 2.26
Ronald A. DeYoung 224,130 1.96
Glen A. Catt 188,190 1.64
Roger L. Boyd 169,310 1.48
James B. Meyer <F2> 36,395 <F*>
Patrick M. Quinn <F3> 30,500 <F*>
Charles B. Fosnaugh <F2> 19,161 <F*>
Dennis J. Otto <F4> 4,000 <F*>
David deS. Couch <F2> 2,755 <F*>
Michael D. Frank <F2> 2,042 <F*>
James G. Buick 1,000 <F*>
John S. Carton 1,000 <F*>
All Directors and Executive
Officers as a group <F2> 2,878,736 25.12%
<FN>
- --------------------------------
<F*> Less than one percent.
<F1> Except for Messrs. Buick, Carton and Meyer, the Class A Shares
reported as beneficially owned by each director are directly owned by
a corporation that is a Customer of 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 "Item 10 - Directors and Executive Officers of the Registrant"
above. Mr. Meyer and the named executive officers directly own the
Class A Shares reported to be owned by each and hold the sole voting
and dispositive power with respect to those shares.
<F2> Includes shares that may be acquired through the exercise of stock
options that 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
13, 1998.
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<PAGE>
Mr. Meyer 18,000
Mr. Fosnaugh 10,000
Mr. Couch 2,000
Mr. Frank 1,000
All Executive Officers as a group 32,000
<F3> Mr. Quinn retired from Spartan on July 15, 1997.
<F4> Mr. Otto resigned from Spartan on May 25, 1998.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Spartan's directors (except 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 that 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 or businesses 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 and practice 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 that are not affiliated with any
director.
For any other transaction in which a director has an interest
(including, without limitation, the Company's leasing, purchasing, or
selling any property involving any loan or guarantee of an obligation by
the Company in a transaction involving a Related Entity), it is the
Company's policy and practice that the director shall proceed with the
transaction only if the material facts of the transaction and the
director's interest in the transaction have been disclosed to the Board,
the Board determines that it is fair to the Company, and the transaction is
approved by the affirmative vote of a majority of the Board of Directors
who have no interest in the transaction. Each such transaction is made on
terms no less favorable to the Company than those offered generally to
Customers that are not affiliated with any director.
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<PAGE>
During the fiscal year ended March 28, 1998, in the aggregate,
Related Entities paid to the Company approximately $595,197,000 for grocery
and related products (23.9 percent of the Company's total net sales for
fiscal year 1998). No single Related Entity accounted for more than
5.2 percent of the Company's total net sales in fiscal year 1998. In
connection with the purchases of such products, the Company paid to the
Related Entities, 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 "Item 10 - Directors and Executive
Officers of the Registrant."
In addition, in the aggregate, Related Entities:
(a) in the fiscal year ended March 28, 1998, paid to the
Company insurance premiums and commissions equal to approximately
$3,700,000, 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 28, 1998, made lease
payments to the Company in the amount of approximately
$4,146,000, or 35 percent of all lease payments made (no single
Related Entity accounted for more than 17 percent of lease
payments made).
Management believes all such leases have been made in the
ordinary course, on 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 were delinquent in payment or in default as of March 28, 1998.
At March 28, 1998, the Company had an outstanding loan of
$100,000 to Mr. Kevin Schlosser, Vice President Sales, which was paid in
full on May 1, 1998. As of the end of fiscal year 1998, no other loans
were outstanding between the Company and any director, executive officer,
or Related Entity. The Company had guaranteed payment of indebtedness to
financial institutions aggregating $6,600,000 at March 28, 1998, on behalf
of Related Entities. In the fiscal year ended March 28, 1998, the Company
incurred construction costs of approximately $3,813,000 on a project to
construct a retail store that is being leased to a Related Entity.
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS.
Independent Auditors' Report of Deloitte & Touche LLP dated
June 10, 1998.
Consolidated Balance Sheets at March 28, 1998 and March 29,
1997
Consolidated Statements of Operations for each of the three
years in the period ended March 28, 1998
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended March 28, 1998
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 28, 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
SCHEDULE DOCUMENT
II Valuation and Qualifying Accounts
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<PAGE>
3. EXHIBITS.
EXHIBIT
NUMBER DOCUMENT
------ --------
3.1<F*> Restated Articles of Incorporation of Spartan Stores,
Inc.
3.2 Certificate of Amendment to Articles of
Incorporation of Spartan Stores, Inc.
3.3<F*> Bylaws of Spartan Stores, Inc.
4.1<F*> Articles III, V, VI and IX of the Restated Articles of
Incorporation--Included in Exhibit 3.1 and incorporated
herein by reference.
4.2<F*> Articles II, III, IV, VII, VIII and IX of the Bylaws--
Included in Exhibit 3.3 and incorporated herein by
reference.
4.3(a)<F*> Form of Spartan Stores, Inc. Stock
Subscription Agreement--Shareholder
Customers.
4.3(b) Form of Spartan Stores, Inc. Stock
Subscription Agreement--Capistar Customers.
Previously filed as an exhibit to the
Registrant's Amendment No. 2 to the
Registration Statement on Form S-1 filed
January 23, 1992. Here incorporated by
reference.
4.4<F*> Form of Spartan Stores, Inc. Customer Agreement.
4.5<F*> Note Purchase Agreement between Spartan
Stores, Inc. and Teachers Insurance and
Annuity Association of America, Nationwide
Life Insurance Company and West Coast Life
Insurance Company.
4.6<F*> Note Agreement between Spartan Stores, Inc. and The
Ohio National Life Insurance Company and United of
Omaha Life Insurance Company.
4.7<F*> Note Agreement between Spartan Stores, Inc. and
Massachusetts Mutual Life Insurance Company, The
Franklin Life Insurance Company and The Columbus Mutual
Life Insurance Company.
4.8<F*> Form of Spartan Stores, Inc. Class A Common Stock
Certificate.
-75-
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
4.9 Note Agreement between Spartan Stores, Inc. and
United of Omaha Life Insurance Company, United
World Life Insurance Company, Companion Life
Insurance Company, Principal Mutual Life Insurance
Company and Nippon Life Insurance Company, dated
as of January 15, 1993. Previously filed as an
exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 27,
1993. Here incorporated by reference.
4.10 First Amendment to Note Purchase Agreement between
Spartan Stores, Inc. and Teachers Insurance and
Annuity Association of America, Nationwide Life
Insurance Company and West Coast Life Insurance
Company, dated as of March 29, 1996. Previously
filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 30, 1996. Here incorporated by reference.
4.11 First Amendment and Waiver to Note Agreements
between Spartan Stores, Inc. and Principal Mutual
Life Insurance Company, Nippon Life Insurance
Company of America, United of Omaha Life Insurance
Company, Companion Life Insurance Company and
United World Life Insurance Company, dated as of
June 20, 1996. Previously filed as an exhibit to
the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 30, 1996. Here
incorporated by reference.
4.12 Credit Agreement among Spartan Stores, Inc.,
Michigan National Bank, and Michigan National Bank
and Old Kent Bank, NBD Bank, Harris Trust and
Savings Bank and National City Bank of Columbus,
dated December 23, 1996. Previously filed as an
exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 4, 1997.
Here incorporated by reference.
10.1<F*> Note Purchase Agreement--Included as Exhibit
4.5 and incorporated herein by reference.
10.2<F*> Note Agreement--Included as Exhibit 4.6 and
incorporated herein by reference.
10.3<F*> Note Agreement--Included as Exhibit 4.7 and
incorporated herein by reference.
10.4<F*> Warehouse Lease Agreement, dated October 6,
1988, between Warehouse Systems Co. and
Spartan Stores, Inc.
-76-
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
10.5<F*> Warehouse Lease Agreement, dated October 14,
1975, between Connecticut Mutual Life
Insurance Company and Spartan Stores, Inc.
10.6<F*> Warehouse Lease Agreement, dated November 11,
1988, between Norman J. Leven and L &
L/Jiroch Distributing Company.
10.7<F*> Computer Lease Agreement, dated May 30, 1989,
between Atlantic Computer Systems, Inc. and
Spartan Stores, Inc.
10.8<F*> Equipment Lease Agreement, dated March 3,
1988, between PHH Financial Services, Inc.
and Spartan Stores, Inc.
10.9<F**> Employment Agreement, dated June 1, 1987, between
Spartan Stores, Inc. and Patrick M. Quinn. Previously
filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here
incorporated by reference.
10.10<F**> Spartan Stores, Inc. 1991 Stock Bonus Plan.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 29, 1997. Here incorporated by
reference.
10.11<F**> Spartan Stores, Inc. 1991 Stock Option Plan as
amended. Previously filed as an exhibit to the
Registrant's Form S-1 Registration Statement filed
July 23, 1993. Here incorporated by reference.
10.12<F**> Spartan Stores, Inc. 1991 Associate Stock Purchase
Plan. Previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 29, 1997. Here
incorporated by reference.
10.13<F**> Spartan Stores, Inc. Supplemental Executive
Retirement Plan. Previously filed as an exhibit
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 29, 1997. Here
incorporated by reference.
10.14 Note Agreement--Included as Exhibit 4.9.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 27, 1993. Here incorporated by
reference.
-77-
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
10.15 Warehouse Lease Agreement, dated November 8, 1993,
between Walker Realty Co. and J.F. Walker Company,
Inc. Previously filed as an exhibit to the
Registrant's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 filed March 16,
1994. Here incorporated by reference.
10.16 First Amendment to Note Purchase Agreement--Included
as Exhibit 4.10. Here incorporated by reference.
10.17 First Amendment and Waiver to Note Agreements--
Included as Exhibit 4.11. Here incorporated by
reference.
10.18 Employment Agreement, dated August 14, 1996,
between Spartan Stores, Inc. and James B. Meyer.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 29, 1997. Here incorporated by
reference.
10.19<F**> Spartan Stores, Inc. Long-Term Incentive
Plan.
10.20<F**> Spartan Stores, Inc. Annual Incentive
Plan.
21 Subsidiaries of Registrant. Previously filed as
an exhibit to the Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on
Form S-1 filed March 16, 1994. Here incorporated
by reference.
23 Consent and Report on Schedule of Deloitte and
Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
<F*> Previously filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here incorporated by
reference.
<F**> These documents are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
(b) Reports on Form 8-K:
None.
-78-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SPARTAN STORES, INC.
(Registrant)
By /S/ JAMES B. MEYER
James B. Meyer
President and Chief Executive Officer
Date: June 26, 1998
-79-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
June 26, 1998 By /S/ DONALD J. KOOP*
Donald J. Koop
Chairman of the Board and Director
June 26, 1998 By /S/ RUSSELL H. VANGILDER, JR.*
Russell H. VanGilder, Jr.
Vice Chairman of the Board and Director
June 26, 1998 By /S/ ROGER L. BOYD*
Roger L. Boyd
Secretary of the Board and Director
June 26, 1998 By /S/ JAMES G. BUICK*
James G. Buick
Director
June 26, 1998 By /S/ JOHN S. CARTON*
John S. Carton
Director
June 26, 1998 By _______________________________
Glen A. Catt
Director
June 26, 1998 By /S/ RONALD A. DEYOUNG*
Ronald A. DeYoung
Director
June 26, 1998 By /S/ PARKER T. FELDPAUSCH*
Parker T. Feldpausch
Director
June 26, 1998 By /S/ MARTIN P. HILL*
Martin P. Hill
Director
-80-
<PAGE>
June 26, 1998 By /S/ JAMES B. MEYER
James B. Meyer
Director
June 26, 1998 By /S/ DAN R. PREVO*
Dan R. Prevo
Director
June 26, 1998 By /S/ CHARLES B. FOSNAUGH
Charles B. Fosnaugh
Vice President Development
(Principal Financial and Accounting
Officer)
June 26, 1998 *By /S/ JAMES B. MEYER
James B. Meyer
Attorney-in-Fact
-81-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
As of the date of this Form 10-K, Spartan has not yet furnished,
for the fiscal year ending March 28, 1998, an annual report to its
shareholders. Spartan plans to furnish an annual report to its
shareholders subsequent to the filing of this Form 10-K. Spartan shall
furnish copies of such annual report to the Securities and Exchange
Commission when it is sent to the shareholders.
Spartan also shall furnish supplementally to the Securities and
Exchange Commission a copy of any proxy soliciting material sent by Spartan
to its shareholders in connection with the Annual Meeting of Shareholders
currently scheduled to be held on September 24, 1998.
The foregoing material shall not be deemed to be "filed" with the
Securities and Exchange Commission or otherwise subject to the liabilities
of Section 18 of the Securities and Exchange Act of 1934.
-82-
<PAGE>
<TABLE>
SCHEDULE II
SPARTAN STORES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS <FA> END OF YEAR
- -----------------------------------------------------------------------------------------------------------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C> <C>
Year ended 3/30/96 $ 1,960,000 $ 2,252,012 $ 1,577,012 $ 2,635,000
Year ended 3/29/97 $ 2,635,000 $ 1,710,556 $ 1,186,588 $ 3,158,968
Year ended 3/28/98 $ 3,158,968 $ 2,024,205 $ 3,037,691 $ 1,810,000
<FN>
<FA> Represents the write-off of uncollectible accounts
</FN>
</TABLE>
F-1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
------ --------
3.1<F*> Restated Articles of Incorporation of Spartan Stores,
Inc.
3.2 Certificate of Amendment to Articles of
Incorporation of Spartan Stores, Inc.
3.3<F*> Bylaws of Spartan Stores, Inc.
4.1<F*> Articles III, V, VI and IX of the Restated Articles of
Incorporation--Included in Exhibit 3.1 and incorporated
herein by reference.
4.2<F*> Articles II, III, IV, VII, VIII and IX of the Bylaws--
Included in Exhibit 3.3 and incorporated herein by
reference.
4.3(a)<F*> Form of Spartan Stores, Inc. Stock
Subscription Agreement--Shareholder
Customers.
4.3(b) Form of Spartan Stores, Inc. Stock
Subscription Agreement--Capistar Customers.
Previously filed as an exhibit to the
Registrant's Amendment No. 2 to the
Registration Statement on Form S-1 filed
January 23, 1992. Here incorporated by
reference.
4.4<F*> Form of Spartan Stores, Inc. Customer Agreement.
4.5<F*> Note Purchase Agreement between Spartan
Stores, Inc. and Teachers Insurance and
Annuity Association of America, Nationwide
Life Insurance Company and West Coast Life
Insurance Company.
4.6<F*> Note Agreement between Spartan Stores, Inc. and The
Ohio National Life Insurance Company and United of
Omaha Life Insurance Company.
4.7<F*> Note Agreement between Spartan Stores, Inc. and
Massachusetts Mutual Life Insurance Company, The
Franklin Life Insurance Company and The Columbus Mutual
Life Insurance Company.
4.8<F*> Form of Spartan Stores, Inc. Class A Common Stock
Certificate.
1
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
4.9 Note Agreement between Spartan Stores, Inc. and
United of Omaha Life Insurance Company, United
World Life Insurance Company, Companion Life
Insurance Company, Principal Mutual Life Insurance
Company and Nippon Life Insurance Company, dated
as of January 15, 1993. Previously filed as an
exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 27,
1993. Here incorporated by reference.
4.10 First Amendment to Note Purchase Agreement between
Spartan Stores, Inc. and Teachers Insurance and
Annuity Association of America, Nationwide Life
Insurance Company and West Coast Life Insurance
Company, dated as of March 29, 1996. Previously
filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 30, 1996. Here incorporated by reference.
4.11 First Amendment and Waiver to Note Agreements
between Spartan Stores, Inc. and Principal Mutual
Life Insurance Company, Nippon Life Insurance
Company of America, United of Omaha Life Insurance
Company, Companion Life Insurance Company and
United World Life Insurance Company, dated as of
June 20, 1996. Previously filed as an exhibit to
the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 30, 1996. Here
incorporated by reference.
4.12 Credit Agreement among Spartan Stores, Inc.,
Michigan National Bank, and Michigan National Bank
and Old Kent Bank, NBD Bank, Harris Trust and
Savings Bank and National City Bank of Columbus,
dated December 23, 1996. Previously filed as an
exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 4, 1997.
Here incorporated by reference.
10.1<F*> Note Purchase Agreement--Included as Exhibit
4.5 and incorporated herein by reference.
10.2<F*> Note Agreement--Included as Exhibit 4.6 and
incorporated herein by reference.
10.3<F*> Note Agreement--Included as Exhibit 4.7 and
incorporated herein by reference.
10.4<F*> Warehouse Lease Agreement, dated October 6,
1988, between Warehouse Systems Co. and
Spartan Stores, Inc.
2
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
10.5<F*> Warehouse Lease Agreement, dated October 14,
1975, between Connecticut Mutual Life
Insurance Company and Spartan Stores, Inc.
10.6<F*> Warehouse Lease Agreement, dated November 11,
1988, between Norman J. Leven and L &
L/Jiroch Distributing Company.
10.7<F*> Computer Lease Agreement, dated May 30, 1989,
between Atlantic Computer Systems, Inc. and
Spartan Stores, Inc.
10.8<F*> Equipment Lease Agreement, dated March 3,
1988, between PHH Financial Services, Inc.
and Spartan Stores, Inc.
10.9<F**> Employment Agreement, dated June 1, 1987, between
Spartan Stores, Inc. and Patrick M. Quinn. Previously
filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here
incorporated by reference.
10.10<F**> Spartan Stores, Inc. 1991 Stock Bonus Plan.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 29, 1997. Here incorporated by
reference.
10.11<F**> Spartan Stores, Inc. 1991 Stock Option Plan as
amended. Previously filed as an exhibit to the
Registrant's Form S-1 Registration Statement filed
July 23, 1993. Here incorporated by reference.
10.12<F**> Spartan Stores, Inc. 1991 Associate Stock Purchase
Plan. Previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 29, 1997. Here
incorporated by reference.
10.13<F**> Spartan Stores, Inc. Supplemental Executive
Retirement Plan. Previously filed as an exhibit
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 29, 1997. Here
incorporated by reference.
10.14 Note Agreement--Included as Exhibit 4.9.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 27, 1993. Here incorporated by
reference.
3
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
10.15 Warehouse Lease Agreement, dated November 8, 1993,
between Walker Realty Co. and J.F. Walker Company,
Inc. Previously filed as an exhibit to the
Registrant's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 filed March 16,
1994. Here incorporated by reference.
10.16 First Amendment to Note Purchase Agreement--Included
as Exhibit 4.10. Here incorporated by reference.
10.17 First Amendment and Waiver to Note Agreements--
Included as Exhibit 4.11. Here incorporated by
reference.
10.18 Employment Agreement, dated August 14, 1996,
between Spartan Stores, Inc. and James B. Meyer.
Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended March 29, 1997. Here incorporated by
reference.
10.19<F**> Spartan Stores, Inc. Long-Term Incentive
Plan.
10.20<F**> Spartan Stores, Inc. Annual Incentive
Plan.
21 Subsidiaries of Registrant. Previously filed as
an exhibit to the Registrant's Post-Effective
Amendment No. 1 to the Registration Statement on
Form S-1 filed March 16, 1994. Here incorporated
by reference.
23 Consent and Report on Schedule of Deloitte and
Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
<F*> Previously filed as an exhibit to the Registrant's Form S-1
Registration Statement filed July 18, 1991. Here incorporated by
reference.
<F**> These documents are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
4
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit and Non-Profit Corporations
PURSUANT TO THE PROVISIONS OF ACT 284, PUBLIC ACTS OF 1972, (PROFIT
CORPORATIONS), OR ACT 162, PUBLIC ACTS OF 1982 (NONPROFIT CORPORATIONS),
THE UNDERSIGNED CORPORATION EXECUTES THE FOLLOWING CERTIFICATE:
1. The present name of the corporation is: SPARTAN STORES, INC.
2. The corporation identification number assigned by
the Bureau is: 185-372
3. The location of the registered office is: 850 76th Street, S.W.,
Grand Rapids, Michigan 49508
<PAGE>
4. Article III of the Restated Articles of Incorporation is hereby
amended to read as follows:
ARTICLE III
The total authorized capital stock of the corporation is Twenty
Million (20,000,000) shares of Class A common stock with the par value of
$2 per share and Five Million (5,000,000) shares of Class B common stock.
The following provisions are applicable to the authorized stock of the
corporation:
A. Provisions Applicable to Class A Common Stock:
1. Each holder of Class A common stock shall be entitled to one
vote for each share held.
2. Each share of common stock outstanding at the time these
Restated Articles become effective shall constitute one share of Class A
common stock.
B. Provisions Applicable to Class B Common Stock:
1. The Board of Directors may at any time, and from time to
time, provide for the issuance of 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 the Class B common stock, such voting,
distribution, dividend, liquidation, conversion, participation, redemption,
and other rights, preferences, limitations, and restrictions, if any, as
shall be stated in the resolution or resolutions providing for the issuance
thereof, and as are not inconsistent with these Articles of Incorporation,
or any amendments thereto.
2. Except as provided in the resolution or resolutions
providing for the issuance of shares, all shares of Class B common stock
and any series thereof shall be identical.
3. Shares of Class B common stock 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.
C. Provisions Applicable to All Stock:
1. The holders of Class A common stock shall 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
-2-
<PAGE>
to the preferential, participation, and other rights of holders of shares
of Class B common stock, if any, provided in the resolution or resolutions
providing for the issuance of such shares.
2. In the event of the voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, the holders of the Class A
common stock shall be entitled to receive all of the remaining assets of
the corporation ratably in proportion to the number of shares of Class A
common stock held by them, but subject to the preferential, participation,
or other rights of holders of shares of Class B common stock, if any,
provided in the resolution or resolutions providing for the issuance of
such shares.
3. The Board of Directors may from time to time authorize the
payment of rebates to customers of the corporation upon such terms and
conditions as the Board of Directors may from time to time determine. Any
such rebate shall not be deemed to be a dividend or distribution upon the
corporation's capital stock.
4. The holders of shares of the corporation's capital stock
shall not have any preemptive right to acquire the corporation's unissued
shares.
5. The foregoing amendment to the Restated Articles of
Incorporation was duly adopted on the 15th day of July, 1997 by a majority
vote of all the shareholders at a meeting.
Signed this 15th day of July, 1997
By /s/Charles B. Fosnaugh
Charles B. Fosnaugh
Senior Vice President Business
Development and Finance
-3-
<PAGE>
EXHIBIT 10.19
SPARTAN STORES, INC.
LONG-TERM INCENTIVE PLAN
<PAGE>
SECTION 1
ESTABLISHMENT AND PURPOSES OF PLAN
1.1 ESTABLISHMENT OF PLAN. Spartan Stores, Inc., a Michigan
corporation, hereby establishes its Long-Term Incentive Plan (the "Plan")
for its corporate and Subsidiary officers, director-level and other key
employees. The Plan permits the grant and award of shares of the Company's
Common Stock.
1.2 PURPOSES OF PLAN. The purposes of the Plan are to motivate
Participants toward the achievement of specific long-term financial goals
of the Company, to create a sense of ownership in the Company among
Participants and to attract and retain top quality key executives and other
key associates of the Company. The Plan is further intended to provide
flexibility to the Company in structuring long-term incentive compensation
to best promote the foregoing objectives.
1.3. PLAN DOCUMENT. This instrument, as amended from time to time,
constitutes the governing document of the Plan.
1.4 EFFECTIVE DATE. The Plan is effective as of March 30, 1997. The
Plan shall remain in effect until terminated by the Board of Directors of
the Company. Unless earlier terminated by the Board, the Plan shall
terminate as of the end of the Company's Fiscal Year ending in the year
2008. No Stock Award shall be granted under the Plan after such date.
1.5 INCENTIVE COMPENSATION PLAN. The Plan is an incentive
compensation program for eligible Employees. Because the Plan does not
provide welfare benefits and does not provide for the deferral of
compensation until termination of employment, it is established with the
intent and understanding that it is not an employee benefit plan within the
meaning of the federal Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
SECTION 2
DEFINITIONS
The following words have the following meanings unless a
different meaning is plainly required by the context:
2.1 ACT. "Act" means the Securities Exchange Act of 1934, as
amended.
2.2 ANNUAL BASE SALARY. "Annual Base Salary" means the Participant's
annualized weekly salary as of the end of the Fiscal Year without regard to
incentive compensation under this Plan or other benefits or incentive
compensation plans maintained by the Company.
<PAGE>
2.3 BENEFICIARY. "Beneficiary" means the individual, trust or other
entity designated by the Participant to receive any Stock Award payable
with respect to the Participant under the Plan after the Participant's
death. A Participant may designate or change a Beneficiary by filing a
signed designation with the Committee in a form approved by the Committee.
A Participant's will is not effective for this purpose. If a designation
has not been completed properly and filed with the Committee or is
ineffective for any other reason, the Beneficiary shall be the
Participant's Surviving Spouse, if any. If there is no effective
designation and the Participant does not have a Surviving Spouse, the
remaining Stock Award under this Plan, if any, shall be paid to the
Participant's estate.
2.4 BOARD. "Board" means the Board of Directors of the Company.
2.5 CHANGE IN CONTROL. "Change in Control" means (a) the sale,
lease, exchange or other transfer of substantially all of the Company's
assets (in one transaction or in a series of related transactions) to, or
the merger or consolidation of the Company with, a corporation that is not
controlled by the Company; or (b) a change in control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Act; PROVIDED THAT,
without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Act), other than a Subsidiary or any employee benefit plan
of the Company or a Subsidiary or any entity holding Common Stock pursuant
to the terms of any such employee benefit plan, is or becomes the
beneficial owner (as defined in Rule 13(d)-3 under the Act), directly or
indirectly, of securities of the Company representing twenty percent (20%)
or more of the combined voting power of the Company's then outstanding
securities; or (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board cease for any
reason to constitute at least a majority of the Board, unless the election,
or nomination for election by the Company's shareholders, of each new
director was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors at the beginning of the
period. For purposes of this Section 2.5, it shall be assumed that the
Company is subject to the portions of the Act and the rules thereunder
specified above.
2.6 CODE. "Code" means the Internal Revenue Code of 1986, as
amended.
2.7 COMMITTEE. "Committee" means the Compensation Committee of the
Board or such other committee as the Board designates to administer this
Plan. The Committee shall consist of at least two persons, all of whom are
"non-employee directors" as defined in Rule 16b-3 under the Act and
"outside directors" as defined in Section 162(m) of the Code.
2
<PAGE>
2.8 COMMON STOCK. "Common Stock" means the Company's Class A Common
Stock, $2 par value per share.
2.9 COMPANY. "Company" means Spartan Stores, Inc., a Michigan
corporation, and its Subsidiaries.
2.10 FISCAL YEAR. "Fiscal Year" means the financial reporting and
taxable year of the Company.
2.11 NORMAL RETIREMENT DATE. "Normal Retirement Date" means the date
the Participant attains age 65.
2.12 PARTICIPANT. "Participant" means an employee of the Company or
any Subsidiary designated by the Committee to participate in this Plan for
a Performance Period pursuant to Section 3.2 of this Plan.
2.13 PERFORMANCE LEVELS. "Performance Levels," including Minimum
Performance Levels, Target Performance Levels and Maximum Performance
Levels, shall have the meanings set forth in Section 5.2 of this Plan.
2.14 PERFORMANCE PERIOD. "Performance Period" means a three-year
period beginning on the first day of each of the Company's Fiscal Years
during the term of this Plan. A new Performance Period will begin on the
first day of each of the Company's Fiscal Years during the term of this
Plan. The first Performance Period shall begin March 30, 1997.
2.15 RETIREMENT. "Retirement" means termination of employment on or
after the Participant's Normal Retirement Date.
2.16 RETURN ON SHAREHOLDERS' EQUITY. "Return on Shareholders' Equity"
means the Company's net earnings at the end of each Fiscal Year in a
relevant Performance Period divided by the Company's shareholders' equity
as of the date immediately preceding the beginning of the Fiscal Year in
such Performance Period, as determined from the Company's audited financial
statements at the end of the Fiscal Year.
2.17 STOCK AWARD. "Stock Award" means an award of Common Stock
awarded to a Participant pursuant to Section 6 of the Plan.
2.18 SUBSIDIARY. "Subsidiary" means any corporation or other entity
of which fifty percent (50%) or more of the outstanding voting stock or
voting ownership interest is directly or indirectly owned or controlled by
the Company or by one or more Subsidiaries of the Company, except that for
purposes of this Plan, the term "Subsidiary" does not include Spartan
Insurance Company, Ltd., Shield Insurance Services, Inc. and Shield Benefit
Administrators, Inc.
3
<PAGE>
2.19 SURVIVING SPOUSE. "Surviving Spouse" means the husband or wife
of the Participant at the time of the Participant's death who survives the
Participant. If the Participant and the spouse die under circumstances
that make the order of their deaths uncertain, it shall be presumed for
purposes of this Plan that the Participant survived the spouse.
2.20 TRADING VALUE. "Trading Value" of Common Stock on any given date
means the most recently established amount that the Company has determined
to sell or purchase a share of Common Stock.
2.21 TOTAL DISABILITY. "Total Disability" or "Disability" means a
physical or mental condition which allows the Participant to receive long-
term disability income as provided under the disability benefits then
offered by the Company. The determination of Total Disability shall be
made by the Committee through procedures established for that purpose and
on the basis of reasonable medical examinations. The cost of any medical
examination shall be an expense of administration of the Plan.
Other defined terms shall have the meanings ascribed to them
herein.
SECTION 3
ADMINISTRATION OF PLAN
3.1 PLAN ADMINISTRATION.
(a) POWER AND AUTHORITY. The Committee shall have full power
and authority to interpret the provisions of the Plan and shall have full
power and authority to supervise the administration of the Plan. All
determinations, interpretations and selections made by the Committee
regarding the Plan shall be final and conclusive. The Committee shall hold
its meetings at such times and places as it deems advisable. Action may be
taken by a written instrument signed by a majority of the members of the
Committee and any action so taken shall be fully as effective as if it had
been taken at a meeting duly called and held. The Committee shall make
such rules and regulations for the conduct of its business as it deems
advisable. The members of the Committee shall not be paid any additional
fees for their services.
(b) DELEGATION OF AUTHORITY. The Committee may delegate
administrative authority and responsibility from time to time to and among
the management compensation committee of the Company, other management
committees or individual employees of the Company, but all actions taken
pursuant to delegated authority and responsibility shall be subject to
review, change and approval by the Committee.
(c) PERSONAL INTEREST OF MEMBERS. A member of the Committee
shall not participate in and shall not be counted as a member with respect
to any action of the Committee directly affecting only that member.
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(d) FINALITY OF DECISIONS. All decisions, determinations and
interpretations of the Plan by the Committee shall be final and binding on
all parties.
3.2 GRANTS OF AWARDS TO PARTICIPANTS; ELIGIBILITY.
(a) AWARDS. In accordance with and subject to the provisions
of the Plan, the Committee shall have the authority to determine all
provisions of Stock Awards as the Committee may deem necessary or desirable
and as are consistent with the terms of the Plan, including, without
limitation, the following: (i) the designation of persons who shall be
Participants, (ii) the nature and extent of the Stock Awards to be made to
each Participant (including the number of shares of Common Stock to be
subject to each Stock Award), and (iii) the restrictions and other
conditions to which payment or vesting of Stock Awards may be subject.
(b) PARTICIPATION. A person shall be a Participant in the Plan
for a Performance Period upon his designation as a Participant for that
Performance Period by the Committee. When deemed appropriate by the
Committee, the Committee may designate an effective date for the
commencement of participation by a Participant that is subsequent to the
first day of the Performance Period. Designated Participants shall be
notified in writing and provided a written summary and explanation of the
Plan.
(c) CONTINUING PARTICIPATION. Designation as a Participant for
a Performance Period will continue in effect for each subsequent
Performance Period until participation is terminated by the Committee or
the Participant shall not be an employee of the Company or any of its
Subsidiaries at the commencement of the Performance Period. The Committee
may terminate participation by any Participant any time with or without
cause.
3.3 INDEMNIFICATION. A member of the Committee or any other
individual or group to whom authority is delegated shall not be personally
responsible or liable for any act or omission in connection with the
performance of powers or duties or the exercise of discretion or judgment
in the administration and implementation of the Plan. The Company shall
hold harmless and indemnify each member of the Committee and any other
individual or group exercising delegated authority or responsibility with
respect to the Plan, from any and all liabilities and costs arising from
any act or omission related to the performance of duties or the exercise of
discretion and judgment with respect to the Plan.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
4.2 of the Plan, a maximum of 500,000 shares of Common Stock shall be
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available for Stock Awards under the Plan. Such shares shall be authorized
and may be either unissued or treasury shares.
4.2 ADJUSTMENTS. If the number of shares of Common Stock outstanding
changes by reason of a stock dividend, stock split, recapitalization,
merger, consolidation, combination, exchange of shares or any other change
in the corporate structure or shares of the Company, the number and kind of
securities subject to and reserved under the Plan, together with applicable
Trading Values, shall be appropriately adjusted. No fractional shares
shall be issued pursuant to the Plan and any fractional shares resulting
from adjustments shall be eliminated from the respective Stock Awards, with
an appropriate cash adjustment for the value of any Stock Awards
eliminated. If an Stock Award is canceled, surrendered, modified or
exchanged for a substitute Stock Award or if a Participant elects to
receive a portion of a Stock Award in cash pursuant to Section 6.3, the
shares subject to but not delivered under such Stock Award shall be
available for other Stock Awards.
SECTION 5
ESTABLISHMENT OF PERFORMANCE LEVELS
5.1 PERFORMANCE CRITERIA. In general, the Plan shall be administered
so that the Stock Awards provided to Participants under the Plan for a
particular Performance Period are based on whether minimum, target or
maximum financial performance levels are reached for that Performance
Period.
5.2 PERFORMANCE LEVELS. The Board of Directors shall establish
Minimum, Target and Maximum Performance Levels for each Performance Period.
For each Performance Period after the Performance Period commencing March
30, 1997, the Committee shall communicate in writing Performance Levels to
each Participant within ninety (90) days after the beginning of each
Performance Period. For the Performance Period commencing March 30, 1997,
the Committee shall communicate in writing Performance Levels to each
Participant within thirty (30) days after the Board of Directors' adoption
of this Plan document.
Performance Levels in the first Performance Period, and each
Performance Period thereafter unless changed by the Board of Directors,
will be based on the average Return on Shareholders' Equity for each of the
three Fiscal Years in the Performance Period. The Minimum Performance
Level is the performance level that the Company must achieve for
Participants to receive any Stock Award relating to a given Performance
Period. The Target Performance Level is the performance level that the
Company must achieve for Participants to receive the targeted Stock Award
under this Plan. The Maximum Performance Level is the performance level
that the Company must achieve for Participants to receive the maximum Stock
Award under this Plan.
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SECTION 6
DETERMINATION AND PAYMENT OF INCENTIVE AMOUNTS
6.1 DETERMINATION OF PERFORMANCE. Company performance, including any
necessary or appropriate adjustments required or permitted hereunder, shall
be determined as soon as administratively feasible following the
availability of audited financial statements for the Company for each of
the three Fiscal Years in a Performance Period.
6.2 DETERMINATION OF INCENTIVE COMPENSATION. The Stock Award for
each Participant for each Performance Period shall be calculated based on
the attainment of Minimum, Target and Maximum Performance Levels. The
Stock Award for each Participant in the Plan for the first Performance
Period shall be calculated using the following steps:
(a) INCENTIVE PERCENTAGES. Stock Awards relating to the
attainment of Minimum, Target and Maximum Performance Levels
shall be a percentage of each Participant's Annual Base Salary.
These percentages shall be known as the "Minimum Incentive
Percentage," the "Target Incentive Percentage" and the "Maximum
Incentive Percentage," respectively. The Minimum, Target and
Maximum Incentive Percentages for all Participants in the Plan
shall be as determined by the Committee.
(b) DETERMINATION OF STOCK AWARD. The Stock Award paid to
a Participant for a Performance Period shall be determined by
reference to the Company's average Return on Shareholders' Equity
for each of the Fiscal Years in a Performance Period expressed as
a percentage (the "Performance Percentage") of the Target
Performance Level for the Performance Period, as follows:
1. PERFORMANCE BELOW MINIMUM PERFORMANCE LEVEL.
If the Company achieves less than the Minimum
Performance Level during the Performance Period, no
Participant shall receive a Stock Award under this Plan
relating to that Performance Period.
2. PERFORMANCE BETWEEN MINIMUM PERFORMANCE LEVEL
AND TARGET PERFORMANCE LEVEL. If the Company achieves
the Minimum Performance Level or higher, but less than
the Maximum Performance Level, during the Performance
Period, the value of a Participant's Stock Award for
that Performance Period shall be determined by
multiplying the Performance Percentage by the
Participant's Target Incentive Percentage and then
multiplying the product of that equation by his average
Annual Base Salary during that Performance Period.
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3. PERFORMANCE AT OR ABOVE MAXIMUM PERFORMANCE
LEVEL. If the Company achieves the Maximum Performance
Level (or higher) during the Performance Period, the
value of a Participant's Stock Award for that
Performance Period shall be determined by multiplying
his Maximum Incentive Percentage by his average Annual
Base Salary during that Performance Period.
6.3 PAYMENT OF STOCK AWARDS. Subject to the provisions of this
Section 6.3, Stock Awards shall be paid to Participants in the form of
shares of the Company's Common Stock. Subject to Section 4.2 of this Plan,
the number of shares of Common Stock in a Stock Award shall be determined
by dividing the value of the Stock Award by the Trading Value of one share
of Common Stock at the beginning of the relevant Performance Period. No
fractional shares of Common Stock shall be issued. Cash shall be awarded
in lieu of fractional shares of Common Stock. If a Participant so elects,
he may receive up to thirty-three percent (33%) of the value of his Stock
Award in cash and the balance in the form of shares of Common Stock.
Before any Stock Award or cash payment in lieu thereof is made pursuant to
this Plan, the Committee shall certify in writing, whether by appropriate
resolution or otherwise, that the relevant Performance Levels were met and
that the other material terms of this Plan have been satisfied.
6.4 PARTIAL PERFORMANCE PERIOD PARTICIPATION AND EMPLOYMENT CHANGES.
(a) PARTIAL PARTICIPATION. Except as provided in Section
6.4(b), a person may only be designated as a Participant as of the
beginning of a Performance Period. No credit shall be allowed for Company
service during a portion of a Performance Period, except as set forth in
Sections 6.4(b) or 6.4(c) below.
(b) EMPLOYMENT CHANGES. Stock Awards for a Participant for
a Performance Period may be awarded, prorated or adjusted by the Committee
from time to time to recruit new associates or in the event of any change
in compensation or employment status or location, or any other change that
the Committee approves that would affect the Participant's determination
for the Performance Period.
(c) RETIREMENT, DEATH OR DISABILITY. If a Participant's
employment terminates during a Performance Period by reason of Retirement,
death or Total Disability, the Participant's Stock Award for that
Performance Period, if any, shall be prorated, under rules established and
maintained by the Committee for such purpose, based on the Participant's
time of active employment as a Participant during the Performance Period.
Any such proration shall be determined following the termination of the
Performance Period.
(d) OTHER TERMINATION OF EMPLOYMENT. Except as otherwise
provided in this Section 6.4(d) or pursuant to Section 7 of this Plan, upon
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termination of a Participant's employment during a Performance Period for
any reason other than Retirement, death or Total Disability, the
Participant shall not be entitled to the payment of a Stock Award for the
relevant Performance Period(s). Notwithstanding the preceding sentence,
the Committee shall have full discretion to determine that payment of a
pro-rated amount may be made when termination of a Participant's employment
results from job elimination, reduction in work force or other similar
company initiative, or is encouraged or induced by incentives offered by
the Company.
SECTION 7
COMMITTEE DISCRETION
The Committee shall exercise all of its power and duties as the
Committee deems appropriate in its sole and absolute discretion. All
decisions of the Committee shall be final and binding on all Participants
and their respective heirs, representatives and Beneficiaries. If the
Committee determines in its sole and absolute discretion that any factor
applicable in the ultimate determination of a Stock Award under the Plan
for a Performance Period is not appropriate with respect to one or more
Participants due to unusual events, circumstances or other factors that the
Committee determines to be appropriate, the applicable factor or the amount
of the resulting Stock Award may be adjusted or modified in any manner
deemed appropriate by the Committee. Without limiting the generality of
the foregoing, to reflect significant, unanticipated events, Performance
Levels may be adjusted during a Performance Period by recommendation of the
Committee and approval of the Board of Directors. Adjustments to
Performance Levels are expected to be made on an extraordinary basis only.
SECTION 8
CHANGE IN CONTROL
8.1 ACCELERATION OF VESTING. If a Change in Control of the Company
shall occur, then, unless the Committee, prior to the Change in Control,
determines otherwise, without action by the Committee all contingent Stock
Awards shall become immediately fully vested and nonforfeitable, subject to
such proration as the Committee determines to be appropriate based on the
financial period of the Company that shall be most recently completed prior
to the date of the Change in Control.
8.2 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in Section 8.1 to the contrary, if, with respect to a Participant,
the acceleration of the vesting of an Stock Award as provided in Section
8.1 (which acceleration could be deemed a "payment" within the meaning of
Section 280G(b)(2) of the Code), together with any other payments that such
Participant has the right to receive from the Company or any corporation
that is a member of an "affiliated group" (as defined in Section 1504(a) of
the Code without regard to Section 1504(b) of the Code) of which the
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Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the payments to such Participant
pursuant to Section 8.1 shall be reduced to the largest amount as will
result in no portion of such payments being subject to the excise tax
imposed by Section 4999 of the Code.
SECTION 9
TERMINATION AND AMENDMENT
The Board may terminate the Plan at any time, or may from time to
time amend the Plan as it deems appropriate and in the best interests of
the Company, provided that no such amendment may impair any outstanding
Stock Award without the consent of the Participant, except according to the
terms of the Plan or the Stock Award. No termination or amendment of the
Plan shall become effective with respect to any Stock Award previously
granted under the Plan without the prior written consent of the Participant
holding such Stock Award unless such amendment operates solely to the
benefit of the Participant.
SECTION 10
GENERAL PROVISIONS
10.1 BENEFITS NOT GUARANTEED; NO RIGHTS TO AWARDS. Neither the
establishment and maintenance of the Plan nor participation in the Plan
shall provide any guarantee or other assurance that incentive compensation
will be payable under the Plan. The success of the Company and its
subdivisions and affiliates, as determined hereunder and adjusted as
provided herein and application of the administrative rules and
determinations by the Committee, shall determine the extent to which
Participants are entitled to receive incentive compensation payments under
this Plan. No Participant or other person shall have any claim to be
granted any award or benefit under the Plan and there is no obligation of
uniformity of treatment of Participants under the Plan. The terms and
conditions of any award or benefit of the same type and the determination
of the Committee to grant a waiver or modification of any award or benefit
and the terms and conditions thereof need not be the same with respect to
each Participant. No Participant or other person shall have any claim to
be granted any Stock Award under the Plan and there is no obligation of
uniformity of treatment of Participants or holders or beneficiaries of
Stock Awards under the Plan. The terms and conditions of Stock Awards of
the same type and the determination of the Committee to grant a waiver or
modification of any Stock Award and the terms and conditions thereof need
not be the same with respect to each Participant.
10.2 NO RIGHT TO PARTICIPATE. Nothing in this Plan shall be deemed or
interpreted to provide a Participant or any non-participating employee with
any contractual right to participate in or receive benefits of the Plan.
No designation of a person as a Participant for all or any part of a
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Performance Period shall create a right to incentive compensation or other
benefits of the Plan for any other Performance Period.
10.3 NO RIGHT TO EMPLOYMENT. Participation in this Plan shall not be
construed as constituting a commitment, guarantee, agreement, or
understanding of any kind that the Company or any subdivision of the
Company will continue to employ any individual and this Plan shall not be
construed or applied as any type of employment contract or obligation.
Nothing herein shall abridge or diminish the rights of the Company or the
employing subdivision of the Company to determine the terms and conditions
of employment of any Participant or other person or to terminate the
employment of any Participant or other person with or without cause at any
time.
10.4 NO ASSIGNMENT OR TRANSFER. Neither a Participant nor any
Beneficiary or other representative of a Participant shall have any right
to assign, transfer, attach, or pledge any incentive compensation amount or
credit, potential payment, or right to future payments of any incentive
compensation amount or credit, or any other benefit provided under this
Plan. Payment of any amount due or to become due under this Plan shall not
be subject to the claims of creditors of the Participant or to execution by
attachment or garnishment or any other legal or equitable proceeding or
process.
10.5 WITHHOLDING. The Company shall be entitled to (a) withhold and
deduct from future wages of a Participant (or from other amounts that may
be due and owing to a Participant from the Company), or make other
arrangements for the collection of, all legally required amounts necessary
to satisfy any and all federal, state and local withholding and employment-
related tax requirements attributable to an Stock Award, including, without
limitation, the grant, exercise, or vesting of, or payment of dividends
with respect to, an Stock Award; or (b) require a Participant promptly to
remit the amount of such withholding to the Company before taking any
action with respect to a Stock Award. Unless the Committee determines
otherwise, withholding may be satisfied by withholding Common Stock to be
received upon exercise or by delivery to the Company of previously owned
Common Stock.
10.6 INCOMPETENT PAYEE. If the Committee determines that a person
entitled to a payment hereunder is incompetent, it may cause benefits to be
paid to another person for the use or benefit of the Participant or the
Participant's Beneficiary at the time or times otherwise payable hereunder,
in total discharge of the Plan's obligations to the Participant or
Beneficiary.
10.7 GOVERNING LAW. The validity, construction and effect of the
Plan and any rules and regulations relating to the Plan shall be determined
in accordance with the laws of the State of Michigan and applicable federal
law.
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10.8 CONSTRUCTION. The singular includes the plural and the plural
includes the singular and terms connoting gender include both the masculine
and feminine, unless the context clearly indicates the contrary.
Capitalized terms, except those at the beginning of a sentence or part of a
heading, have the meaning defined in the Plan.
10.9 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.
10.10 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other or additional compensation arrangements,
including the grant of stock options and other stock-based awards, and such
arrangements may be either generally applicable or applicable only in
specific cases.
10.11 COMPLIANCE WITH LAWS; LISTING AND REGISTRATION OF SHARES. All
Stock Awards granted under the Plan (and all issuances of Common Stock or
other securities under the Plan) shall be subject to all applicable laws,
rules and regulations, and to the requirement that if at any time the
Committee shall determine, in its discretion, that the listing,
registration or qualification of the shares covered thereby upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as
a condition of, or in connection with, the grant of such Stock Award or the
issue or purchase of shares thereunder, such Stock Award may not be
exercised in whole or in part, or the restrictions on such Stock Award
shall not lapse, unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
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EXHIBIT 10.20
SPARTAN STORES, INC.
ANNUAL INCENTIVE PLAN
<PAGE>
SPARTAN STORES, INC. ANNUAL INCENTIVE PLAN
PREAMBLE
This SPARTAN STORES, INC. ANNUAL INCENTIVE PLAN (the "Plan") is a
program for measuring the financial performance of Spartan Stores, Inc. and
its subsidiaries and affiliates and providing eligible Employees with
incentive compensation based upon corporate and individual results. The
objectives of the Plan are to assist in the attraction, retention and
motivation of top quality Employees; to reward Participants for high levels
of performance relative to established goals and objectives; to reward
Participants for their contribution to the success of the Company and of
their departments or divisions of the Company; and to help emphasize and
reinforce teamwork among departments and divisions of the Company. The
Plan provides annual incentive compensation for eligible Employees who are
in a position to make substantial contributions toward achievement of the
financial and customer satisfaction performance goals established pursuant
to the Plan.
SECTION 1
ESTABLISHMENT AND PURPOSES OF PLAN
1.1 ESTABLISHMENT OF PLAN. Spartan Stores, Inc., a Michigan
corporation, hereby establishes its Annual Incentive Plan (the "Plan") for
its corporate and Subsidiary officers, director-level and other key
employees. The Plan permits the award of incentive compensation.
1.2 PURPOSES OF PLAN. The purposes of the Plan are to motivate
Participants toward the achievement of specific goals of the Company and to
attract and retain top quality key executives and other key associates of
the Company. The Plan is further intended to provide flexibility to the
Company in structuring incentive compensation to best promote the foregoing
objectives.
1.3 PLAN DOCUMENT. This instrument, as amended from time to time,
constitutes the governing document of the Plan.
1.4 EFFECTIVE DATE. The Plan is effective as of March 30, 1997. The
Plan shall remain in effect until terminated by the Board of Directors of
the Company. Unless earlier terminated by the Board, the Plan shall
terminate as of the end of the Company's Fiscal Year ending in the year
2008. No award under the Plan shall be granted after such date.
1.5 INCENTIVE COMPENSATION PLAN. The Plan is an annual incentive
compensation program for eligible Employees. Because the Plan does not
provide welfare benefits and does not provide for the deferral of
compensation until termination of employment, it is established with the
intent and understanding that it is not an employee benefit plan within the
meaning of the federal Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
<PAGE>
SECTION 2
DEFINITIONS
The following terms shall have the definitions stated, unless the
context requires a different meaning. Other defined terms shall have the
meanings ascribed to them herein.
2.1 ANNUAL BASE SALARY. "Annual Base Salary" means Participant's
annualized weekly salary at the end of the Fiscal Year without regard to
incentive compensation under this Plan or other benefits or incentive
compensation plans maintained by the Company.
2.2 BENEFICIARY. "Beneficiary" means the individual, trust or other
entity designated by the Participant to receive any incentive compensation
payable with respect to the Participant under the Plan after the
Participant's death. A Participant may designate or change a Beneficiary
by filing a signed designation with the Committee in a form approved by the
Committee. A Participant's will is not effective for this purpose. If a
designation has not been completed properly and filed with the Committee or
is ineffective for any other reason, the Beneficiary shall be the
Participant's Surviving Spouse. If there is no effective designation and
the Participant does not have a Surviving Spouse, the remaining incentive
compensation under this Plan, if any, shall be paid to the Participant's
estate.
2.3 BOARD. "Board" means the Board of Directors of the Company.
2.4 CODE. "Code" means the Internal Revenue Code of 1986, as
amended.
2.5 COMMITTEE. "Committee" means the Compensation Committee of the
Board of the Company or such other committee as the Board designates to
administer this Plan. The Committee shall consist of at least two persons,
all of whom are "non-employee directors" as defined in Rule 16b-3 under the
Securities Exchange Act of 1934 and "outside directors" as defined in
Section 162(m) of the Code.
2.6 COMPANY. "Company" means Spartan Stores, Inc., a Michigan
corporation, and its Subsidiaries.
2.7 CORPORATE GOAL WEIGHT. "Corporate Goal Weight" shall have the
meaning set forth in Section 5.2(d).
2.8 CORPORATE PERFORMANCE GOAL. "Corporate Performance Goal" shall
have the meaning set forth in Section 5.2(a).
2.9 CORPORATE PROFITABILITY GOAL. "Corporate Profitability Goal"
means the level of earnings before taxes on income as designated by the
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Board from year to year or any other profitability measure designated by
the Board.
2.10 CORPORATE CUSTOMER SATISFACTION GOAL. "Corporate Customer
Satisfaction Goal" means the level of customer satisfaction relating to an
index of measures as designated by the Board from time to time.
2.11 FISCAL YEAR. "Fiscal Year" means the financial reporting and
taxable year of the Company.
2.12 INCENTIVE PERCENTAGES. "Incentive Percentages," including
"Minimum Incentive Percentage," "Target Incentive Percentage" and "Maximum
Incentive Percentage" shall have the meanings set forth in Section 5.2(c).
2.13 INDIVIDUAL GOAL WEIGHT. "Individual Goal Weight" shall have the
meaning set forth in Section 5.2(d).
2.14 INDIVIDUAL PERFORMANCE GOAL. "Individual Performance Goal" shall
have the meaning set forth in Section 5.2(a).
2.15 NORMAL RETIREMENT DATE. "Normal Retirement Date" means the date
the Participant attains age 65.
2.16 PARTICIPANT. "Participant" means an employee of the Company or a
Subsidiary designated by the Committee to participate in this Plan for a
Plan Year pursuant to Section 4 of this Plan.
2.17 PERFORMANCE LEVELS. "Performance Level," including "Minimum
Performance Level," "Target Performance Level" and "Maximum Performance
Level," shall have the meanings set forth in Section 5.2(b).
2.18 PERFORMANCE PERCENTAGE. "Performance Percentage" shall have the
meaning set forth in Section 5.3(a).
2.19 PLAN YEAR. "Plan Year" means the annual period that constitutes
the Fiscal Year of the Company.
2.20 RETIREMENT. "Retirement" means termination of employment on or
after the Participant's Normal Retirement Date.
2.21 SUBSIDIARY. "Subsidiary" means any corporation or other entity
of which fifty percent (50%) or more of the outstanding voting stock or
voting ownership interest is directly or indirectly owned or controlled by
the Company or by one or more Subsidiaries of the Company, except that for
purposes of this Plan, the term "Subsidiary" shall exclude Spartan
Insurance Company Ltd., Shield Insurance Services, Inc., and Shield Benefit
Administrators, Inc.
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2.22 SUBSIDIARY/DEPARTMENT GOAL WEIGHT. "Subsidiary/Department Goal
Weight" shall have the meaning set forth in Section 5.2(d).
2.23 SUBSIDIARY/DEPARTMENT PERFORMANCE GOAL. "Subsidiary/Department
Performance Goal" shall have the meaning set forth in Section 5.2(a).
2.24 SURVIVING SPOUSE. "Surviving Spouse" means the husband or wife
of the Participant at the time of the Participant's death who survives the
Participant. If the Participant and the spouse die under circumstances
that make the order of their deaths uncertain, it shall be presumed for
purposes of this Plan that the Participant survived the spouse.
2.25 TOTAL DISABILITY. "Total Disability" or "Disability" means a
physical or mental condition which totally and presumably permanently
prevents an individual from performing the duties of his employment. The
determination of Total Disability shall be made by the Committee through
procedures established for that purpose and on the basis of reasonable
medical examinations. The cost of any medical examination shall be an
expense of administration of the Plan.
SECTION 3
ADMINISTRATION OF PLAN
3.1 PLAN ADMINISTRATION.
(a) POWER AND AUTHORITY. The Committee shall have full power
and authority to interpret the provisions of the Plan and shall have full
power and authority to supervise the administration of the Plan. All
determinations, interpretations and selections made by the Committee
regarding the Plan shall be final and conclusive. The Committee shall hold
its meetings at such times and places as it deems advisable. Action may be
taken by a written instrument signed by a majority of the members of the
Committee and any action so taken shall be fully as effective as if it had
been taken at a meeting duly called and held. To the extent it deems
necessary or appropriate, the Committee will adopt rules, policies and
forms for the administration, interpretation and implementation of the Plan
and for the conduct of its business. The members of the Committee shall
not be paid any additional fees for their services.
(b) DELEGATION OF AUTHORITY. The Committee may delegate
administrative authority and responsibility from time to time to and among
the management compensation committee of the Company, other management
committees or individual employees of the Company, but all actions taken
pursuant to delegated authority and responsibility shall be subject to
review, change and approval by the Committee.
(c) PERSONAL INTEREST OF MEMBERS. A member of the Committee
shall not participate in and shall not be counted as a member with respect
to any action of the Committee directly affecting only that member.
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(d) FINALITY OF DECISIONS. All decisions, determinations and
interpretations of the Plan by the Committee shall be final and binding on
all parties.
3.2 GRANTS OR AWARDS TO PARTICIPANTS. In accordance with and subject
to the provisions of the Plan, the Committee shall have the authority to
determine all provisions of awards of incentive compensation as the
Committee may deem necessary or desirable and as are consistent with the
terms of the Plan, including, without limitation, the following: (a) the
persons who shall be selected as Participants and (b) the nature and extent
of the awards of incentive compensation to be made to each Participant.
3.3 INDEMNIFICATION. A member of the Committee or any other
individual or group to whom authority is delegated shall not be personally
responsible or liable for any act or omission in connection with the
performance of powers or duties or the exercise of discretion or judgment
in the administration and implementation of the Plan. The Company shall
hold harmless and indemnify each member of the Committee and any other
individual or group exercising delegated authority or responsibility with
respect to the Plan, from any and all liabilities and costs arising from
any act or omission related to the performance of duties or the exercise of
discretion and judgment with respect to the Plan.
SECTION 4
ELIGIBILITY
4.1 PARTICIPATION. A person shall be a Participant in the Plan for
a Plan Year upon his designation as a Participant for that year by the
Committee. When deemed appropriate by the Committee, the Committee may
designate an effective date for the commencement of participation by a
Participant that is subsequent to the first day of the Plan Year.
Designated Participants shall be notified in writing and provided a
written summary and explanation of the Plan.
4.2 CONTINUING PARTICIPATION. Designation as a Participant for a
Plan Year will continue in effect for each subsequent Plan Year until
participation is terminated by the Committee. The Committee may terminate
participation by any Participant any time with or without cause.
SECTION 5
ESTABLISHMENT OF PERFORMANCE LEVELS
AND PERFORMANCE GOALS
5.1 PERFORMANCE CRITERIA. The Plan shall be administered so that the
incentive compensation provided to Participants under the Plan for each
Plan Year is based on whether certain goals that are applicable to the
Participant are achieved for that Plan Year.
5
<PAGE>
5.2 DETERMINATION OF POSSIBLE INCENTIVE COMPENSATION. The Committee
shall establish the following performance criteria applicable to
determining the incentive compensation for any Participant under the Plan.
(a) PERFORMANCE GOALS. The Board of Directors shall establish
for each Plan Year for all Participants corporate performance goals and
subsidiary/department (if applicable to the Participant) performance goals
(the "Corporate Performance Goal" and the "Subsidiary/Department
Performance Goal," respectively). The individual performance goal
applicable to the President and Chief Executive Officer shall be the
accountability contract goals that the Executive Committee establishes for
the President and Chief Executive Officer and the individual performance
goals for associates other than the President and Chief Executive Officer
shall be the accountability contract goals that the President and Chief
Executive Officer establishes for the associates (collectively referenced
as the "Individual Performance Goals"). Unless the Board of Directors
determines otherwise, the determination as to whether and to what extent
the Corporate Performance Goal has been achieved will be based upon
weighting factors of 50% applied to the Corporate Profitability Goal and
50% applied to the Customer Satisfaction Goal; provided, however, that the
Customer Satisfaction Goal shall not be applicable to Participants who are
employed by Subsidiaries and that for such Participants the Corporate
Performance Goal shall be based solely on the Corporate Profitability Goal.
For each Plan Year after the Plan Year beginning March 30, 1997, the
Committee shall communicate Performance Goals in writing to each
Participant within ninety (90) days after the beginning of each Plan Year.
For the Plan Year beginning March 30, 1997, the Committee shall communicate
Performance Goals in writing to each Participant within thirty (30) days
after the Board of Directors' date of adoption of this Plan document.
(b) PERFORMANCE LEVELS. The Committee shall establish Minimum,
Target and Maximum Performance Levels for each Plan Year for each
Performance Goal that are applicable to the Participant and communicate
these levels in writing to each Participant within 90 days after to the
beginning of each Plan Year. The Minimum Performance Level, as applied to
each Performance Goal, is the performance level that must be achieved for
the Participant to receive any incentive compensation relating to that
Performance Goal under this Plan. The Maximum Performance Level is the
performance level that must be achieved for the Participant to receive the
maximum incentive compensation relating to that Performance Goal under this
Plan. As a general matter, the Minimum Performance Level shall be eighty
percent (80%) of the Target Performance Level and the Maximum Performance
Level shall be one hundred twenty percent (120%) of the Target Performance
Level, although the Committee reserves the right to modify these
percentages in its sole discretion. For each Plan Year after the Plan Year
beginning March 30, 1997, the Committee shall communicate Performance
Levels in writing to each Participant within ninety (90) days after the
beginning of each Plan Year. For the Plan Year beginning March 30, 1997,
6
<PAGE>
the Committee shall communicate Performance Goals in writing to each
Participant within thirty (30) days after the Board of Directors' date of
adoption of this Plan document.
(c) INCENTIVE PERCENTAGES. For each Participant for each Plan
Year, the Committee shall determine the amount of compensation to be
received under this Plan to be reflected as a percentage of each
Participant's Annual Base Salary that is based upon achieving Minimum,
Target and Maximum Performance Levels. These percentages shall be known in
this Plan collectively as the "Incentive Percentages," and individually as
the "Minimum Incentive Percentage," the "Target Incentive Percentage" and
the "Maximum Incentive Percentage," respectively.
(d) GOAL WEIGHTS. The Committee shall establish, for each
Participant for each Plan Year, a weighting factor to be applied to the
Incentive Percentages to determine any award and to be reflected as a
percentage of the Incentive Percentage based on individual, subsidiary or
department, or corporate level performance (the "Individual Goal Weight,"
the "Subsidiary/Department Goal Weight" or the "Corporate Goal Weight,"
respectively).
5.3 DETERMINATION OF ACTUAL INCENTIVE COMPENSATION.
(a) PERFORMANCE PERCENTAGE. After the end of a Fiscal Year, the
Committee shall determine the Participant's progress during that Fiscal
Year toward achieving each Performance Goal. This determination shall be
expressed as a percentage (the "Performance Percentage") of the Target
Performance Level relating to that Performance Goal. For example, the
Committee may determine that a Participant achieved 90% of the Target
Performance Level relating to the Individual Performance Goal, 100% of the
Target Performance Level relating to the Subsidiary/Department Performance
Goal and 110% of the Target Performance Level relating to the Corporate
Performance Goal.
(b) DETERMINATION OF AWARD. For each Performance Goal, the
Committee shall determine whether the Participant's Performance Percentage
for that Performance Goal meets or exceeds the Minimum, Target or Maximum
Performance Level applicable to such Performance Goal. The aggregate
incentive compensation paid to a Participant shall equal the sum of the
amounts calculated with respect to the Performance Goals as follows:
(i) If the Participant's Performance Percentage is
less than the Minimum Performance Level applicable to that
Performance Goal, no incentive compensation shall be awarded to
the Participant relating to that Performance Goal.
(ii) If the Participant's Performance Percentage is
equal to or greater than the Minimum Performance Level but less
than the Maximum Performance Level applicable to the Performance
7
<PAGE>
Goal, the Participant shall receive incentive compensation
determined by multiplying the Target Incentive Percentage by the
Performance Percentage and multiplying the product of that
equation by the Goal Weight applicable to such Performance Goal.
(iii) If the Participant's Performance Percentage is
equal to or greater than the Maximum Performance Level applicable
to the Performance Goal, the Participant shall receive incentive
compensation determined by multiplying the Maximum Incentive
Percentage by the Goal Weight applicable to such Performance
Goal.
5.4 ADJUSTMENTS. Adjustments to Minimum, Maximum and Target
Performance Levels may be made when deemed appropriate by the Committee
pursuant to Section 7 of this Plan.
SECTION 6
DETERMINATION AND PAYMENT OF INCENTIVE AMOUNTS
6.1 FINAL PLAN YEAR PERFORMANCE. Corporate, subsidiary/department
and individual performance, including any necessary or appropriate
adjustments required or permitted hereunder, shall be determined for each
Participant as soon as administratively feasible following the availability
of final performance results for the Plan Year.
6.2 DETERMINATION OF INCENTIVE COMPENSATION. Under rules established
by the Committee, the incentive compensation for each Participant for each
Plan Year shall be determined pursuant to Section 5.
6.3 PAYMENT OF INCENTIVE AMOUNTS. The dollar amount of the annual
incentive compensation for a Plan Year shall be paid to the Participant as
soon as feasible following the completion of the incentive compensation
calculations for the Plan Year. Before any incentive award shall be paid,
the Committee shall certify in writing, whether by appropriate resolution
or otherwise, that the relevant Performance Levels and Performance Goals
were met and that the other material terms of this Plan have been
satisfied.
6.4 PARTIAL YEAR PARTICIPATION AND EMPLOYMENT CHANGES.
(a) PARTIAL YEAR PARTICIPATION. If a person is designated to
become a Participant in a Plan Year as of a date other than the first day
of the Plan Year, then (i) if the person is a Participant for six (6)
months or more of such Plan Year, he or she shall be entitled to incentive
compensation related to such Plan Year as if he or she had been a
Participant for the entire Plan Year and (ii) if the person is a
Participant for less than six (6) months of such Plan Year, he or she shall
8
<PAGE>
not be eligible to receive any incentive compensation relating to this Plan
for such Plan Year.
(b) EMPLOYMENT CHANGES. Target Performance Levels and incentive
awards for a Participant for a Plan Year will be prorated or adjusted as
appropriate, under rules established and maintained by the Committee for
this purpose from time to time, in the event of any change in compensation
or employment status, or any other change that would affect the
determination for the Plan Year, in proportion to the duration of each
applicable factor during the Plan Year.
(c) RETIREMENT, DEATH, OR DISABILITY. If a Participant's
employment terminates during a Plan Year by reason of Retirement, death, or
Total Disability, the Participant's incentive compensation dollar amount
for the Plan Year, if any, shall be prorated, under rules established and
maintained by the Committee for such purpose, based on the Participant's
time of active employment as a Participant during the Plan Year.
(d) OTHER TERMINATION OF EMPLOYMENT. Except as otherwise
provided in this subsection (d) or pursuant to subsection (e), upon
termination of a Participant's employment during a Plan Year for any reason
other than Retirement, death, or Total Disability, the Participant shall
not be entitled to the payment of incentive compensation for the Plan Year.
Notwithstanding the preceding sentence, the Committee shall have full
discretion to determine that payment of a pro-rated amount may be made when
termination of a Participant's employment results from job elimination,
reduction in work force or other similar company initiative, or is
encouraged or induced by incentives offered by the Company.
(e) COMMITTEE DISCRETION. Pursuant to the powers conferred in
Section 7, the Committee may amend or modify any rule and make any other
rule or exception applicable to participation and employment changes
relating to any Participant.
SECTION 7
COMMITTEE DISCRETION
The Committee shall exercise all of its power and duties as the
Committee deems appropriate in its sole and absolute discretion. All
decisions of the Committee shall be final and binding on all Participants
and their respective heirs, representatives and Beneficiaries. If the
Committee determines in its sole and absolute discretion that any factor
applicable in the ultimate determination of incentive compensation under
the Plan for a Plan Year is not appropriate with respect to one or more
Participants due to unusual events, circumstances, or other factors that
the Committee determines to be appropriate, the applicable factor or the
amount of the resulting incentive compensation may be adjusted or modified
in any manner deemed appropriate by the Committee. Without limiting the
9
<PAGE>
generality of the foregoing, to reflect significant, unanticipated changes,
Corporate and Subsidiary/Department Performance Goals may be adjusted
during a Plan Year by recommendation of the Committee and upon approval of
the Board of Directors and the President and Chief Executive Officer's
Individual Performance Goal may be adjusted during a Plan Year by
recommendation of the Committee and upon approval of the Executive
Committee. Adjustments to Performance Goals are expected to be made on an
extraordinary basis only.
SECTION 8
TERMINATION AND AMENDMENT
The Board may terminate the Plan at any time, or may from time to
time amend the Plan as it deems appropriate and in the best interests of
the Company, provided that no such amendment may impair any outstanding
incentive compensation award without the consent of the Participant, except
according to the terms of the Plan.
SECTION 9
GENERAL PROVISIONS
9.1 BENEFITS NOT GUARANTEED; NO RIGHTS TO AWARD. Neither the
establishment and maintenance of the Plan nor participation in the Plan
shall provide any guarantee or other assurance that incentive compensation
will be payable under the Plan. The success of the Company and its
subdivisions and affiliates, as determined hereunder and adjusted as
provided herein and application of the administrative rules and
determinations by the Committee, shall determine the extent to which
Participants are entitled to receive incentive compensation payments under
this Plan. No Participant or other person shall have any claim to be
granted any award or benefit under the Plan and there is no obligation of
uniformity of treatment of Participants under the Plan. The terms and
conditions of any award or benefit of the same type and the determination
of the Committee to grant a waiver or modification of any award or benefit
and the terms and conditions thereof need not be the same with respect to
each Participant.
9.2 NO RIGHT TO PARTICIPATE. Nothing in this Plan shall be deemed or
interpreted to provide a Participant or any non-participating employee with
any contractual right to participate in or receive benefits of the Plan.
No designation of a person as a Participant for all or any part of a Plan
Year shall create a right to incentive compensation or other benefits of
the Plan for any other Plan Year.
9.3 NO EMPLOYMENT RIGHT. Participation in this Plan shall not be
construed as constituting a commitment, guarantee, agreement, or
understanding of any kind that the Company or any subdivision of the
Company will continue to employ any individual and this Plan shall not be
10
<PAGE>
construed or applied as any type of employment contract or obligation.
Nothing herein shall abridge or diminish the rights of the Company or the
employing subdivision of the Company to determine the terms and conditions
of employment of any Participant or other person or to terminate the
employment of any Participant or other person with or without cause at any
time.
9.4 NO ASSIGNMENT OR TRANSFER. Neither a Participant nor any
Beneficiary or other representative of a Participant shall have any right
to assign, transfer, attach, or pledge any incentive compensation amount or
credit, potential payment, or right to future payments of any incentive
compensation amount or credit, or any other benefit provided under this
Plan. Payment of any amount due or to become due under this Plan shall not
be subject to the claims of creditors of the Participant or to execution by
attachment or garnishment or any other legal or equitable proceeding or
process.
9.5 WITHHOLDING AND PAYROLL TAXES. The Company shall deduct from any
payment made under this Plan all amounts required by federal, state and
local tax laws to be withheld and shall subject any payments made under the
Plan to all applicable payroll taxes and assessments.
9.6 INCOMPETENT PAYEE. If the Committee determines that a person
entitled to a payment hereunder is incompetent, it may cause benefits to be
paid to another person for the use or benefit of the Participant or the
Participant's beneficiary at the time or times otherwise payable hereunder,
in total discharge of the Plan's obligations to the Participant or
Beneficiary.
9.7 GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Michigan and applicable federal
law.
9.8 CONSTRUCTION. The singular includes the plural and the plural
includes the singular and terms connoting gender include both the masculine
and feminine, unless the context clearly indicates the contrary.
Capitalized terms, except those at the beginning of a sentence or part of a
heading, have the meaning defined in the Plan.
9.9 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.
11
<PAGE>
9.10 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other or additional compensation arrangements,
including the grant of stock options and other stock-based awards, and such
arrangements may be either generally applicable or applicable only in
specific cases.
12
<PAGE>
EXHIBIT 23
[DELOITTE & TOUCHE LLP LOGO]
- ----------------------------------------------------
700 Bridgewater Place Telephone: (616)
336-7900
333 Bridge Street, N.W. Facsimile: (616)
336-7950
Grand Rapids, Michigan 49504-5359
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Spartan Stores, Inc.
Grand Rapids, Michigan
We consent to the incorporation by reference in Registration Statement No.
33-47442 Spartan Stores, Inc. 1991 Stock Bonus Plan, Registration Statement
No. 33-47493 Spartan Stores, Inc. 1991 Stock Option Plan and Registration
Statement No. 33-49074 Spartan Stores, Inc. 1991 Associate Stock Purchase
Plan on Forms S-8 of our report dated June 10, 1998, appearing in
this Annual Report on Form 10-K of Spartan Stores, Inc. for the year ended
March 28, 1998.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of
Spartan Stores, Inc. (the "Company"), listed in Item 14(a)(2). This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/DELOITTE & TOUCHE LLP
June 26, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 11, 1998 /S/DONALD KOOP, CHAIRMAN OF THE BOARD AND
DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 13, 1998 /S/RUSSEL H. VANGILDER, JR., VICE CHAIRMAN OF THE
BOARD AND DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 8, 1998 /S/ROGER L. BOYD, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 7, 1998 /S/JAMES G. BUICK, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 10, 1998 /S/JOHN S. CARTON, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 11, 1998 /S/RONALD A. DEYOUNG, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 11, 1998 /S/PARKER T. FELDPAUSCH, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 8, 1998 /S/MARTIN HILL, DIRECTOR
(Sign and print name and title)
<PAGE>
POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Spartan Stores, Inc., does hereby appoint
JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his
attorneys or attorney to execute in his name, place, and stead, a Form 10-K
Annual Report of Spartan Stores, Inc. for its fiscal year ended March 28,
1998, and any and all amendments thereto, and to file it or them with the
Securities and Exchange Commission.
DATE SIGNATURE
May 13, 1998 /S/DAN R. PREVO, DIRECTOR
(Sign and print name and title)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SPARTAN STORES,
INC. AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR<F1>
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> MAR-28-1998
<CASH> 37,027
<SECURITIES> 18,333
<RECEIVABLES> 76,359
<ALLOWANCES> (1,810)
<INVENTORY> 92,706
<CURRENT-ASSETS> 236,779
<PP&E> 308,258
<DEPRECIATION> (147,147)
<TOTAL-ASSETS> 406,133
<CURRENT-LIABILITIES> 175,097
<BONDS> 107,666
<COMMON> 22,888
0
0
<OTHER-SE> 91,304
<TOTAL-LIABILITY-AND-EQUITY> 406,133
<SALES> 2,489,249
<TOTAL-REVENUES> 2,489,249
<CGS> 2,234,165
<TOTAL-COSTS> 2,234,165
<OTHER-EXPENSES> 223,207
<LOSS-PROVISION> 2,024
<INTEREST-EXPENSE> 7,610<F2>
<INCOME-PRETAX> 22,243
<INCOME-TAX> 8,009
<INCOME-CONTINUING> 14,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,234
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
<FN>
<F1>52 Weeks
<F2>Net of interest income of $3,324
</FN>
</TABLE>
