<PAGE>
Filed pursuant to Rule 424(b)(3)
Commission File No. 33-94496
PROSPECTUS
3,500,000 CLASS A SHARES
SPARTAN STORES, INC.
CLASS A COMMON STOCK
$2 PAR VALUE
Spartan Stores, Inc. hereby offers for sale 3,500,000 shares of Class
A Common Stock, $2 par value. At June 19, 1999, 1,628,307 Class A
shares remained unsold and were available for sale pursuant to this
Prospectus. Spartan hereby offers the Class A shares to its retail
customers who are required to purchase and maintain a minimum investment in
the Class A shares, to persons who apply to become retail customers of
Spartan, to employees of Spartan, to persons designated from time to time
by Spartan's Board of Directors, and to certain other qualified holders.
Spartan offers the Class A shares at a price its Board of Directors
establishes from time to time. For information about the factors
considered in determining the price of the Class A shares, see "THE
COMPANY."
Spartan has not established any minimum number of Class A shares that
it must sell in this offering. Therefore, Spartan may not receive all of
the proceeds described in this offering. In addition, Spartan will not
place any offering proceeds received in escrow pending the receipt of a
minimum amount of proceeds. See "PLAN OF DISTRIBUTION."
There is currently no public market for the Class A shares. As a
result of the restrictions on the transferability of the Class A shares, it
is not likely that a public market for the Class A shares will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A SUMMARY OF CERTAIN
FACTORS THAT PROSPECTIVE INVESTORS SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC<F1> AND COMMISSIONS<F2> SPARTAN<F3>
---------- --------------------- -----------
<S> <C> <C> <C>
Per Share . . . . . $ 13.30 0 $ 13.30
Total . . . . . . . $21,656,483.10 0 $21,656,483.10
<FN>
<F1> Spartan offers the Class A shares at the price established from time
to time by the Board of Directors. As of the date of this Prospectus,
the price was $13.30 per share. The total price to public and proceeds
to Spartan are based on the number of Class A shares remaining unsold in
this offering as of June 19, 1999.
<F2> Spartan offers the Class A shares directly for its own account without
paying any selling commission.
<F3> Before deducting expenses payable by Spartan estimated at $120,069.
</FN>
</TABLE>
THE DATE OF THIS PROSPECTUS IS AUGUST 5, 1999
<PAGE>
Spartan will sell the Class A shares directly. Spartan has not
engaged any broker or selling agent to offer and sell the Class A shares.
No person has been authorized to give information or make any
representation in connection with this offering other than that which is
contained in this Prospectus. Spartan will not pay any commission to any
person for soliciting or otherwise obtaining investors. This is a
best-efforts, continuous offering to persons who are qualified to hold
Class A shares. The Board of Directors may reject any subscription for any
Class A shares in whole or in part for any reason. Spartan expects to
deliver stock certificates within 30 days after payment by a subscriber.
AVAILABLE INFORMATION
Spartan has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the Class A shares offered by this Prospectus. This Prospectus
does not contain all of the information contained in the registration
statement and the exhibits and schedules to the registration statement.
For further information on Spartan and the Class A shares, refer to the
registration statement and to the exhibits and schedules filed with the
registration statement. Statements contained in this Prospectus about any
contract or other document are not necessarily complete, and in each case
you should refer to the copy of such contract or other document filed as an
exhibit to the registration statement.
Spartan is also subject to the filing requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the SEC. The registration statement, reports, and other
information filed by Spartan (including the exhibits and schedules filed
with them) may be inspected without charge at the SEC's office at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of this
material can also be obtained from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC also maintains a Web site (http://www.sec.gov) that contains
reports, proxy statements and other information regarding Spartan.
Spartan intends to furnish to its shareholders, after the close of
each year, an annual report relating to the operations of Spartan
containing financial statements audited and reported on by independent
public accountants, including an opinion expressed by such independent
public accountants. In addition, Spartan may furnish to its shareholders
such other reports as the Board of Directors may authorize from time to
time.
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<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Spartan Stores, Inc. and its subsidiaries distribute grocery and related
products to retail stores located in Michigan, Georgia, Illinois, Indiana,
Kentucky, Ohio, Pennsylvania, Tennessee, and West Virginia. As used in this
Prospectus, the term "Spartan" refers to Spartan Stores, Inc. without its
subsidiaries, and the term "Company" refers to Spartan and its subsidiaries.
Spartan's principal executive offices are located at 850 76th Street, S.W.,
P.O. Box 8700, Grand Rapids, Michigan 49518. Spartan's telephone number is
(616) 878-2000.
The Company's business is concentrated in Michigan. According to
industry sources, the Company is the ninth largest wholesaler of grocery
and related products in the United States.
As of June 19, 1999, approximately 73 percent of Spartan's outstanding
shares of common stock were owned by persons actively engaged in the retail
grocery business. Spartan's customers are required to purchase and maintain
an investment in Class A shares and are referred to in this Prospectus as
"Shareholder-Customers."
In addition to a wide variety of grocery and related products, the
Company also offers its customers an array of services, including new store
site selection; market analysis; store planning and development; financing
programs for store development and remodeling; marketing, promotion and
advertising assistance; insurance; data processing; accounting and tax
preparation; human resources; coupon redemption; and product reclamation.
The Company's current strategy is to continue to focus on the full
service distribution of grocery and related products. However, during the
fiscal year ended March 27, 1999, management expanded the strategic
direction of the Company by acquiring retail grocery stores in an effort to
secure existing business and obtain future sales growth. The Company
currently operates 44 retail stores in Michigan and expects to continue to
acquire additional stores as opportunities become available.
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<PAGE>
THE OFFERING
COMMON STOCK OFFERED
3,500,000 Shares of Class A Common Stock, $2 par value per share
("Class A Shares").
OFFERING PRICE
The offering price in effect at the time of purchase. At the date of
this Prospectus, the offering price is $13.30 per share. The Board of
Directors may from time to time change the offering price.
ELIGIBLE SUBSCRIBERS
Shareholder-Customers, persons who apply to become retail customers of
Spartan, employees of the Company ("Associates"), persons designated from time
to time by Spartan's Board of Directors ("Approved Holders"), or certain
qualified holders.
INVESTMENT CONSIDERATIONS
Each prospective investor should carefully consider the summary of
certain factors set forth in "RISK FACTORS."
USE OF NET PROCEEDS
To increase working capital and for other general corporate
purposes.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial information presented below as of
and for the years ended March 27, 1999, March 28, 1998, March 29, 1997,
March 30, 1996, and March 25, 1995 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 27, 1999, audited by Deloitte & Touche LLP,
independent certified public accountants, attached to this Prospectus. The
following data also should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
All amounts set forth below are in thousands, except per share data.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: FOR THE YEAR ENDED
--------------------------------------------------------------------------
MARCH 27, MARCH 28, MARCH 29, MARCH 30, MARCH 25,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales $2,671,700 $2,489,249 $2,475,025 $2,554,688 $2,526,128
Volume Incentive
Rebates<F1> $ 0 $ 0 $ 0 $ 15,577 $ 17,584
Costs and Expenses $2,646,722 $2,467,006 $2,459,641 $2,571,279 $2,494,446
Earnings (Loss) Before
Taxes on Income and
Extraordinary Item<F2> $ 24,978 $ 22,243 $ 15,384 $ (32,168) $ 14,098
Extraordinary Item
(Net of Income Taxes) $ 1,031 $ 0 $ 0 $ 0 $ 0
Net Earnings (Loss)<F2> $ 14,799 $ 14,234 $ 9,703 $ (21,668) $ 9,030
Basic and Diluted Earnings
(Loss) per share:
Earnings (Loss) Before
Extraordinary Item $ 1.42 $ 1.21 $ .80 $ (1.74) $ .74
Extraordinary Item (Net of
Income Taxes) $ .09
Net Earnings (Loss) $ 1.33 $ 1.21 $ .80 $ (1.74) $ .74
</TABLE>
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<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF
--------------------------------------------------------------------------
MARCH 27, MARCH 28, MARCH 29, MARCH 30, MARCH 25,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working Capital $ 101,984 $ 61,682 $ 59,669 $ 69,284 $ 64,381
Total Assets $ 538,734 $ 406,133 $ 403,731 $ 387,451 $ 386,141
Long-Term Debt and
Capital Lease
Obligation $ 269,522 $ 107,666 $ 125,776 $ 124,372 $ 106,794
Shareholders' Equity $ 121,061 $ 114,192 $ 107,258 $ 102,587 $ 125,801
Book Value Per
Class A Share<F2><F3> $ 11.16 $ 9.98 $ 8.91 $ 8.23 $ 10.03
Return on Average
Shareholders' Equity<F3> 12.58% 12.86% 9.26% (17.66%) 7.52%
Cash Dividends $ 556 $ 587 $ 606 $ 623 $ 613
Dividends Paid Per
Share<F3> $ .05 $ .05 $ .05 $ .05 $ .05
Shares Outstanding<F3> 10,844 11,444 12,033 12,460 12,544
<FN>
(footnotes on following page)
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<PAGE>
<F1> 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 (defined below on page 8) 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.
<F2> During the years ended March 27, 1999 and March 30, 1996, the Company
incurred restructuring, reorganization, and other charges amounting to
$5,697,738 and $46,439,743, respectively.
<F3> 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>
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
RISK FACTORS
In addition to general risks of investments and economic conditions,
prospective investors should carefully consider the following factors
before purchasing any Class A Shares offered hereby.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this Prospectus include forward-looking
statements that describe the Company's plans, strategies, objectives,
goals, expectations or projections. These forward-looking statements are
identifiable by words or phrases indicating that the Company or management
"expects," "anticipates," "projects," "plans" or "believes" that a
particular occurrence "may result" or "will likely result" or that a
particular event "may occur" or "will likely occur" in the future, or
similarly stated expectations. In addition to other risks and
uncertainties described in connection with the forward-looking statements
contained in this Prospectus, 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 grocery store and convenience store
distribution segments compete with numerous warehouse discount stores,
supermarkets, pharmacies and product manufacturers. The Company's
insurance segment is subject to intense competition from numerous insurance
agents and insurance companies, especially in the property and casualty
insurance markets. Competitive pressures in these and other business
segments may result in unexpected reductions in sales volumes, product
prices or service fees. Additionally, future sales will be dependent on
the number of retail stores owned and operated by the Company and
competitive pressures in the retail industry.
Operating and administrative expenses may be adversely affected
by unexpected costs associated with, among other factors: software
development activities; computer and other system modifications and
upgrades to address Year 2000 issues; unanticipated labor shortages,
stoppages or disputes; business acquisitions, including the Company's
acquisition of retail stores; business divestitures; the transition of the
business operations of recently acquired retail stores; the defense,
settlement or adverse judgments in connection with current or future legal
or administrative proceedings; the cessation of operations at the Company's
existing distribution center in Plymouth, Michigan; the discontinuance of
the "Over-the-Road" freight department; and the adoption of Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative and Hedging Activities". The
Company's future interest expense and income also may differ from current
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expectations, depending upon: the amount of additional borrowings necessary in
connection with retail store acquisitions; interest rate fluctuations;
cigarette inventory levels; retail property sales; the volume of notes
receivable; and the amount of fees received on delinquent accounts, among
other factors.
The Company's estimated costs and completion dates for addressing
Year 2000 issues, as well as the estimated potential effects on the Company's
business operations arising from Year 2000 issues, are based upon management's
best estimates. These estimates were derived using numerous assumptions with
respect to future events. Actual results could differ materially from those
anticipated if there are greater than expected disruptions or costs experienced
by the Company or its customers or suppliers in connection with the Year 2000,
including unanticipated delays in correcting Year 2000 problems; increased
costs of trained personnel; increased costs associated with the Company's
retail store acquisitions; the interruption of electronic or telephonic
communications; the interruption in banking or commercial payment systems;
transportation delays; the failure of basic utilities; or other similar events
or factors. Accordingly, there can be no guarantee that the Company's estimates
will be achieved.
The foregoing is intended to provide meaningful cautionary statements
for purposes of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The foregoing should not be construed as an
exhaustive list of all economic, competitive, governmental and
technological factors that could adversely affect the Company's expected
consolidated financial position, results of operations or liquidity. The
Company disclaims any obligation to update its forward-looking statements
to reflect subsequent events or circumstances.
COMPETITION
The grocery and convenience store industries are characterized by
intense competition and low profit margins. The Company competes with a
number of grocery and convenience store wholesalers and with a number of
other businesses that market their products directly to food retailers,
including companies having greater assets and larger sales volume than the
Company. Customers compete with other retailers and with several large
chain stores which have integrated wholesale and retail operations.
Customers also compete with mass merchandisers, wholesale membership clubs,
convenience stores, shop-at-home services, restaurants and fast food
businesses. In addition, the Company considers competitors of its
customers to be competitors of the Company, since the Company's long term
success depends upon the success of its customers. There can be no
assurance that the Company or its customers will be able to compete
successfully in the future. See "THE COMPANY--Competition."
The Company operates an insurance agency and insurance company. The
insurance industry also is highly competitive. Many competitors may have
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<PAGE>
far greater financial and other resources than those of the Company. There
can be no assurance that the Company will be able to compete effectively in
the insurance industry.
RETAIL EXPANSION
During the fiscal year ended March 27, 1999, management expanded the
strategic direction of the Company by acquiring retail grocery stores. As a
result, the Company now operates 44 retail grocery stores in Michigan. The
retail grocery industry is highly competitive and characterized by narrow
profit margins. The Company's competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, warehouse club stores, deep discount drug stores and supercenters.
Retail grocers generally compete on the basis of location, quality of
products, service, price, product variety and store condition. There can be
no assurance that new competitors will not enter the grocery store industry
or that the Company can maintain its current market share. All of the
Company's stores are located in Michigan and thus the performance of the
Company will be particularly influenced by developments in this area.
Michigan has experienced relatively stable economic conditions over the past
several years, but a significant economic downturn could have a material
adverse effect on the Company's business, financial condition or results of
operations.
While the Company has some grocery store operations experience as a
result of operating four stores in the past five years and over 20 stores
more than 10 years ago as well as advising the operators of retail grocery
stores, the operation of such stores is a new line of business in which the
Company has limited experience. Due to this, as well as other factors, there
is no assurance that the Company will be successful in the retail grocery
store business.
STATE ECONOMIC CONDITIONS
The Company's business operations are dependent upon the sale of
groceries and related products to its customers. Most of these customers
are located in Michigan, Georgia, Illinois, Indiana, Kentucky, Ohio,
Pennsylvania, Tennessee, and West Virginia. Adverse economic conditions, a
reduction in the populations or the loss of purchasing power by residents
in these states could correspondingly reduce the amount of groceries
purchased in these states, which could adversely affect the Company's net
sales and profitability.
INDEBTEDNESS AND LEVERAGING
As of March 27, 1999, the Company had approximately $269.5 million
outstanding in long-term debt and capital lease obligation, resulting in a
debt to equity ratio of 2.23 to 1.00. To facilitate acquisitions, as well
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as to refinance existing debt and fund working capital and support other
general corporate needs, the Company entered into a $425 million senior
secured credit facility on March 18, 1999. At March 27, 1999, the Company
had $175 million in additional availability under this credit facility. The
Company's ability to make scheduled payments of the principal of, or interest
on, or to refinance, its indebtedness and to make scheduled payments under
its operating leases depends on its future performance, which is affected
by economic, financial, competitive and other factors beyond its control.
Furthermore, the Company's debt load could cause significant debt service
obligations and make it more difficult for the Company to be profitable or
to pay dividends or other distributions to its shareholders.
Based upon current and forecasted levels of operations, management
believes that available cash flow, together with available borrowings under
the new credit facility will be adequate to meet the Company's anticipated
requirements for working capital, capital expenditures, interest payments
and scheduled principal payments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital
Resources." There can be no assurance, however, that the Company's business
will continue to generate cash flow at or above current levels or that
forecasted levels will occur. If the Company is unable to meet its
obligations from such sources, the Company may be required to refinance all
or a portion of its existing debt, sell assets or obtain additional financing.
There can be no assurance that any such refinancing would be possible or that
any such sales of assets or additional financing could be completed, or
completed on terms favorable to the Company.
ENERGY MATTERS
The Company's trucking operations are extensive. A shortage or
substantial increase in the cost of diesel fuel could materially and
adversely affect deliveries of grocery and related products and, thus,
materially and adversely affect the Company's net sales and profitability.
PROFITS AND SHAREHOLDERS' EQUITY
There can be no assurance that the Company will consistently earn
profits and increase its shareholders' equity. The value of the Class A
Shares may be adversely affected by poor operating results due, in part, to
circumstances beyond the Company's control, the loss of customers and other
problems associated with the Company's business operations.
DIVIDENDS
For at least 20 years, the Board of Directors has declared, and
Spartan has paid, a regular quarterly dividend. There can be no assurance
that Spartan's profitability or general business conditions will enable the
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Board to continue to declare, and Spartan to continue to pay, dividends on
such a regular basis or at historical levels.
REDEMPTION POLICY
The Board of Directors 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. The Board of Directors has
adopted a policy to redeem, if possible, upon a Shareholder-Customer's
request the Class A Shares held by a Shareholder-Customer that are in excess
of the Shareholder-Customer's Required Investment, and to redeem shares held
by a former Shareholder-Customer, upon certain terms and conditions. See
"DESCRIPTION OF CAPITAL STOCK--Redemption Policy." The policy does not create
or evidence any obligation on Spartan's behalf. The Board of Directors may
at any time, without notice, revise or terminate the policy based on Spartan's
financial condition, general market conditions, any requirement of or
limitation imposed by law or any agreement by which Spartan is bound, or for
any other reason deemed sufficient by the Board. Furthermore, the Company's
new credit facility imposes certain limitations on its ability to redeem
shares. See "DESCRIPTION OF CAPITAL STOCK Redemption Policy."
Spartan may at any time, in its sole discretion, call for redemption
any Class A Shares which are beneficially owned by any person who is not at
the time of the redemption either: (i) a Shareholder-Customer who continues
to purchase grocery and grocery related products from Spartan, (ii) an
Associate who continues to be employed by the Company, (iii) an Approved
Holder, or (iv) a Qualified Holder.
VALUE OF CLASS A SHARES
The price at which Shareholder-Customers must acquire Class A Shares
from Spartan is the "Trading Value." The Board of Directors from time to
time, usually on an annual basis, establishes the Trading Value for the
Class A Shares. The Board determines the Trading Value, in its sole and
absolute discretion, based on the Company's financial condition, results of
operations, operating trends, market conditions, the state of the economy,
and such other factors as the Board deems appropriate. During the fiscal
year ending March 27, 1999, the Trading Value was $12.30 per share.
However, effective June 21, 1999, the Trading Value was set at $13.30 per
share.
The price for each Class A Share is the Trading Value in effect on the
date of the purchase. In addition, the Trading Value is the price at which
Spartan will acquire Class A Shares from a Shareholder-Customer pursuant to
Spartan's options to purchase or redeem or its redemption policy. See
"DESCRIPTION OF CAPITAL STOCK." Although the Board has annually increased
the Trading Value in recent years, there can be no assurance that such
increases will continue or that the Trading Value will not decrease.
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RESTRICTIONS ON TRANSFER
A holder may transfer Class A Shares only to an Approved Holder or a
Shareholder-Customer who continues to purchase grocery and related products
from Spartan. As of the date of this Prospectus, the Board 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) a member of Spartan's Board of Directors;
and (iii) any spouse of an Associate, any biological or adopted child of an
Associate, if the child is 21 years of age or younger, and any trust
created by an Associate or his or her spouse which is established for the
benefit of the Associate or the spouse or any such child of the Associate.
In addition, upon any proposed transfer of Class A Shares, Spartan has an
option to purchase the Class A Shares that are subject to the proposed
transfer. See "DESCRIPTION OF CAPITAL STOCK."
NO MINIMUM OFFERING
Spartan offers the Class A Shares on a "best efforts," continuous
basis. Spartan has not established a minimum number of Class A Shares that
must be subscribed before effecting any sales. There is no assurance that
Spartan will sell all of the Class A Shares that are offered by this
Prospectus.
ABSENCE OF A PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for Spartan's
securities, including the Class A Shares. Spartan does not expect an
active market for the Class A Shares to develop. In addition, although
Spartan has a policy to redeem Class A Shares under certain circumstances,
Spartan is not obligated to do so. Furthermore, only limited classes of
persons are eligible to hold Class A Shares. Thus, any purchaser of Class
A Shares who desires to sell the shares may not be able to do so.
CONFLICTS OF INTEREST
Spartan's directors (except Messrs. Buick, Carton, DeYonker 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
Shareholder-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.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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CLASS B SHARES ELIGIBLE FOR FUTURE SALE
Spartan is authorized to issue 5,000,000 shares of Class B Common
Stock ("Class B Shares") with such preferences, limitations, and voting,
distribution, dividend, liquidation, conversion, participation, redemption
and other rights as the Board may determine before issuance of the shares.
The Board of Directors may authorize and issue one or more series of Class
B Shares with preferences and rights superior to the rights of the holders
of the Class A Shares. As of the date of this Prospectus, no Class B
Shares are outstanding. However, the Board of Directors, without
shareholder approval, could issue Class B Shares with voting or conversion
rights that could adversely affect the voting power of the holders of Class
A Common Stock.
THE COMPANY
INTRODUCTION
The Company distributes grocery and related products to retail stores
located in Michigan, Georgia, Illinois, Indiana, Kentucky, Ohio, Pennsylvania,
Tennessee, and West Virginia. The owners or operators of the retail stores
served by the Company are referred to as "Customers." The independently
owned grocery store Customers served by the Company range from single stores
to supermarket chains with as many as 25 stores. In addition, Spartan's
subsidiary, Valuland, Inc. ("Valuland"), owns and operates 44 retail grocery
stores (the "Company Owned Stores"). Spartan's subsidiaries also 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.
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.
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. The Company
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expanded its strategic direction into the retail grocery industry through
the acquisition of eight retail grocery stores in the fiscal year ended
March 27, 1999 and an additional 36 stores since then.
On June 19, 1999, Spartan had approximately 517 record shareholders of
Class A Shares, of whom 221 were Shareholder-Customers. In the aggregate,
Shareholder-Customers owned 7,487,488 Class A Shares, or approximately 73
percent of the total outstanding. The remaining shareholders of Spartan are
former retail grocery customers, persons who were issued shares of common
stock in certain business acquisitions, the Spartan Stores, Inc. Pension Plan,
and Associates of the Company.
Spartan is authorized to sell its shares of common stock to Customers
of Spartan, Associates, and Approved Holders. In addition, pursuant to its
Bylaws, Spartan may issue Class A Shares in connection with the acquisition
of businesses, assets, or capital stock of another corporation (the persons
to whom such shares are issued are referred to as "Qualified Holders").
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.
DESCRIPTION OF BUSINESS
GENERAL
The Company operates in five operating segments: (1) grocery store
distribution, (2) convenience store distribution, (3) retail grocery
operations, (4) insurance sales and underwriting, and (5) real estate and
finance. Grocery store distribution is the Company's largest operating
segment. The grocery store distribution business includes the distribution
of grocery and related products to the Company's Customers, including the
Company Owned Stores, as well as services directly related to the operation
of those stores. The convenience store distribution segment includes
product distribution to convenience stores. The retail grocery operations
segment includes the operations of the Company Owned Stores. The insurance
sales and underwriting segment includes commission and premium income
generated by sales to Customers and others. The real estate and finance
segment represents revenues from real estate activities with Customers and
others. Spartan's seven subsidiaries distribute products; provide support
and insurance services to Customers; operate the Company Owned Stores; and
fulfill other functions for the Company.
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Financial information on the operating segments is set forth under the
caption "Operating Segment Information" in the notes to the Consolidated
Financial Statements of the Company included with this Prospectus.
BUSINESS STRATEGY
The Company's current strategy is to continue to focus on its core
business: the full service distribution of grocery and related products.
However, during the fiscal year ended March 27, 1999, management expanded
the strategic direction of the Company by acquiring retail grocery stores
in an effort to secure existing business and obtain future sales growth.
The Company currently operates 44 retail stores in Michigan and expects to
continue to acquire additional stores as opportunities become available.
The Company's business strategy emphasizes a philosophy of service to
its Customers. Management of the Company believes that by providing
grocery retailers, including the Company Owned Stores, with a broad array
of products and services, those retailers should be better able to grow and
compete. This growth and success in retail operations should, in turn,
enable the Company's wholesale and retail businesses to grow and prosper.
In addition, Spartan believes that Shareholder-Customers gain an
important competitive advantage by access to the "Spartan" name and image.
The "Spartan" name and logo are widely recognized by consumers in Michigan
and other parts of the Midwest who have come to associate the "Spartan"
name with service, selection, and quality in their grocery shopping. A
majority of all grocery stores supplied by Spartan display the "Spartan"
name and logo.
GROCERY STORE DISTRIBUTION
GENERAL
The Company's grocery store distribution segment includes the
operations of Spartan, a full-service distributor of grocery and related
products. Spartan 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. In addition to Spartan brand products, the Company also
supplies its customers with Spartan "Value" brands. The HomeHarvest value
brand includes approximately 360 items and the SAVE RITE brand includes
approximately 55 items. Spartan ships the products from its main warehouse
and distribution center in Grand Rapids, Michigan, and from a warehouse in
Plymouth, Michigan. On October 14, 1998, the Company's Board of Directors
approved an initiative to replace the Company's Plymouth distribution
center with a new multi-commodity distribution center. The initiative
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includes the cessation of operations at the Company's existing distribution
center in Plymouth, Michigan by April 2000. To supply its Customers,
Spartan operates a fleet of approximately 122 tractors, 217 conventional
trailers, and 152 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.
Spartan utilizes cost-plus pricing for all services and products other
then general merchandise and meat products. Cost-plus pricing consists of
two parts. The first part is the "cost," which is generally the cost that
the manufacturer charges Spartan, subject to definitions and exceptions in
the program. The second part is the "plus," which is a charge generally
consisting of: (1) a fixed amount per case times the number of cases on
the invoice; (2) a percentage of the total invoice product billing; and (3)
a transportation charge based on a transportation pricing schedule that
reflects Spartan's general transportation expenses. Through the cost-plus
pricing program, Spartan prices products, services, and transportation as
separate elements. The program is intended to reflect accurately the
different costs in warehousing and distributing various commodities and to
assist Spartan and its Customers to work together to reduce costs. During
the fiscal year ended March 27, 1999, the Company implemented variable
markup pricing, rather than cost-plus pricing, for general merchandise and
meat products to promote increased sales volumes in these price sensitive
categories.
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. 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 the following 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
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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. 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.
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 27, 1999, the
Company had 46 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 by 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 1999 to 2006. As of the fiscal
years ended March 1999, 1998, and 1997, the Company had outstanding loans
to Shareholder-Customers totaling approximately $5,740,000, $8,010,000 and
$9,770,000, respectively. Over the last 15 years, the Company has not
experienced significant aggregate losses on loans to Shareholder-Customers.
Impaired loans totaled approximately $500,000 at March 27, 1999, including
the current portion, with related allowances of $500,000. The estimated
fair market value of the loans approximates the net carrying value at March
27, 1999.
Spartan has guaranteed payment of indebtedness to financial institutions
aggregating $16,421,000 at March 27, 1999, on behalf of certain Customers.
Market Development Corporation ("Market Development"), a subsidiary of Spartan,
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.
CONVENIENCE STORE DISTRIBUTION
Several subsidiaries of the Company operate and are included in the
convenience store distribution operating 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, Georgia, Illinois,
Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, and West Virginia. United
Wholesale Grocery Company ("United Wholesale") operates 13 cash and carry
outlets in Michigan and Ohio serving approximately 4,700 convenience stores.
RETAIL GROCERY
As a result of three recent acquisitions, the Company's subsidiary
Valuland owns and operates 44 retail supermarkets. On January 4, 1999,
Valuland acquired certain assets of Ashcraft's Market, Inc., an operator of
eight retail grocery stores located primarily in mid-Michigan. On March
29, 1999, Valuland acquired all the issued and outstanding shares of Family
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Fare, Inc., Family Fare Management Services, Inc. and Family Fare Trucking,
Inc. (collectively, "Family Fare"). Family Fare operates 13 retail grocery
stores, a bakery, a warehouse facility and a transportation business
located primarily in Western Michigan. On May 19, 1999, Valuland acquired
certain assets and assumed certain liabilities associated with the retail
grocery, pharmacy and transportation business of Glen's Market, Inc.,
Catt's Realty Co. and Glen's Pharmacy, Inc. (collectively, "Glen's"). As a
result of this acquisition, Valuland operates 23 Glen's retail grocery
stores, four pharmacies, and a distribution center located primarily in
Northern Michigan.
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
Market Development owns 18 retail grocery store facilities that are
leased to Customers and other retailers and owns two vacant properties that are
held for sale. Market Development also owns two vacant properties sites that
it intends to develop. Market Development leases 11 other sites that are
subleased to Customers.
The Company finances its direct investments in shopping centers or new
retail food stores through internally generated capital and borrowed funds.
COMPETITION
The grocery and convenience store industries are characterized by
intense competition and low profit margins. The principal methods of
competition in the grocery industry are price, product quality and variety,
and service. The principal methods of competition in the convenience store
industry are price and product quality, and to a lesser extent, service.
The Company believes that the Company and its Customers are competitive in
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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 that 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 and the Company Owned Stores is approximately 23
percent in Michigan, consisting of approximately 42 percent in Western
Michigan (a 26 county market area), 12 percent in Eastern and Southern
Michigan (a 24 county market area), and 68 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
substantial compliance with all FDA and other federal, state and local laws
and regulations governing its businesses.
SHAREHOLDER-CUSTOMERS/COMPANY OWNED STORES
At March 27, 1999, Spartan was the primary supplier to 445 retail
grocery stores owned by 222 Shareholder-Customers. The average purchases
per store was $4,080,188 during fiscal year 1999. The following table
reflects the number of Shareholder-Customers, the number of stores owned by
the Shareholder-Customers, and the average annual purchases per store
served during the past five years:
<TABLE>
<CAPTION>
END OF NUMBER OF NUMBER OF SHAREHOLDER- AVERAGE ANNUAL PURCHASES
FISCAL SHAREHOLDER- CUSTOMER STORES PER SHAREHOLDER-CUSTOMER
YEAR CUSTOMERS AT YEAR END SERVED AT YEAR END<F*> STORE<F*>
----- --------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
1999 222 445 $ 4,080,188
1998 236 450 3,876,414
1997 232 444 3,910,170
1996 259 465 3,767,745
1995 273 450 3,363,538
<FN>
<F*>Includes eight Company Owned Stores that the Company purchased on January
4, 1999, from Ashcraft's Market, Inc., a Shareholder-Customer of the
Company prior to the acquisition.
</FN>
</TABLE>
As the above illustrates, 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 Customers has increased. In addition,
Spartan's largest Shareholder-Customers grew substantially.
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The following table reflects the diversity in the Shareholder-Customer
base of Spartan as of March 27, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDER- PERCENT OF TOTAL
NUMBER OF CUSTOMERS OPERATING CUSTOMERS
STORES OPERATED THE NUMBER OF STORES SALES<F*>
--------------- ---------------------- ----------------
<S> <C> <C> <C>
1 174 23.0%
2 24 10.0%
3 5 4.0%
4 or more 19 63.0%
<FN>
<F*>Includes eight Company Owned Stores that the Company purchased on January
4, 1999, from Ashcraft's Market, Inc., a Shareholder-Customer of the
Company prior to the acquisition.
</FN>
</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 50 percent of its total net sales for fiscal year 1999,
but no single Shareholder-Customer accounted for more than 8 percent of
Spartan's total net sales. Subsequent to year end, Valuland became
Spartan's largest retail Customer with a projected 13 percent of 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 27, 1999, the Company employed approximately 3,500
Associates, of which approximately 1,070 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, J.F. Walker and Valuland are not represented by a union.
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The Company considers its relations with all Associates to be satisfactory
and has not had any work stoppages in the last five years.
TERMS OF SALE AND BAD DEBT EXPERIENCE
The Company furnishes to its Customers in the grocery store and
convenience store distribution segments 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.
PROPERTIES
Spartan owns approximately 1,331,000 square feet of warehouse,
distribution, and office space located on 210 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 71 acres of the 210-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 307,000 square feet; dry grocery space
of approximately 585,000 square feet; general office space, including a
print shop, of approximately 151,000 square feet; and transportation and
salvage buildings of approximately 55,000 square feet. Spartan leases a
416,000 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.
The Company has begun the relocation to a new multi-commodity distribution
center that will replace its existing Plymouth distribution center by April
2000.
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 52,000 square feet of warehouse and office space in
Grand Rapids, Michigan and a trailer relay station in Kalkaska, Michigan
that consists of four trailer parking stations in a secured area.
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L & L/Jiroch owns approximately 180,000 square feet of warehouse and
office space located on approximately 34 acres in Wyoming, Michigan, to
service its Customers.
Market Development owns approximately 644,000 square feet in nine
shopping centers and an additional 415,000 square feet in nine
free-standing locations, all of which it leases to Customers and other
retailers. This leased space consists of approximately 819,000 square feet
of grocery retail space and approximately 240,000 square feet of other
retail space. The nine leased shopping centers (the "Shopping Centers")
are located in Brighton, Michigan (78,000 square feet of retail space);
Cascade Township, Michigan (100,000 square feet of retail space); Fenton,
Michigan (77,000 square feet of retail space); Fremont, Michigan (41,000
square feet of retail space); Kentwood, Michigan (78,000 square feet of
retail space); Ludington, Michigan (42,000 square feet of retail space);
Sterling Heights, Michigan (99,000 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 Milford Township, Macomb Township and Jackson,
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 18 retail grocery store facilities (including
those leased in the Shopping Centers) that are leased to Customers and
other retailers, with terms expiring from 1999 to 2017. Aggregate lease
rental income received was $6,959,000, $6,496,000, and $6,599,000 in fiscal
years 1999, 1998, and 1997, respectively. In addition, Valuland has a
sixty-five percent interest in a joint venture that constructed and now
operates a grocery store of approximately 45,700 square feet under a lease
that expires in 2018.
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 2001 to 2016. Aggregate
lease rental income received pursuant to the subleases was $2,474,000,
$2,697,000, and $2,471,000 in fiscal years 1999, 1998, and 1997,
respectively. Site lease rental expenses were $2,392,000, $2,524,000, and
$2,361,000 for fiscal years 1999, 1998, and 1997, 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 69,600 square
feet of warehouse and distribution space at its locations in Michigan,
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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.
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 238,000 square feet.
Valuland leases eight Ashcraft's Market retail grocery stores
totalling approximately 283,000 square feet of retail space; 23 Glen's
Market retail grocery stores totalling approximately 757,000 square feet of
retail space; and a distribution center in Waters, Michigan, with
approximately 50,000 square feet. In addition, Family Fare, Inc., a wholly
owned subsidiary of Valuland, leases thirteen Family Fare retail grocery
stores totalling approximately 519,000 square fee of retail space, a
distribution center in Hudsonville, Michigan, with approximately 52,000
square feet, and a bakery with approximately 18,000 square feet.
LEGAL PROCEEDINGS
On August 21, 1996, the Attorney General for the State of Michigan
filed an action in Michigan circuit court against the leading cigarette
manufacturers operating in the United States, twelve wholesalers and
distributors of tobacco products in Michigan (including three Company
subsidiaries) and others seeking certain injunctive relief, the
reimbursement of $4 billion in Medicaid and other expenditures incurred or
to be incurred by the State of Michigan to treat diseases allegedly caused
by cigarette smoking and punitive damages of $10 billion. In July 1998,
the court dismissed the claim for punitive damages. On December 7, 1998,
the State of Michigan and the cigarette manufacturers settled the remaining
claims and the case was dismissed by the court without any payment by the
Company or its subsidiaries. Thirty actions have been filed in state
courts in Pennsylvania against the leading cigarette manufacturers
operating in the United States and certain wholesalers and distributors,
including a subsidiary of the Company. All of the Pennsylvania actions
were filed by individual plaintiffs pursuant to a special notice procedure
which does not include any formal complaint. In these separate cases, the
Company expects that the plaintiffs are seeking compensatory, punitive and
other damages, reimbursement of medical and other expenditures and
equitable relief. The Company believes that its subsidiaries have valid
defenses to these legal actions. These actions are being vigorously
defended. All but two of the Pennsylvania actions have been dismissed
without prejudice pursuant to a Dismissal and Tolling Agreement under which
the defendants have agreed not to raise the defense of statute of
limitations or laches if an action is filed by a plaintiff before April 1,
1999. It is anticipated that the Dismissal and Tolling Agreement will be
extended to October 1, 1999 with respect to certain defendants, including
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the Company's subsidiaries. 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.
REQUIRED INVESTMENT POLICY AND TRADING VALUE
The Board of Directors of Spartan has adopted a policy which requires
Shareholder-Customers to purchase and hold a Required Investment in the
Class A Shares. From time to time, the Board may change the minimum
investment and other terms of the Required Investment policy.
To become a Shareholder-Customer, a retail grocer must agree to make the
Required Investment. To satisfy the Required Investment policy in effect as
of the date of this Prospectus, each Shareholder-Customer must purchase 1,000
Class A Shares at the current Trading Value for each corporation, partnership
or other entity which is affiliated with the retail grocer and which owns one
or more Approved Stores (defined below).
In addition, to satisfy the Required Investment, on or before the date
five years from the date that Spartan accepts a store as an approved location
for the sale of Spartan products (an "Approved Store"), each Shareholder-
ustomer also must own Class A Shares (including the 1,000 Class A Shares
described above) with an aggregate Trading Value equal to $10,000 plus
one-and-one-half times the Shareholder-Customer's average weekly purchases
from Spartan during Spartan's prior fiscal year attributable to each Approved
Store, up to a maximum Required Investment for each Approved Store of
$125,000.
The Trading Value is the price at which Shareholder-Customers must
acquire Class A Shares from Spartan. 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, 1999, the Trading
Value was established at $13.30 per share. During the fiscal years ended
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<PAGE>
March 1999, 1998 and 1997, the Trading Value was $12.30, $11.30 and $10.50
per share, respectively, as adjusted for the July 1997 ten-for-one stock
split.
If a Shareholder-Customer no longer purchases grocery and related products
from Spartan, it is Spartan's policy (but not a contractual obligation) to
redeem, at the Shareholder-Customer's request, that number of Class A Shares
then held by the Shareholder-Customer with an aggregate Trading Value which
equals the Shareholder-Customer's Required Investment as of the date the
Shareholder-Customer ceased purchasing from Spartan. Payment for such
redeemed Class A Shares is made in six equal installments over a five-year
period.
A Shareholder-Customer may elect to accumulate stock in excess of the
Required Investment. As of June 19, 1999, Shareholder-Customers owned in the
aggregate 8,386,000 Class A Shares in excess of their aggregate Required
Investments. It is Spartan's policy (but not a contractual obligation) also
to redeem for cash at the current Trading Value any Class A Shares owned by a
Shareholder-Customer with an aggregate Trading Value in excess of the
Shareholder-Customer's Required Investment, or, if the Shareholder-Customer
no longer purchases grocery and related products from Spartan, in excess of
the Shareholder-Customer's Required Investment as of the date the Shareholder-
ustomer ceased purchasing products from Spartan. See "RISK FACTORS--
Redemption Policy" and "DESCRIPTION OF CAPITAL STOCK--Redemption Policy."
In addition to Class A Shares sold to satisfy the applicable Required
Investment, Spartan offers all Shareholder-Customers, Associates, Approved
Holders and Qualified Holders the opportunity to purchase Class A Shares at
any time and from time to time. Spartan sells the Class A Shares at the
Trading Value in effect at the time of the purchase.
Certain subsidiaries of Spartan distribute grocery products to convenience
stores or independent grocers or operate cash and carry outlets. These
subsidiaries do not require their customers to maintain an investment in the
capital stock of Spartan or the respective subsidiary.
CUSTOMER AGREEMENTS
To become a Shareholder-Customer, a retail store must submit to Spartan,
among other documents, a completed Stock Subscription Agreement, together with
the initial payment for Class A Shares to satisfy the Required Investment,
and a Customer Agreement. The following summarizes only the Stock Subscription
Agreement and Customer Agreement. The summary is qualified in its entirety
by reference to the Stock Subscription Agreement and the Customer Agreement,
copies of which are available from Spartan. Spartan encourages each applicant
to review the Stock Subscription and Customer Agreements carefully before
applying, and to obtain the advice of counsel.
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<PAGE>
In the Stock Subscription Agreement, the Shareholder-Customer agrees to
acquire from time to time and hold an investment in Class A Shares sufficient
to comply with the Required Investment. In addition, the Shareholder-Customer
agrees to be bound by the transfer restrictions and the options to purchase
the Class A Shares granted to Spartan as set forth in Spartan's Bylaws. The
terms of the Stock Subscription Agreement apply to all Class A Shares held by
the Shareholder-Customer, whenever acquired.
In the Customer Agreement, Spartan agrees to use its best efforts to
supply the Shareholder-Customer with the Shareholder-Customer's requirements
for resale at Approved Stores. A Shareholder-Customer may sell grocery and
related products supplied by Spartan only at Approved Stores. A Shareholder-
ustomer may add a new retail store location as an Approved Store only upon
Spartan's approval.
The Shareholder-Customer agrees to comply with the rules, regulations and
policies applicable to Spartan's Customers as may be established from time to
time by Spartan (the "Policy Manual"). Among other matters, the Policy Manual
contains Spartan's policies on the Required Investment, Trading Value, Volume
Incentive Rebates, and stock redemptions. In its discretion, Spartan may
revise or terminate any portion of the Policy Manual at any time, provided
that Spartan must give the Shareholder-Customer reasonable notice of any
revision which imposes any new or changed obligation on the Shareholder-
Customer.
The Shareholder-Customer agrees that its purchases of the grocery and
related products and services will be in accordance with Spartan's Standard
Terms and Conditions of Sale, which Spartan may amend from time to time.
Among other matters, the Standard Terms and Conditions of Sale set forth the
terms of payment, order procedures, procedures for price and rebate changes,
delivery terms, inspection and acceptance practices and warranties and
limitations on warranties.
The Customer Agreement grants to the Shareholder-Customer the
nonexclusive, nontransferable right to use all Spartan trademarks, trade
names, designs, logos, slogans, trade dress, product configurations, container
configurations and other identifications (the "Trademarks"). The Shareholder-
ustomer may use the Trademarks to advertise and promote the sale of products
at Approved Stores.
Either Spartan or the Shareholder-Customer may terminate the Customer
Agreement at any time with or without cause by giving the other party not
less than 30 days prior written notice. Upon a default by a Shareholder-
ustomer, as described below, Spartan may terminate the Customer Agreement
upon written notice to the Shareholder-Customer. In addition, the Customer
Agreement will automatically terminate, without notice, if: (i) the
Shareholder-Customer for a continuous 30-day period fails to order any
merchandise from Spartan, unless the failure to order for the period results
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from a cause beyond the Shareholder-Customer's control; (ii) the Shareholder-
Customer is adjudicated bankrupt, or a petition is filed by or against the
Shareholder-Customer under any federal or state bankruptcy laws relating to
the relief of debtors for reorganization, arrangement or other similar relief
permitted thereby, or the Shareholder-Customer makes a general assignment for
the benefit of creditors; or (iii) a receiver, trustee, or similar officer is
appointed with respect to any of the Shareholder-Customer's properties or
businesses, or the Shareholder-Customer's interest in the Customer Agreement
is attached, executed or levied upon, seized, garnished, or appropriated by a
legal process, unless the appointment of the officer is vacated or discharged,
or the effect of the legal process is otherwise released, within 10 days; or
(iv) any act or event of the type described in the above subsection occurs
which relates to, involves, or affects the interest of one or more persons
having a 50 percent or greater ownership interest in a Shareholder-Customer
which is a corporation, partnership or other legal entity.
The Shareholder-Customer will be in default under the Customer Agreement
if the Shareholder-Customer fails to pay when due any amount owed Spartan or
to perform any obligation, default of which cannot be cured, under the Customer
Agreement, Spartan's Bylaws, the Policy Manual, or the Stock Subscription
Agreement. The Shareholder-Customer will also be in default if it fails to
perform any other obligation under the Customer Agreement or under Spartan's
Bylaws, the Policy Manual, or the Stock Subscription Agreement, and the
failure continues for 10 days following receipt of notice from Spartan
specifying the failure.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIGNIFICANT CURRENT YEAR DEVELOPMENT
During the fiscal year ended March 27, 1999, the Company announced at
its Annual Meeting of Shareholders that the strategic direction of the
Company would be expanded into the retail grocery industry. Since that
announcement, Valuland has completed the acquisition of 44 retail grocery
stores located in Michigan, eight of which had been acquired by March 27,
1999. Management of the Company believes that these acquisitions will
secure existing market share, provide future acquisition opportunities and
increase the long term value of the Company. The acquisitions were funded
by borrowings under a new bank credit agreement, which also provides credit
facilities for future acquisitions in the retail grocery industry.
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<PAGE>
Management of the Company continues to evaluate potential acquisitions and
anticipates completing future acquisitions of retail grocery stores. The
impact of the eight retail stores acquired during the fiscal year ended
March 27, 1999 is discussed in the "Results of Operations" section below.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Earnings as percentages of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
MARCH 27, MARCH 28, MARCH 29,
1999 1998 1997
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Gross profit 10.2 10.2 9.6
Less:
Operating and administrative expenses 8.9 9.2 8.8
Restructuring charge 0.2
Interest expense 0.3 0.4 0.4
Interest income (0.1) (0.1) (0.1)
Gain on sale of property and equipment (0.2) (0.1)
----- ----- -----
Total 9.3 9.3 9.0
----- ----- -----
Earnings before income taxes and
extraordinary item 0.9 0.9 0.6
Income taxes 0.3 0.3 0.2
----- ----- -----
Earnings before extraordinary item 0.6 0.6 0.4
4Extraordinary item (net of income taxes)
----- ----- -----
Net earnings 0.6% 0.6% 0.4%
===== ===== =====
</TABLE>
NET SALES
FISCAL 1999
Net sales for the fiscal year ended March 27, 1999 increased $182.5
million compared to the fiscal year ended March 28, 1998.
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<PAGE>
Net sales in the grocery store distribution segment for this period
increased $37.7 million. The increase is primarily the result of increased
sales of pharmacy and perishable products and incremental sales associated
with the Company's entrance into the retail grocery industry. Management
of the Company has taken several actions to positively impact net sales
growth in the grocery store distribution segment. The Company has been
successful in securing new pharmacy business with existing retail
customers. Additionally, the Company is focusing its promotional efforts
on higher priced items and has committed a portion of earnings to the
development of promotional programs in conjunction with food manufacturers.
Several of these programs have been established for perishable products,
where many retailers are differentiating themselves from competing formats
such as the supercenter, limited assortment or discount format. During
1999, in an effort to drive sales growth, the Company implemented variable
markup pricing for general merchandise and meat products rather than the
cost-plus pricing strategy used for other products. Finally, the Company
acquired eight retail grocery stores in mid-Michigan on January 4, 1999
that contributed to current year sales growth. Offsetting sales growth to
a certain degree were declines in sales of grocery products due to highly
competitive market conditions, declines in retail store equipment sales
resulting from a reduction in retail store remodeling and expansion
activity, and declines in revenue associated with the discontinuance of the
Company's "Over-the-Road" trucking division. Management expects net sales
in the grocery store distribution segment to continue to be positively
impacted by the acquisition of an additional 36 retail grocery stores
completed subsequent to March 27, 1999, as well as anticipated future
retail store acquisitions.
Net sales in the convenience store distribution segment for the fiscal
year ended March 27, 1999 increased $145.7 million compared to the fiscal
year ended March 28, 1998 primarily due to cigarette price increases by
cigarette manufacturers. The Company experienced four price increases
during the first two quarters of the fiscal year that together resulted in
price inflation of approximately 10%. During the third quarter, the
Company experienced another price increase that resulted in additional
inflation of approximately 33%.
Net sales in the insurance segment for the fiscal year ended March 27,
1999 were comparable with net sales in the fiscal year ended March 28,
1998. Net sales in the real estate segment declined by approximately $1.4
million due to management's planned reduction of its retail property
portfolio.
FISCAL 1998
Net sales for the fiscal year ended March 28, 1998 increased $14.2
million compared to the fiscal year ended March 29, 1997.
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Net sales in the grocery store distribution segment increased by $3.2
million. The increase was 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.
Net sales in the convenience store distribution segment increased $9.9
million. The increase in sales to convenience store retailers was
primarily the result of an acquisition by a subsidiary of the Company,
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.
Sales in the insurance segment for the fiscal year ended March 28,
1998 declined approximately $.7 million. The decline reflected increased
competitive pressures in the property and casualty insurance markets.
Sales in the real estate segment during the fiscal year ended March 28,
1998 were comparable to sales experienced during the fiscal year ended March
29, 1997.
GROSS PROFIT
FISCAL 1999
Gross profit as a percentage of net sales for the fiscal year ended
March 27, 1999 was 10.2%, unchanged from the fiscal year ended March 28,
1998. The grocery store distribution segment experienced increases in
gross profit as a percentage of sales resulting from a change in the
methodology by which it administers its cost-plus pricing policy.
Additionally, gross profit as a percentage of sales was positively impacted
by the Company's entry into the retail grocery industry, where gross
profits are typically higher as a percentage of sales than in wholesale
operations. Offsetting these increases were disbursements by the Company
to complement promotions offered by manufacturers as discussed in the Net
Sales section above. The convenience store distribution segment
experienced improvements in gross profit resulting from sales of cigarettes
that were purchased prior to price increases discussed above. The
increases in gross profit as a percentage of sales in the grocery and
convenience store distribution segments were offset by declines in sales in
the insurance and real estate segments. Management expects gross profits
as a percentage of net sales to be positively impacted by the Company's
past and future acquisitions of retail grocery stores.
FISCAL 1998
Gross profit as a percentage of net sales for the fiscal year ended
March 28, 1998 was 10.2%, compared to 9.6% in fiscal year ended March 29,
1997. The improvement in gross profit for the fiscal year ended March 28,
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<PAGE>
1998 was attributable to several factors, including enhanced inventory
procurement practices in the grocery store distribution segment, as the
Company purchased inventories in excess of current needs to take advantage
of promotions offered by vendors. Also, the Company experienced some
improvements in gross profit in the convenience store distribution segment
from the sale of cigarette inventories purchased prior to price increases
in 1998. Finally, during the third quarter, the Company revised the
methodology by which it administers its cost-plus pricing policy to compute
amounts billed based on acquisition cost before considering any promotional
allowance.
RESTRUCTURING CHARGE
On October 14, 1998, the Company's Board of Directors approved an
initiative to replace the Company's Plymouth distribution center with a new
multi-commodity distribution center. The initiative includes the cessation
of operations at the Company's existing distribution center in Plymouth,
Michigan by April 2000 and would result in the displacement of
approximately 300 Associates in Plymouth and approximately 100 Associates
at its Grand Rapids, Michigan distribution center. In connection with the
initiative, $5,697,738, or .2% of net sales, has been accrued as of March
27, 1999. The charge encompasses accruals for contractual amounts to be
paid under a collective bargaining agreement, additional severance pay, and
amounts due in connection with withdrawal from the union pension plan.
Management expects the accrual to continue to increase as additional
severance costs are recognized over the period of service provided.
OPERATING AND ADMINISTRATIVE EXPENSES
FISCAL 1999
Operating and administrative expenses for the fiscal year ended March
27, 1999 were 8.9% of net sales compared to 9.2% in the fiscal year ended
March 28, 1998. The decline is primarily the result of the increase in net
sales as discussed above. Actual operating costs increased by
approximately $9.2 million, with a majority of the increase resulting from
Company's entrance into the retail grocery industry and incremental costs
associated with volume increases in the convenience store distribution
segment. Management expects operating and administrative expenses to
increase as a percentage of net sales due to the Company's retail store
operations for which operating and administrative expenses are typically
higher as a percentage of net sales than in wholesale operations.
FISCAL 1998
Operating and administrative expenses for the fiscal year ended March
28, 1998 were 9.2% of net sales, compared to 8.8% for the fiscal year ended
March 29, 1997. The increase was primarily attributable to information
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<PAGE>
technology costs to address Year 2000 issues, software amortization
expense, declines in warehouse efficiency and the implementation of an
incentive compensation program for management associates. During January
1998, the Company also paid approximately $1.3 million in settlement of
certain employee-related claims.
INTEREST EXPENSE AND INCOME
FISCAL 1999
Interest expense for the fiscal year ended March 27, 1999 declined by
approximately $1.7 million from the fiscal year ended March 28, 1998. The
decline was due primarily to average lower borrowings during the year as a
result of the Company's increase in cash flows generated from operations.
However, management expects interest expense to increase as a result of a
new bank credit agreement entered into during March 1999 that has resulted
in an increase in borrowing rates. This bank credit agreement is discussed
in greater detail in the "Liquidity and Capital Resources" section below.
Interest income for the fiscal year ended March 27, 1999 was slightly lower
than the fiscal year ended March 28, 1998 due to lower notes receivable
from retailers and fewer delinquent accounts. This decline was offset
somewhat by increased interest income in the convenience store segment due
to the Company's short-term investment of cash generated from operations.
FISCAL 1998
Interest expense for the fiscal year ended March 28, 1998 increased by
approximately $1.2 million over the fiscal year ended March 29, 1997. 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 the fiscal year ended March 29, 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. Interest income declined by approximately $.3 million in the
fiscal year ended March 28, 1998 from the fiscal year ended March 29, 1997.
The reduction in interest income 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.
GAIN ON SALE OF PROPERTY AND EQUIPMENT
The gain on sale of property and equipment of $1.2 million for the
fiscal year ended March 27, 1999 was due primarily to approximately $1.9
million in gains on the sales of three retail properties, offset by losses
of approximately $.7 million on the write-down of certain assets. These
assets included certain technology-related equipment in connection with the
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<PAGE>
implementation of a logistics software package and assets associated with
the closing of administrative offices in conjunction with the Company's
continuing efforts to centralize existing processes. Management does not
expect significant sales of retail properties to occur during the current
fiscal year. However, the Company will recognize a gain of approximately
$2.5 million associated with the sale of common stock held in another
entity during the current fiscal year.
The gain on sale of property and equipment of $3.9 million and $1.7
million, respectively, for the fiscal years ended March 28, 1998 and March
27, 1997, were due primarily to the sale of retail properties during these
years and the sale of a distribution facility in the fiscal year ended
March 29, 1997. The sales of retail properties were completed in
conjunction with a plan to reduce the Company's debt and real estate
portfolio to historical levels.
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Earnings before income taxes and extraordinary item were $25.0 million
for the fiscal year ended March 27, 1999, compared to $22.2 million for the
fiscal year ended March 28, 1998, and $15.4 million for the fiscal year
ended March 29, 1997.
Earnings before income taxes and extraordinary item in the grocery
store distribution segment were $2.3 million for the fiscal year ended
March 27, 1999, compared to $6.5 million for the fiscal year ended March
28, 1998, and $1.9 million for the fiscal year ended March 29, 1997. The
decline experienced during the fiscal year ended March 27, 1999 was due
primarily to the restructuring charge of approximately $5.7 million,
recorded in connection with management's decision to replace the Company's
Plymouth distribution center. The new multi-commodity distribution center
along with related initiatives is expected to reduce overall operating
costs, provide better service to existing Customers, and promote expansion
and growth in southern markets. The increase experienced during the fiscal
year ended March 28, 1998 was due primarily to improvements in gross
profit.
Earnings before income taxes and extraordinary item in the convenience
store distribution segment were $15.3 million for the fiscal year ended
March 27, 1999, compared to $6.1 million for the fiscal year ended March
28, 1998, and $6.6 million for the fiscal year ended March 29, 1997. The
increase during the fiscal year ended March 27, 1999 was due primarily to
the sale of cigarettes purchased prior to significant price increases by
cigarette manufacturers.
Earnings before income taxes and extraordinary item in the insurance
segment were $3.6 million for the fiscal year ended March 27, 1999,
compared to $3.6 million for the fiscal year ended March 28, 1998, and $3.9
million for the fiscal year ended March 29, 1997.
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<PAGE>
Earnings before income taxes and extraordinary item in the real estate
segment were $3.8 million for the fiscal year ended March 27, 1999,
compared to $6.0 million for the fiscal year ended March 28, 1998, and $2.9
million for the fiscal year ended March 29, 1997. Earnings in the real
estate segment in each of these years have been positively impacted by
sales of retail properties which are not expected to occur in the current
fiscal year.
EXTRAORDINARY ITEM
During the fourth quarter of the fiscal year ended March 27, 1999, the
Company incurred a pre-payment penalty of approximately $1.6 million in
connection with the repayment of senior notes outstanding. This
extraordinary item was recorded in the grocery store distribution segment.
The payment of the senior notes was required as a result of the Company's
new bank credit agreement discussed in the Liquidity and Capital Resources
section below.
YEAR 2000 READINESS DISCLOSURE
During the fiscal year ended March 29, 1997, the Company began assessing
the ability of its computers and other systems to accurately process date
and time data in connection with the Year 2000. As a result of this
assessment, the Company developed a plan that addressed internally
developed systems, purchased systems, imbedded processors and third party
risks. The strategy for internally developed systems has been to replace or
convert non-compliant systems or eliminate unnecessary systems. The
Company is using both internal resources as well as contracted consultants
to assist in this process. The Company also has completed an inventory of
its purchased systems and imbedded processors, has contacted or attempted
to contact the related vendors or manufacturers to determine their Year
2000 compliance, and is in the process of replacing, converting or
eliminating the purchased systems that the Company has been informed or
otherwise has determined are not Year 2000 compliant. The Company has
identified and replaced or repaired a small number of systems having
non-compliant imbedded processors and anticipates Year 2000 readiness in
this area by July 1999. Finally, the Company has mailed inquiries to its
customers, suppliers and financial institutions relative to their Year 2000
compliance status. The Company continues to communicate Year 2000 issues to
the Company's Customers by conducting seminars and distributing tool kits
and other similar materials.
The Company estimates that it already has replaced or converted
approximately 85% to 90% of its non-compliant systems and that all of its
major systems are Year 2000 compliant. The Company has spent approximately
$5.5 million during the past two fiscal years and expects to incur an
additional $.8 million to address Year 2000 issues. The Company has
delayed other non-critical development and support initiatives as a result
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<PAGE>
of these expenditures. The Company believes that due to its current
efforts and future plans the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. If all
modifications and conversions to the Company's systems are not timely
completed, however, or if the Company's customers, suppliers or financial
institutions should fail to adequately modify their computer systems, the
Year 2000 problem could have a material adverse impact on the Company's
ability to order and distribute product as well as operate its insurance,
retail and real estate and finance businesses. Management believes the
Company's greatest exposure exists with its Customers and suppliers and
their inability to process business transactions should they fail to
adequately address the Year 2000 problem. The Company is developing
business interruption contingency plans designed to address adverse
consequences potentially arising from the Year 2000 problem.
This Year 2000 Readiness Disclosure is in part based upon and repeats
information provided to the Company by outside sources, including its
suppliers, Customers, outside consultants and other business partners and
the manufacturers, vendors and licensors of the Company's software,
hardware and other systems and equipment. Although the Company believes
this outside information is accurate, the Company is not the original
source of this outside information and has not independently verified the
information.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $101.9 million at March 27, 1999
compared to $61.7 million at March 28, 1998. The Company's current ratio
increased from 1.35:1.00 at March 28, 1998 to 1.77:1.00 at March 27, 1999.
The improvement in liquidity is primarily the result of cash flows from
operations and refinancing in connection with a new bank credit agreement
entered into on March 18, 1999, under which borrowings are classified as
long-term. Net cash provided by operating activities continues to outpace
prior year levels at $50 million for the fiscal year ended March 27, 1999,
compared to $29.6 million and $16.4 million for the fiscal years ended
March 28, 1998 and March 29, 1997, respectively. These increases are
primarily the result of improved earnings and the liquidation of excess
cigarette inventories held during the fiscal year ended March 27, 1999.
Net cash used in investing activities was $70.3 million during the
fiscal year ended March 27, 1999, compared to $3.2 million and $35.8
million during the fiscal years ended March 28, 1998 and March 29, 1997,
respectively. The increase in the fiscal year ended March 27, 1999 was
primarily the result of the acquisition of eight retail grocery stores
prior to fiscal year end and the deposit of funds to be used for
acquisitions completed subsequent to year end, offset by reductions in
capital expenditures and proceeds from the sale of three retail properties
during the year. The decline in the fiscal year ended March 28, 1998 was
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<PAGE>
primarily the result of proceeds from the sale of nine retail properties
and reductions in capital expenditures.
Net cash flows provided by financing activities were $27.4 million
during the fiscal year ended March 27, 1999, compared to net cash flows
used in financing activities of $23.6 million during the fiscal year ended
March 28, 1998 and net cash flows provided by financing activities of $13.8
million during the fiscal year ended March 29, 1997. On March 19, 1999,
the Company entered into a $425 million senior secured credit facility to
refinance existing debt, support retail store acquisitions, fund working
capital and support other general corporate needs. The new credit facility
resulted in debt issuance costs of approximately $9.0 million. The credit
facility consists of (a) a Revolving Credit Facility in the amount of $100
million with a term of six years, (b) a Term Loan A in the amount of $100
million with a term of six years, (c) an Acquisition Facility in the amount
of $75 million with a term of seven years and (d) a Term Loan B in the
amount of $150 million with a term of eight years. The credit facility
provides for the issuance of letters of credit of which $11,810,000 were
available for use as of March 27, 1999. Interest rates payable on amounts
borrowed under the senior secured credit facility are based on the prime
rate, the federal funds rate or the eurodollar rate. As of March 27, 1999,
the Company had $100 million outstanding on the Term Loan A facility
bearing interest at 9.00% and $150 million outstanding on the Term Loan B
facility bearing interest at 9.75% per annum. As of March 27, 1999,
approximately $78.1 million of the proceeds from the credit facility were
held in a bank escrow account for use in connection with acquisitions
consummated subsequent to year-end.
The Company is also permitted to sell Variable Rate Promissory Notes
under a note offering 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, although the Company's bank credit agreement
restricts the total amount outstanding under the offering to approximately
$16.1 million. As of March 27, 1999, approximately $51.4 million of these
notes have been issued and approximately $15.9 million were outstanding.
CAPITAL STRUCTURE
The following table summarizes the Company's capital structure for the
last two fiscal years:
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<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------
<S> <C> <C> <C> <C>
Average short-term borrowing during the year $ 13,600,000 3.0% $ 29,800,000 10.5%
Long-term debt at year-end 274,136,907 60.4 112,444,327 39.7
Present value at year-end:
Capital leases 1,111,394 0.2 1,765,995 0.6
Operating leases:
Used in operations 28,118,168 6.2 8,885,000 3.1
Subleased to others 15,808,593 3.5 16,281,652 5.8
------------ ----- ------------- -----
Total debt capital 332,775,062 73.3 169,176,974 59.7
Shareholders' equity 121,061,390 26.7 114,192,251 40.3
------------ ----- ------------- -----
Total capitalization $453,836,452 100.0% $ 283,369,225 100.0%
============ ===== ============= =====
</TABLE>
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 Trading Value of the Class A Shares was $12.30 per
share at March 27, 1999. Effective as of June 21, 1999, the new Trading
Value has been established at $13.30 per share.
The Company paid quarterly dividends of $.0125 per share for each of
the past three fiscal years. Dividends were $555,714 for the fiscal year
ended March 27, 1999. The senior secured credit facility contains covenants
which restrict the amount of cash dividends payable by the Company to
$800,000 in any twelve-month period.
On July 15, 1997, Spartan's Articles of Incorporation 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 SOP 98-1, "Accounting for the Costs of Computer Software Developed or
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<PAGE>
Obtained for Internal Use." The SOP is effective for the Company on March
28, 1999. 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.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement requires companies to record derivatives on the balance sheet as
assets and liabilities measured at fair value. The accounting treatment of
gains and losses resulting from changes in the value of derivatives depends
on the use of the derivative and whether it qualifies for hedge accounting.
The Company will adopt SFAS No. 133 as required no later than March 26, 2000,
and is currently assessing the impact of adoption on its consolidated
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to interest rate risk related to its debt
outstanding and notes receivable from Customers. The interest rate paid on
a majority of the Company's debt outstanding is vulnerable to changes in
either the prime rate, the federal funds rates or the eurodollar rate.
Interest received on notes receivable from Customers is vulnerable to
changes in the prime rate. The Company does not use financial instruments
or derivatives for trading or speculative purposes.
The Company manages interest rate risk on a portion of its debt
through the use of an interest rate swap agreement that was entered into
subsequent to the fiscal year-end, and that is effective from June 30, 1999
to June 29, 2003. Under the terms of the agreement, the Company is
protected against increases in interest rates from and after the date of
the contract in the initial aggregate notional amount of $162,500,000,
which amount decreases in proportion to principal payments made on the Term
Loan A and the Term Loan B under the Company's credit facility. The
aggregate notional amount will be $123,666,667 at the end of the contract's
four-year term.
The following table sets forth the maturities of the Company's notes
receivable from Customers and debt outstanding as of March 27, 1999:
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<PAGE>
<TABLE>
<CAPTION>
NOTES DEBT
RECEIVABLE OUTSTANDING
MATURITIES (VARIABLE RATE) (VARIABLE RATE)
---------- --------------- ---------------
<S> <C> <C> <C>
Fiscal 2000 $ 1,423,410 $ 5,726,153
Fiscal 2001 2,239,402 34,519,242
Fiscal 2002 906,834 21,030,721
Fiscal 2003 759,126 15,816,927
Fiscal 2004 525,168 21,106,159
Thereafter 413,013 177,049,099
------------ --------------
Fair value at March 27, 1999 $ 6,266,953 $ 275,248,301
============ ==============
Average variable rate at March 27, 1999 8.25% 9.30%
===== =====
</TABLE>
MANAGEMENT
The names, ages, and principal occupations of directors and executive
officers of Spartan as of June 25, 1999 are set forth below.
<TABLE>
<CAPTION>
POSITION AND PRINCIPAL
NAME AND AGE OCCUPATION FOR LAST FIVE YEARS
- ------------ ------------------------------
<S> <C>
Russell H. VanGilder, Jr. (65) Chairman of the Board since 1998; Vice
Chairman of the Board from 1992 to 1998 and
director since 1970; Chairman of the Board,
V.G.'s Food Center, Inc. (retail grocery
chain)
Parker T. Feldpausch (67) Vice-Chairman of the Board since 1998 and
Director since 1990; President, G & R
Felpausch Co. (retail grocery chain)
Roger L. Boyd (53) 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)
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<PAGE>
James G. Buick (66) 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 (58) Director since 1995; Chairman of the Board,
Pine View Golf Club, Inc. and Turfside, Inc.
(golf course and restaurant)
Alex J. DeYonker (49) Director since 1999; General Counsel and
Assistant Secretary since May 1995; partner
of Warner Norcross & Judd LLP (law firm)
Ronald A. DeYoung (65) Director since 1974; President, Great Day,
Inc. (retail grocery chain)
Martin P. Hill (54) 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 (49) Director since 1996; President, Prevo's
Family Market, Inc. (retail grocery chain)
James B. Meyer (53) 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 (49) 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, Valuland, Inc.
since 1992; President, Market Development
Corporation since 1990
David deS. Couch (48) Vice President Information Technology since
May 1996; Director of Management Information
Services from December 1991 to May 1996
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<PAGE>
Michael D. Frank (47) Vice President Logistics since July 1997;
Vice President Distribution, Associated
Wholesale Grocers, Inc. from 1987 to
July 1997 (supermarket cooperative)
J. Kevin Schlosser (49) 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)
Richard C. Deming (54) Vice President Human Resources since August
1998; Vice President Human Resources, AP
Parts International, Inc. from 1994 to
1998; Vice President Human Resources,
Pirelli Cables North America from
1991 to 1994
</TABLE>
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. Mr. Donald J. Koop and Mr. Glen A.
Catt resigned from the Board of Directors on December 9, 1998 and April 5,
1999, respectively. Mr. Alex J. DeYonker was appointed to the Board of
Directors on March 31, 1999. The terms of Messrs. Buick, Hill, Prevo, and
VanGilder expire in 1999; Messrs. Feldpausch, Meyer and DeYonker expire in
2000; and Messrs. Boyd, Carton and DeYoung expire in 2001. The election of
directors will be held at the Annual Meeting of Shareholders currently
scheduled to be held on July 21, 1999. Nominees for election to the Board
of Directors are Messrs. Buick, Hill, Prevo, and VanGilder. 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 Spartan's capital stock is not registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended, Spartan's directors
and officers and persons owning greater than 10 percent of any class of
Spartan's equity securities are not subject to Section 16 of that statute.
EXECUTIVE COMPENSATION AND OTHER BENEFITS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table sets forth the cash and non-cash compensation
earned during the fiscal years ended March 27, 1999, March 28, 1998 and
March 29, 1997 by the persons who served as the Chief Executive Officer of
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<PAGE>
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
ANNUAL COMPENSATION SECURITIES ALL OTHER
FISCAL ----------------------- UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS<F1> OPTIONS<F2> SATION<F3>
- --------------------------- ---- ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
James B. Meyer 1999 $ 371,540 $ 220,566 4,000 $ 8,136
(President and Chief 1998 350,494 106,712 4,000 6,348
Executive Officer) 1997 308,250 24,500 2,000 6,348
Charles B. Fosnaugh 1999 $ 200,980 $ 90,576 1,000 $ 7,949
(Vice President) 1998 195,330 52,555 2,000 5,921
Development) 1997 190,640 18,688 2,000 5,921
David deS. Couch 1999 $ 168,260 $ 68,349 1,000 $ 7,313
(Vice President 1998 127,214 35,602 1,000 6,027
Information Technology) 1997 120,330 7,500 0 6,824
Michael D. Frank 1999 $ 154,405 $ 65,717 1,000 $ 3,036
(Vice President Logistics) 1998 88,920 35,847 0 3,009
1997 N/A N/A N/A N/A
J. Kevin Schlosser 1999 $ 138,500 $ 47,187 1,000 $ 33,752
(Vice President Sales) 1998 N/A N/A N/A N/A
1997 N/A N/A N/A N/A
<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 years 1998
and 1999 for payment 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
and have been adjusted to reflect the results of the July 1997 ten-for-one
stock split. These awards have vested and are exercisable at the date of
grant.
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<PAGE>
<F3> The compensation listed in this column for the fiscal year ended March
27, 1999 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 for relocation expenses in
connection with acceptance of employment. The amounts included for each
such factor for fiscal year 1999 are:
(i) (ii) (iii)
---------- ---------- -------
Mr. Meyer $ 1,598 $ 6,538 $ 0
Mr. Fosnaugh 2,098 5,851 0
Mr. Couch 2,074 5,239 0
Mr. Frank 3,036 0 0
Mr. Schlosser 2,478 5,537 25,737
</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 27, 1999, to the named executive
officers and the unexercised options held by them as of the end of the
fiscal year.
<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 50.00% $ 12.30 5/2008 $ 30,942 $ 78,412
Charles B. Fosnaugh 1,000 12.50 12.30 5/2008 7,735 19,603
David deS. Couch 1,000 12.50 12.30 5/2008 7,735 19,603
Michael D. Frank 1,000 12.50 12.30 5/2008 7,735 19,603
J. Kevin Schlosser 1,000 12.50 12.30 5/2008 7,735 19,603
-46-
<PAGE>
<FN>
<F1> The per share exercise price of each option equals the Trading Value
of the Class A Shares effective as of June 21, 1998. 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>
<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 18,000 0 $ 33,000 $ 0
Charles B. Fosnaugh 0 0 10,000 0 20,600 0
David deS. Couch 0 0 2,000 0 1,000 0
Michael D. Frank 0 0 1,000 0 0 0
J. Kevin Schlosser 0 0 1,000 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 $12.30 per share at fiscal
year-end.
</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. 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. As of July 1997, he became the
President and Chief Executive Officer of Spartan, pursuant to the terms of
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<PAGE>
the employment agreement. Under the employment agreement, Mr. Meyer's
annual base salary is to be and has been revised upon mutual agreement of
Spartan and Mr. Meyer on a year-to-year basis. Under the employment
agreement, Spartan provides Mr. Meyer with an automobile and certain other
fringe benefits. The employment agreement may be terminated upon mutual
agreement, upon Mr. Meyer's death or disability, by either party at its
option upon 90 days' written notice to the other, for cause, or upon
certain other events. Upon termination by Spartan for any reason other
than for cause or Mr. Meyer's death or disability, or upon termination by
Mr. Meyer for good reason, Mr. Meyer will receive life, health, accident,
and dental insurance benefits and an amount equal to his current salary for
one year after the date of severance. In addition, all options held by Mr.
Meyer to acquire Class A Shares will immediately vest and become
exercisable for 90 days after the date of severance, all risks of
forfeiture applicable to any restricted stock granted to Mr. Meyer will
lapse and no longer apply, and Spartan will purchase and transfer to Mr.
Meyer the automobile then furnished to him.
In February 1999, each of the named executive officers (referred to as
"executives" in the following discussion) entered into an Executive
Severance Agreement with Spartan. Under these agreements, if the
executive's employment with Spartan terminates during a Termination Period
(which is defined for Mr. Meyer as the 36-month period and for the other
executives as the 18-month period beginning on a Change in Control (as
described below) of Spartan), then the executive will receive payment of
(1) the executive's unpaid base salary through the date of termination; (2)
any earned or payable benefit awards and bonus payments pursuant to any
plans; (3) the executive's target bonus under Spartan's Annual Incentive
Plan pro rated for the time the executive was employed in the fiscal year
of termination; (4) a bonus under Spartan's Long Term Incentive Plan
payable upon termination of the executive's employment without cause; and
(5) the amount of salary and estimated bonus that would have been payable
to the executive had his employment continued until the end of the
Termination Period. Each executive other than Mr. Meyer also will receive
the additional amount he would have been eligible to receive under the
Pension Plan and Supplemental Executive Retirement Plan ("SERP") had his
employment continued until the end of the Termination Period. With certain
exceptions, these payments will not be made if the executive's employment
is terminated by Spartan for cause, by the executive other than with notice
and for good reason, or as a result of the executive's death, disability or
retirement (a "Nonqualifying Termination").
The SERP establishes a target amount for payment to Mr. Meyer
depending upon the date of his termination. Under Mr. Meyer's Executive
Severance Agreement, if Mr. Meyer's employment terminates at any time and
for any reason after a Change in Control, Mr. Meyer will receive the target
amount under the SERP to the extent it is not otherwise paid under the
Pension Plan and the SERP on the date of termination (assuming the election
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<PAGE>
of lump sum payment options under those plans). If Mr. Meyer's employment
terminates for any reason other than a Nonqualifying Termination, the SERP
target amount will be determined by adding the following additional years
to Mr. Meyer's date of termination: five years if the termination occurs
in 1999, four years if the termination occurs in 2000, three years if the
termination occurs in 2001, two years if the termination occurs between
2001 and 2010, and one year if the termination occurs in 2010.
The Executive Severance Agreements further provide that upon a Change
in Control, all unvested stock options will vest and all restrictions on
ownership of stock previously issued to the executive will lapse. Each
agreement also provides certain "gross up" payments if the payments under
the agreement cause certain excise taxes under the Internal Revenue Code to
be payable by the executive. With certain exceptions, Spartan also will
maintain in full force and effect for the benefit of the executive and his
spouse and covered dependents all employee benefit plans, programs and
arrangements that the executive and his spouse and covered dependents were
entitled to participate in immediately prior to the date of termination
until the earlier of the end of the Termination Period or (as to any
particular benefit) the date upon which the executive receives a
substantially equal benefit from a new employer. The agreements also
provide for certain automobile privileges and outplacement services.
The term "Change in Control" is defined in the agreements generally as
(1) the acquisition by any person or group of 20% or more of the
outstanding common stock or voting power of Spartan, (2) the majority of
the Board of Directors being comprised of persons other than the current
members of the Board of Directors or their successors whose nominations
were approved by at least two-thirds of the board, or (3) the approval by
the shareholders of certain mergers, reorganizations, plans of dissolution
or sales of substantially all of Spartan's assets.
PENSION PLAN
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."
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:
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<PAGE>
<TABLE>
<CAPTION>
YEARS OF VESTED SERVICE PERCENTAGE OF
AS OF JANUARY 1 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>
<CAPTION>
PARTICIPANT'S AGE PERCENTAGE OF
AS OF JANUARY 1 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.
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<PAGE>
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 were participants prior to April 1, 1998, the Pension Plan
provides that the retirement benefit will not be less than the benefit
accrued as of March 31, 1998.
Spartan also maintains the SERP, which provides nonqualified deferred
compensation benefits to Spartan's executive officers. The purpose of the
SERP is to provide the executive officers with the benefits which they are
otherwise denied under the Pension Plan due to the annual dollar limit on
compensation and other limitations of the Internal Revenue Code (which are
known collectively as the "statutory limits"). Accordingly, each officer's
benefit under the SERP is equal to the officer's benefit that would have
accrued under the Pension Plan but for the operation of the statutory
limits, minus the accrued benefit actually payable to the officer under the
Pension Plan calculated in accordance with the statutory limits. However,
Mr. Meyer's SERP benefit is expressed as a target amount which is equal to
the benefit that would have accrued but for the operation of statutory
limits under the Pension Plan's formula that was in effect prior to April
1, 1998, minus his actual accrued benefit under the Pension Plan.
Benefits under the SERP are paid from Spartan's general assets. There
is no separate trust which has been established to fund benefits. As of
March 27, 1999, the estimated total benefits payable under the Pension Plan
and the SERP upon retirement at normal retirement age (age 65) for Messrs.
Meyer, Fosnaugh, Couch, Frank and Schlosser are expected to be
approximately $4,240,000, $1,040,000, $1,010,000, $350,000, and $290,000,
respectively.
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, DeYoung,
and Hill. Messrs. DeYoung and Hill each have an ownership interest in a
business which is a Shareholder-Customer of the Company and purchases
groceries, perishables, general merchandise, and other products and
services from the Company on an ongoing basis. For a discussion of
transactions with entities related to directors and the Board's policy with
respect to transactions in which a director has an interest, see "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
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<PAGE>
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
Spartan's Restated Articles of Incorporation (the "Articles") provide
that a director of Spartan will not be personally liable to the Company for
monetary damages for a breach of fiduciary duty as a director, with the
exception of: liability for a breach of a director's duty of loyalty to the
Company or its shareholders; liability for acts or omissions not in good
faith or that involved intentional misconduct or knowing violation of law;
liability for certain unlawful dividends, distributions or loans; liability
in connection with a transaction from which the director derived an improper
personal benefit; and liability in connection with an action or omission
occurring prior to the date the limitation of liability provision became
effective.
Michigan law permits, and Spartan's Articles require, indemnification of
Spartan's directors and executive officers in a variety of circumstances,
which may include liabilities under the Federal Securities Act of 1933, as
amended. The Articles require Spartan to indemnify any director or executive
officer who is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he
or she is or was a director or executive officer, or is or was serving at the
request of Spartan in another capacity, to the fullest extent permitted by
law. Spartan may further indemnify any director or executive officer, and may
indemnify any person who is not a director or an executive officer, as
authorized by any Bylaw, resolution of the Board, or contractual agreement
authorized by the Board. Pursuant to this authority, Spartan's Bylaws provide
that Spartan will indemnify directors, executive officers, and other officers
of Spartan to the extent that an indemnified person is successful on the merits
or otherwise in the defense of the action. Spartan will indemnify the
indemnified party against actual and reasonable expenses (including attorneys'
fees) incurred in connection with the action. Prior to a final determination
of a proceeding, Spartan may reimburse an indemnified party for reasonable
expenses incurred by the indemnified party, if certain procedures are
followed. In addition, upon request, a court may order Spartan to indemnify a
director, officer, employee or agent if it determines that the person is
fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the applicable standard of conduct set forth in
the Bylaws has been met.
In addition, the Bylaws permit Spartan to grant other rights to a person
seeking indemnification or advancement of expenses. Further, Spartan may
purchase and maintain insurance for a director, officer, employee or agent of
Spartan against any liability asserted against the individual.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Spartan's directors (except Messrs. Buick, Carton, DeYonker, 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.
During the fiscal year ended March 27, 1999, in the aggregate, Related
Entities paid to the Company approximately $669,000,000 for grocery and
related products (25.0 percent of the Company's total net sales for fiscal
year 1999). No single Related Entity accounted for more than 5.2 percent
of the Company's total net sales in fiscal year 1999. 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 "MANAGEMENT."
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<PAGE>
In addition, in the aggregate, Related Entities:
(a) in the fiscal year ended March 27, 1999, paid to the Company
insurance premiums and commissions equal to approximately $2,900,000, or
18.3 percent of all premiums and commissions paid (no single Related Entity
accounted for more than 3.6 percent of the total insurance premiums and
commissions paid); and
(b) in the fiscal year ended March 27, 1999, made lease and
rental payments to the Company in the amount of approximately $4,000,000,
or 38.5 percent of all lease and rental payments made (no single Related
Entity accounted for more than 20.6 percent of lease and rental 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 27, 1999.
Mr. DeYonker is a partner in the law firm of Warner Norcross & Judd
LLP. During the past year and the current year, Spartan has retained
Warner Norcross & Judd LLP for certain legal services.
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Class A Shares as of May 22, 1999 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 22, 1999, D&W Food Centers, Inc.
is the only person known to the Company to be the beneficial owner of more
than five percent of the Class A Shares.
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP <F1> PERCENT OF CLASS
- ------------------------ ------------------------- ----------------
<S> <C> <C>
D&W Food Centers, Inc. 559,110 5.44%
Parker T. Feldpausch 508,390 4.92
Russell H. VanGilder, Jr. 507,410 4.91
Martin P. Hill 330,090 3.20
Ronald A. DeYoung 224,130 2.17
Roger L. Boyd 169,310 1.64
Dan R. Prevo 101,103 <F*>
James B. Meyer<F2> 46,689 <F*>
Charles B. Fosnaugh <F2> 12,291 <F*>
David deS. Couch <F2> 5,377 <F*>
Michael D. Frank <F2> 4,536 <F*>
J. Kevin Schlosser<F2> 2,447 <F*>
James G. Buick 1,000 <F*>
John S. Carton 1,000 <F*>
Alex J. DeYonker 0 <F*>
All Directors and Executive
Officers as a group<F2> 1,914,773 18.54%
<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 "MANAGEMENT" 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 19, 1999.
-55-
<PAGE>
Mr. Meyer 22,000
Mr. Fosnaugh 11,000
Mr. Couch 3,000
Mr. Frank 2,000
Mr. Schlosser 2,000
All Executive Officers as a group 41,000
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of
Spartan consisted of 20,000,000 Class A Shares and 5,000,000 Class B
Shares.
The following description of Spartan's capital stock is qualified by
reference to Spartan's Articles and Bylaws, copies of which are included as
exhibits to the registration statement of which this Prospectus is a part.
As of June 19, 1999, Spartan had outstanding 10,282,583 Class A
Shares, held by approximately 517 record holders. As of the date of this
Prospectus, Spartan has not issued any Class B Shares. The Board of
Directors may at any time, and from time to time, provide for the issuance
of Class B Shares in one or more series, each with such a designation and,
relative to the Class A Shares and to other series of the Class B Shares,
such voting, distribution, dividend liquidation, conversion, participation,
redemption and other rights, preferences, limitations and restrictions, if
any, as will be stated in the resolution or resolutions providing for the
issuance of the Class B Shares. Except as provided in the resolution or
resolutions providing for the issuance of shares, all Class B Shares and
any series thereof will be identical. Class A Shares, or Class B Shares or
any series thereof, may be issued as a share dividend in respect of shares
of another class or series as the Board of Directors may determine from
time to time, or as otherwise permitted by statute.
VOTING
Each outstanding Class A Share entitles its holder to one vote.
Except as otherwise required by law, or pursuant to the resolution or
resolutions providing for the issuance of Class B Shares, Class A Shares
and Class B Shares vote together as a single class and, except for the
election of directors and certain extraordinary matters, the vote required
to approve any corporate action is a majority of the votes cast at a
meeting at which a quorum is present. Directors will be elected by a
plurality of the votes cast at a meeting at which a quorum is present.
Extraordinary matters, such as amendments to the Articles, mergers, share
exchanges, sales of assets, and dissolution, must be approved by the holders
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<PAGE>
of a majority of the Class A Shares and all other voting groups entitled to
vote thereon.
Spartan's Articles divide the Board of Directors into three classes, each
class serving a three-year term, so that each year the terms of approximately
one-third of the directors expire and approximately one-third of the directors
are elected for a new three-year term.
Under Michigan law, Class A Shares and Class B Shares will vote as
separate voting groups on any amendment to the Articles or any merger or
share exchange to which Spartan is a party if the resolution or resolutions
providing for the issuance of the Class B Shares provides for such a vote
or if the amendment, merger or share exchange (1) would change the
aggregate number of authorized shares of the class, (2) would alter or
change the powers, preferences, or special rights of the shares of the
class or other classes so as to affect the class adversely, or (3) in the
case of a share exchange, if the class or series thereof is included in the
exchange.
There are no preemptive rights to subscribe to shares of Spartan's
capital stock.
DIVIDENDS AND OTHER DISTRIBUTIONS
The holders of Class A Shares will be entitled to receive, to the
extent permitted by law, such dividends and distributions as may be
declared from time to time by the Board of Directors, but subject to any
preferential, participation and other rights of holders of Class B Shares
provided in the resolution or resolutions providing for the issuance of
such Class B Shares. A senior secured credit facility to which Spartan is
a party contains covenants which restrict the amount of cash dividends
payable by the Company to $800,000 in any twelve-month period.
In the event of the voluntary or involuntary liquidation, dissolution
or winding up of Spartan, the holders of the Class A Shares will be
entitled to receive all of the remaining assets of Spartan ratably in
proportion to the number of Class A Shares held by them, but subject to any
preferential, participation or other rights of holders of Class B Shares
provided in the resolution or resolutions providing for the issuance of
Class B Shares.
RESTRICTIONS ON ORIGINAL ISSUE AND TRANSFER; OPTIONS TO PURCHASE
Spartan's Bylaws authorize Spartan to issue its shares of capital
stock only to: (1) Shareholder-Customers; (2) Associates; (3) Qualified
Holders; or (4) Approved Holders. The Board may not revoke the
authorization as an Approved Holder of any person who owns any shares of
capital stock of Spartan at the time of the attempted revocation. The
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<PAGE>
Board of Directors has designated as Approved Holders: (1) any shareholder
or other equity owner of any Shareholder-Customer who owns 5 percent or
more of the equity interests in the Shareholder-Customer; (2) any member of
the Board of Directors of Spartan; or (3) any spouse of an Associate, any
biological or adopted child of an Associate, if the child is 21 years of
age or younger, or any trust created by the Associate or his or her spouse
which is established for the benefit of the Associate or the spouse or any
such child of the Associate.
No sale, gift or other transfer by a shareholder of any Class A Shares
of Spartan's capital stock, or any transfer of any such Class A Shares by
operation of law, will be permitted by, or be effective with respect to,
Spartan if the transferee would be at the time of transfer any person other
than (1) a Shareholder-Customer who continues to purchase from Spartan
grocery and other related products or (2) an Approved Holder.
Spartan has the option to purchase any Class A Shares which a
shareholder proposes to sell, give or otherwise transfer or which are to be
transferred by operation of law. Any shareholder proposing to effect a
transfer is required to notify Spartan of the proposed transfer, the
proposed terms and conditions of the proposed transfer and the identity of
the person to receive an interest in the Class A Shares. The option is
exercisable for 60 days following Spartan's receipt of notice of the
transfer. If Spartan does not exercise its option to purchase any of the
Class A Shares which are the subject of a proposed transfer, then for a
period of 90 days following the expiration of Spartan's option, the
transferring shareholder may transfer the Class A Shares to the person or
persons identified in the written notice required to be given to Spartan,
if: (1) after the transfer, the selling shareholder complies with any
applicable Required Investment, (2) the transferee agrees in a writing
acceptable to Spartan to be bound by the Bylaws, and (3) the transferee is
a Shareholder-Customer who continues to purchase from Spartan grocery and
other related products or is an Approved Holder.
In its discretion, Spartan will have the option at any time to redeem
any Class A Shares of its capital stock which are beneficially owned by any
person who is not at the time of the redemption: (1) a Shareholder-Customer
who continues to purchase from Spartan grocery and related products, (2) an
Associate who continues to be employed by the Company, (3) an Approved
Holder, or (4) a Qualified Holder.
REDEMPTION POLICY
Spartan's policy is to redeem, if possible, upon a shareholder's
request, any Class A Shares held by the shareholder on the terms described
below. Spartan's policy does not create or evidence any obligation on
behalf of Spartan. Moreover, Spartan's Board of Directors, at its sole
discretion, may at any time and from time to time revise or terminate the
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<PAGE>
policy based on Spartan's financial condition, general market conditions,
any requirement of or limitation imposed by law or any agreement by which
Spartan is bound, or for any other reason deemed appropriate by the Board.
In addition, the Company's new $425 million senior secured credit facility,
which it entered into on March 18, 1999, contains limits on the amount of
Class A Shares that Spartan may redeem in certain time periods. Any
redemptions of Class A Shares would have to be made in accordance with that
credit facility.
PURCHASE PRICE AND TERMS
The following describes the price and terms that will apply to
Spartan's purchase of any Class A Shares pursuant to its options to
purchase and redeem the Class A Shares and its redemption policy (subject
to revision or termination of the policy) described above:
(1) If at the time of the purchase the shareholder is a
Shareholder-Customer, Spartan will purchase for cash at the Trading Value
in effect on the date of the purchase, no later than 60 days following the
date Spartan elects to purchase the Class A Shares or the date the
shareholder requests Spartan to redeem the stock, any Class A Shares
beneficially owned by the shareholder in excess of the Required Investment
which is applicable to the Shareholder-Customer or, if the
Shareholder-Customer no longer purchases grocery and related products from
Spartan, the Required Investment which was applicable to the
Shareholder-Customer at the time the Shareholder-Customer ceased purchasing
the products from Spartan;
(2) If at the time of the purchase the shareholder is a
Shareholder-Customer, Spartan will purchase the Class A Shares which
constitute the Required Investment which is applicable to the
Shareholder-Customer, or if the Shareholder-Customer no longer purchases
grocery and related products from Spartan, the Required Investment which
was applicable to the Shareholder-Customer at the time the
Shareholder-Customer ceased purchasing the products from Spartan in the six
equal installments described in paragraph (4) below ("Installments");
(3) For any shareholder who at the time of the purchase is not
and has not been subject to any Required Investment, the Company will
purchase the shareholder's Class A Shares in Installments, unless the
shareholder and Spartan agree to other terms;
(4) The closing on the first Installment will occur at the date
and time as to which Spartan and the selling shareholder mutually agree,
but no later than 60 days following the date Spartan exercises its option
to purchase the stock from the shareholder or the date the shareholder
requests Spartan to redeem the stock. The closing on the second
Installment will occur on the anniversary date following the closing of the
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<PAGE>
first Installment. The closing on each subsequent Installment will occur
on each corresponding anniversary date thereafter. The price for each
Class A Share to be acquired in each Installment will be the Trading Value
in effect at the date of the closing on the Installment; and
(5) For the redemption of a Shareholder-Customer's Required
Investment, no later than 30 days after the Shareholder-Customer's request
to redeem, the Shareholder-Customer may elect to require Spartan to redeem
at the Trading Value in effect at the date of redemption all of the Class A
Shares with an aggregate Trading Value which equals the
Shareholder-Customer's Required Investment on the following terms. Spartan
will pay in cash to the Shareholder-Customer an amount equal to one-sixth
of the purchase price for the Class A Shares. In addition, Spartan will
execute and deliver to the Shareholder-Customer an unsecured promissory
note for the balance of the redemption price. The note will be payable in
no more than five equal annual Installments of principal, commencing one
year from the date of the note. Interest will accrue thereon at the rate
of interest 1 percent below the prime rate from time to time in effect
until maturity as announced by Michigan National Bank, or such other
lending institution as Spartan may select from time to time, and will be
payable quarterly. Spartan may prepay the note at any time, in whole or in
part, without penalty.
CERTAIN PROVISIONS OF THE MICHIGAN BUSINESS CORPORATION ACT
Chapter 7A of the Michigan Business Corporation Act (the "Fair Price
Act") establishes supermajority and fair price provisions for certain
"business combinations." The provisions of the Fair Price Act apply to any
Michigan corporation that: (1) has one hundred or more beneficial owners
of its common stock; and (2) did not have any beneficial owner of 10
percent or more of a class of common stock at the time the Fair Price Act
became effective. Because Spartan satisfies these requirements, the Fair
Price Act applies to Spartan.
The Fair Price Act provides that a supermajority vote of 90 percent of
the shareholders and no less than two-thirds of the votes of noninterested
shareholders must approve a "business combination." The Fair Price Act
defines a "business combination" to encompass any merger, consolidation,
share exchange, sale of assets, stock issue, liquidation or
reclassification of securities involving an "interested shareholder" or
certain "affiliates." An "interested shareholder" is generally any person
who beneficially owns 10 percent or more of the outstanding voting shares
of the corporation. An "affiliate" is a person who directly or indirectly
controls, is controlled by, or is under common control with a specified
person.
The supermajority vote required by the Fair Price Act does not apply
to "business combinations" that satisfy certain conditions. These
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<PAGE>
conditions include, among others, that: (1) the purchase price to be paid
for the shares of the corporation is at least equal to the highest of
either (a) the market value of the shares or (b) the highest per share
price paid by the interested shareholder within the preceding two-year
period or in the transaction in which the shareholder became an interested
shareholder, whichever is higher; (2) once becoming an interested
shareholder, the person does not become the beneficial owner of any
additional shares of the corporation except as part of the transaction
which resulted in the interested shareholder becoming an interested
shareholder or by virtue of proportionate stock splits or stock dividends;
(3) once becoming an interested shareholder, the person does not receive
the benefit, directly or indirectly, except proportionately as a
shareholder, of any loans, advances, guarantees, pledges or other financial
assistance provided by the corporation or any of its subsidiaries; and (4)
there has been at least five years between the date the person became an
"interested shareholder" and the date the business combination is
consummated.
The requirements of the Fair Price Act do not apply to "business
combinations" with an interested shareholder that the board of directors
has approved or exempted, specifically, generally or generally by types,
from the requirements of the Fair Price Act by resolution prior to the time
that the interested shareholder first became an interested shareholder.
The Fair Price Act would cease to apply to Spartan if its Articles
were amended to elect not to be covered by Chapter 7A. Such an amendment
would require the same votes for approval as the Fair Price Act requires
for approval of a business combination with an interested shareholder.
Chapter 7B of the Michigan Business Corporation Act regulates the
acquisition of "control shares" of Michigan corporations (the "Control
Share Act"). The Control Share Act applies to Michigan corporations having
100 or more shareholders of record, more than 10 percent of whom are
residents of Michigan. Spartan also satisfies these requirements. Thus,
the Control Share Act applies to Spartan.
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by a person or entity which, when combined with other shares held by
that person or entity, would give the acquiror voting power at or above any
of the following thresholds: 20 percent, 33 1/3 percent, or a majority.
Under the Control Share Act, an acquiror may not vote shares acquired in a
"control share acquisition" unless a majority of both the corporation's
shareholders and the corporation's disinterested shareholders vote to
confer voting rights on the "control shares." The acquiring person,
officers of the target corporation, and directors of the target corporation
who are also employees of the corporation are precluded from voting on
whether the control shares shall be accorded voting rights. The Control
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<PAGE>
Share Act does not affect the voting rights of shares owned by an acquiring
person prior to the control share acquisition. In some cases, if control
shares are accorded full voting rights as prescribed in Chapter 7B, the
Control Share Act confers dissenters' rights upon all of a corporation's
shareholders except the acquiring person.
By an amendment to its Articles or Bylaws electing not to be covered,
either Spartan's Board of Directors or its shareholders could "opt out" of
Chapter 7B and cause the Control Share Act to be inapplicable to "control
share acquisitions" occurring thereafter, for as long as the amendment
continued in effect. As of the date of this Prospectus, the Board has no
plans to effect such an amendment, nor is it aware of any other plans or
proposals to do so.
The foregoing discussion concerning the provisions of the Michigan
Business Corporation Act is qualified in its entirety by reference to such
Michigan Business Corporation Act provisions.
OTHER MATTERS
The Articles authorize Spartan's Board to determine the preferences,
limitations, and voting, dividend, distribution, liquidation, conversion,
participation, redemption and other rights of any series of Class B Shares
before issuance of the shares. The potential to issue shares pursuant to
the authorization, together with the restrictions on transfer of the Class
A Shares, may discourage or preclude certain transactions, whether or not
beneficial to shareholders, and could discourage certain types of tactics
that involve an actual or threatened acquisition or change in control of
Spartan.
Spartan has no present intention to issue any of its authorized Class
B Shares. However, any issuance of Class B Shares in the future could
adversely affect the rights of the holders of Class A Shares.
DIVIDEND POLICY
For at least 20 years, the Board of Directors has declared, and
Spartan has paid, a regular quarterly dividend. The amount of such
quarterly dividends for each of the three fiscal years in the period ended
March 27, 1999, was $0.05 per share. 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. The Company's senior secured credit facility contains
covenants which restrict the amount of cash dividends payable by the
Company to $800,000 in any 12-month period.
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<PAGE>
PLAN OF DISTRIBUTION
Spartan offers the Class A Shares through its own efforts using
salaried employees without payment of any commission. The offering price
of the Class A Shares is the Trading Value established from time to time by
the Board of Directors. At the date of this Prospectus, the Trading Value
was $13.30 per Class A Share. Each new Shareholder-Customer must purchase
at least 1,000 Class A Shares. See "RISK FACTORS--Value of Class A
Shares."
There is no minimum number of Class A Shares that must be sold to
complete this offering. Spartan offers the Class A Shares on a "best
efforts," continuous basis to Shareholder-Customers, persons who apply to
become Customers of Spartan, Associates of Spartan, Approved Holders, and
Qualified Holders. Thus, Spartan will not place any offering proceeds
received in any escrow, trust or other arrangement pending the receipt of a
minimum amount of proceeds. There is no assurance that all Class A Shares
will be sold.
USE OF PROCEEDS
Spartan expects to use the proceeds from the sale of Class A Shares
for general working capital purposes and from time to time to redeem Class
A Shares from shareholders.
LEGAL MATTERS
The validity of the Class A Shares offered hereby has been passed upon
for Spartan by Warner Norcross & Judd LLP, 900 Old Kent Building, 111 Lyon
Street, N.W., Grand Rapids, Michigan 49503-2489. Alex J. DeYonker, General
Counsel and Assistant Secretary of the Company, is a partner of Warner
Norcross & Judd LLP.
EXPERTS
The Consolidated Financial Statements of the Company as of March 27,
1999 and March 28, 1998, and for each of the three years in the period
ended March 27, 1999, included in this Prospectus and the related financial
statement schedule included elsewhere in the registration statement of
which this Prospectus is a part have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in
accounting and auditing.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Spartan
Independent Auditors' Report.............................................. F-1
Consolidated Balance Sheets as of March 27, 1999 and March 28, 1998....... F-2
Consolidated Statements of Earnings for each of the three years in the
period ended March 27, 1999............................................. F-4
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended March 27, 1999...................................... F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended March 27, 1999...................................... F-6
Notes to Consolidated Financial Statements................................ F-7
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Spartan Stores, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of
Spartan Stores, Inc. and subsidiaries as of March 27, 1999 and March 28,
1998, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended March
27, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 consolidated financial statements present fairly,
in all material respects, the financial position of Spartan Stores, Inc.
and subsidiaries as of March 27, 1999 and March 28, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 27, 1999, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Grand Rapids, Michigan
June 4, 1999
F-1
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 27, MARCH 28,
ASSETS 1999 1998
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 44,112,178 $ 37,026,640
Marketable securities 21,058,381 18,333,323
Accounts receivable 75,940,878 74,549,520
Inventories 82,186,247 92,706,414
Prepaid expenses 6,961,948 6,885,828
Deferred taxes on income 5,025,000 7,277,000
------------ ------------
TOTAL CURRENT ASSETS 235,284,632 236,778,725
OTHER ASSETS
Restricted cash 78,143,825
Deposits 43,856,175
Notes receivable 4,883,491 6,539,412
Other 18,217,679 1,703,110
------------ ------------
TOTAL OTHER ASSETS 145,101,170 8,242,522
PROPERTY AND EQUIPMENT
Land and improvements 32,891,952 33,098,220
Buildings and improvements 137,853,451 136,496,867
Equipment 145,270,179 138,663,310
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 316,015,582 308,258,397
Less accumulated depreciation and amortization 157,667,516 147,146,529
------------ ------------
NET PROPERTY AND EQUIPMENT 158,348,066 161,111,868
------------ ------------
TOTAL ASSETS $538,733,868 $406,133,115
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
MARCH 27, MARCH 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 38,500,000
Accounts payable $ 83,333,101 81,690,574
Accrued payroll and benefits 18,848,809 13,447,559
Insurance reserves 14,164,064 15,799,160
Other accrued expenses 11,228,699 19,114,660
Current maturities of long-term debt and capital
lease obligation 5,726,153 6,544,777
------------ ------------
TOTAL CURRENT LIABILITIES 133,300,826 175,096,730
DEFERRED TAXES ON INCOME 2,125,000 3,750,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,970,421 4,784,200
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION 269,522,148 107,665,545
OTHER LONG-TERM LIABILITIES 7,754,083 644,389
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value $2 a share;
authorized 20,000,000 shares; outstanding 10,844,416
and 11,443,985 21,688,832 22,887,970
Additional paid-in capital 13,814,823 16,431,937
Retained earnings 85,557,735 74,872,344
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 121,061,390 114,192,251
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $538,733,868 $406,133,115
============ ============
</TABLE>
F-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
MARCH 27, MARCH 28, MARCH 29,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES $2,671,699,778 $2,489,249,469 $2,475,025,242
COSTS AND EXPENSES
Cost of sales 2,397,818,378 2,234,164,773 2,238,364,428
Operating and administrative 238,288,678 229,137,439 216,890,506
Restructuring charge 5,697,738
Interest expense 9,207,704 10,934,034 9,700,440
Interest income (3,102,984) (3,324,089) (3,609,410)
Gain on sale of
property and equipment (1,187,360) (3,905,669) (1,704,447)
-------------- -------------- --------------
TOTAL COSTS AND EXPENSES 2,646,722,154 2,467,006,488 2,459,641,517
-------------- -------------- --------------
EARNINGS BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 24,977,624 22,242,981 15,383,725
INCOME TAXES 9,148,000 8,009,000 5,681,000
-------------- -------------- --------------
EARNINGS BEFORE EXTRAORDINARY
ITEM 15,829,624 14,233,981 9,702,725
EXTRAORDINARY ITEM (NET OF INCOME
TAXES OF $554,000) 1,030,638
-------------- -------------- --------------
NET EARNINGS $ 14,798,986 $ 14,233,981 $ 9,702,725
============== ============== ==============
BASIC AND DILUTED
EARNINGS PER CLASS A SHARE:
BEFORE EXTRAORDINARY ITEM $ 1.42 $ 1.21 $ 0.80
============== ============== ==============
NET EARNINGS $ 1.33 $ 1.21 $ 0.80
============== ============== ==============
<PAGE>
BASIC WEIGHTED AVERAGE
CLASS A SHARES 11,157,935 11,785,263 12,136,708
============== ============== ==============
DILUTED WEIGHTED AVERAGE
CLASS A SHARES 11,162,374 11,788,723 12,140,470
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
CLASS A ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL EARNINGS
------------ --------------- --------
<S> <C> <C> <C> <C>
Balance March 31, 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)
- ---------------------------------------------------------------------------------------------------------------
Balance March 28, 1998 22,887,970 16,431,937 74,872,344
Class A common
stock transactions 846,705 shares purchased (1,693,410) (5,108,183) (3,557,881)
247,136 shares issued 494,272 2,491,069
<PAGE>
Net earnings 14,798,986
Cash dividends $.05 per share (555,714)
- ---------------------------------------------------------------------------------------------------------------
Balance March 27, 1999 $21,688,832 $13,814,823 $85,557,735
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTAN STORES, INC. AND SUBSIDIARIES
<CAPTION>
YEAR ENDED
----------------------------------------------------
MARCH 27, MARCH 28, MARCH 29,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 14,798,986 $ 14,233,981 $ 9,702,725
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 21,412,939 21,639,466 20,175,210
Restructuring charge 5,697,738
Postretirement benefits other than pensions 186,221 238,717 444,000
Deferred taxes on income 627,000 (583,000) 4,035,000
Gains on sale of property and equipment (1,187,360) (3,905,669) (1,704,447)
Change in assets and liabilities, net of
acquisitions:
Marketable securities (2,725,058) (727,443) (1,554,272)
Accounts receivable (1,317,903) (1,376,754) 5,546,647
Inventories 14,694,663 (7,497,222) (6,549,385)
Prepaid expenses 894,919 (22,603) (3,795,069)
Accounts payable 1,642,527 3,560,090 (6,738,104)
Accrued payroll and benefits 5,019,928 1,631,848 1,138,090
Insurance reserves (1,635,096) (1,373,182) (1,312,318)
Other accrued expenses (8,118,443) 3,793,733 (2,981,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,991,031 29,611,962 16,407,077
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (16,418,527) (23,997,384) (46,237,512)
Proceeds from the sale of property and
equipment 6,623,230 20,743,170 7,805,730
Acquisitions, net of cash acquired, and deposits (61,100,457)
Other 554,859 27,517 2,624,384
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (70,340,895) (3,226,697) (35,807,398)
------------ ------------ ------------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable (13,650,000) 5,000,000 18,500,000
Proceeds from long-term borrowings 97,887,145 9,212,619 37,274,127
Repayment of long-term debt and
capital lease obligation (39,842,991) (30,470,692) (36,939,210)
Debt issuance costs (9,028,905)
Proceeds from sale of common stock 2,985,341 3,407,234 3,899,110
Common stock purchased (10,359,474) (10,119,467) (8,325,035)
Dividends paid (555,714) (587,071) (605,937)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 27,435,402 (23,557,377) 13,803,055
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,085,538 2,827,888 (5,597,266)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 37,026,640 34,198,752 39,796,018
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 44,112,178 $ 37,026,640 $ 34,198,752
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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 Operating 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 27, 1999, March 28, 1998 and March 29, 1997 were
each comprised of fifty-two 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, notes receivable and notes payable approximate fair value
at March 27, 1999 and March 28, 1998 because of the short-term nature of
these financial instruments.
At March 27, 1999, the cost of marketable securities exceeded the estimated
fair value by $129,536. As of March 28, 1998, the fair value of marketable
securities exceeded cost by $24,235.
At March 27, 1999, the estimated fair value of the Company's long-term debt
(including current maturities) approximated the carrying value. At March
28, 1998, the estimated fair value exceeded the carrying value by
F-7
<PAGE>
approximately $763,000. The estimated fair value was based on anticipated
rates available to the Company for debt with similar terms and maturities.
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
$1,423,410 in 1999 and $2,709,152 in 1998 and are shown net of allowances
for credit losses of $2,335,000 in 1999 and $1,810,000 in 1998.
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 $49,900,000 and $45,400,000 higher at March 27,
1999 and March 28, 1998, respectively. During 1999, 1998 and 1997, 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 1999, 1998 and 1997 by $1,394,000,
$51,000 and $441,000, respectively.
RESTRICTED CASH
Restricted cash at March 27, 1999 consists of $78,143,825 held in a bank
escrow account for acquisitions consummated subsequent to fiscal year end.
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.
OTHER ASSETS
Included in Other Assets is goodwill of $5,978,000 and non-compete
agreements of $2,014,000 as of March 27, 1999. Goodwill consists of
F-8
<PAGE>
amounts paid in excess of the fair value of net assets acquired and is
being amortized over the estimated period benefited of forty years.
Non-compete agreements are being amortized over the terms of the
agreements. Amortization expense was $55,160, $80,452 and $321,807 for the
fiscal years ended March 27, 1999, March 28, 1998 and March 29, 1997,
respectively.
Also included in Other Assets as of March 27, 1999 are debt issuance costs
of $9,028,905 incurred in connection with a new senior secured credit
facility that are being amortized into interest expense over the term of
the credit facility.
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 method over the related
lease terms.
Software development costs are capitalized, and amortization over a five
year period commences as each system is implemented.
ACCOUNTS PAYABLE
Accounts payable include checks in the amount of $15,355,942 and
$18,267,488 at March 27, 1999 and March 28, 1998, respectively, which have
been issued and have not cleared the Company's controlled disbursing bank
accounts.
F-9
<PAGE>
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 estimates. Incurred but not reported losses are estimated
based on available historical information.
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 is computed by increasing the
weighted average number of common shares outstanding by the dilutive effect
of the issuance of common stock for options outstanding under the Company's
stock option plan.
NEW ACCOUNTING STANDARDS
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. 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.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets and liabilities measured
at fair value. The accounting treatment of gains and losses resulting from
changes in the value of derivatives depends on the use of the derivative
and whether it qualifies for hedge accounting. The Company will adopt SFAS
F-10
<PAGE>
No. 133 as required no later than March 26, 2000, and is currently
assessing the impact of adoption on its consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 presentations
in order to conform to the 1999 presentation.
SUBSEQUENT EVENT
Subsequent to March 27, 1999, a gain of approximately $2.5 million was
recognized from the sale of common stock held in a supplier.
ACQUISITIONS
On January 4, 1999, the Company's wholly owned subsidiary, Valuland, Inc.
("Valuland") acquired certain assets and assumed certain liabilities of
Ashcraft's Market, Inc., an operator of eight retail grocery stores located
primarily in mid-Michigan. On March 29, 1999, Valuland acquired all the
issued and outstanding shares of Family Fare, Inc., Family Fare Management
Services, Inc. and Family Fare Trucking, Inc. (collectively "Family Fare").
Family Fare is an operator of 13 retail grocery stores, a bakery, a
warehouse facility and a transportation business located primarily in
Western Michigan. On May 19, 1999, Valuland acquired certain assets and
assumed certain liabilities associated with the retail grocery, pharmacy
and transportation business of Glen's Market, Inc., Catt's Realty Co. and
Glen's Pharmacy, Inc. (collectively "Glen's"). As a result of this
acquisition, Valuland operates 23 Glen's retail grocery stores, four
pharmacies and a distribution center located primarily in Northern
Michigan.
The combined purchase price for the three acquisitions amounted to
$144,400,000. The acquisition of Ashcraft's Market has been accounted for
as a purchase and, accordingly, the acquired assets and assumed liabilities
are included in the accompanying consolidated balance sheets at values
representing an allocation of the purchase price. The excess of the
purchase price over the valuation of Ashcraft's tangible assets and
liabilities amounted to $5,978,000. This excess was assigned to goodwill.
Deposits consist of amounts advanced to Family Fare for the redemption of
the Company's Class A common stock and for the acquisition of the stock of
Family Fare.
The consolidated statements of earnings include the operations of
Ashcraft's Market from January 4, 1999. The following unaudited pro forma
summary presents the consolidated statements of earnings of the Company as
if the acquisition had occurred at the beginning of the period presented.
These pro forma results are based upon assumptions considered appropriate
by management and include adjustments as considered necessary in the
F-11
<PAGE>
circumstances. Such adjustments include the depreciation of property and
equipment, amortization of goodwill, increased interest expense from debt
assumed to have been issued to fund the acquisition, and related income tax
effects of the acquisition. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of results
which would have actually been reported had the acquisition taken place on
the dates indicated or which may be reported in the future.
<TABLE>
<CAPTION>
PRO FORMA 1999 1998 1997
- --------- -------------- -------------- --------------
<S> <C> <C> <C>
Net sales $2,694,509,026 $2,517,953,228 $2,503,729,001
Earnings before extraordinary item
(net of income taxes of $554,000) $16,671,308
Net earnings $15,640,610 $14,507,631 $9,976,375
Basic and diluted earnings
per Class A share:
Before extraordinary item $1.49
Net earnings $1.40 $1.23 $0.82
</TABLE>
RESTRUCTURING CHARGE
On October 14, 1998, the Company's Board of Directors approved an
initiative to replace the Company's Plymouth distribution center with a new
multi-commodity distribution center. The initiative includes the cessation
of operations at the Company's existing distribution center in Plymouth,
Michigan by April 2000 and would result in the displacement of
approximately 300 associates in Plymouth and approximately 100 associates
at its Grand Rapids, Michigan distribution center. In connection with the
initiative, $5,697,738 has been accrued as of March 27, 1999 and is
included in Other Long-term Liabilities in the accompanying consolidated
balance sheets. The charge encompasses accruals for contractual amounts to
be paid under a collective bargaining agreement, additional severance pay,
and amounts due in connection with withdrawal from the union pension plan.
MARKETABLE SECURITIES
The amortized cost and estimated fair values of marketable securities
available-for-sale as of March 27, 1999 and March 28, 1998 are shown below.
Gross unrealized gains and losses as of March 27, 1999 and March 28, 1998
were not material.
F-12
<PAGE>
<TABLE>
<CAPTION>
1999
------------------------------
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 $ 8,603,906 $ 8,193,958
Debt securities issued by
foreign governments,
corporations and agencies 12,584,011 12,864,423
----------- -----------
$21,187,917 $21,058,381
=========== ===========
</TABLE>
<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>
F-13
<PAGE>
The amortized cost and estimated fair values of investments as of March 27,
1999, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 3,269,759 $ 3,522,962
Due after one year through five years 6,068,944 6,053,517
Due after five years through ten years 7,398,931 7,281,774
Due after ten year through fifteen years 4,450,283 4,200,128
----------- -----------
$21,187,917 $21,058,381
=========== ===========
</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 2006 at March 27, 1999. Impaired notes total
approximately $500,000 at March 27, 1999 and $480,000 at March 28, 1998,
including the current portion. The allowance for credit losses on accounts
receivable at March 27, 1999 and March 28, 1998 includes $500,000 and
$290,000, respectively, relating to impaired notes.
NOTES PAYABLE AND LONG-TERM DEBT
On March 18, 1999, the Company entered into $425 million in senior secured
credit facilities to refinance existing debt, support retail store
acquisitions, fund working capital and provide for other general corporate
needs. The credit facilities consist of (a) a Revolving Credit Facility in
the amount of $100 million with a term of six years, (b) a Term Loan A in
the amount of $100 million with a term of six years, (c) an Acquisition
Facility in the amount of $75 million with a term of seven years and (d) a
Term Loan B in the amount of $150 million with a term of eight years. The
credit facilities provide for the issuance of letters of credit of which
$11,810,000 were outstanding and unused as of March 27, 1999. Interest
rates payable on amounts borrowed under the credit facilities are based on
F-14
<PAGE>
the prime rate, the federal funds rate or the eurodollar rate, plus a
stipulated margin. As of March 27, 1999, the Company had $100 million
outstanding on the Term Loan A facility bearing interest at 9.00% per annum
and $150 million outstanding on the Term Loan B facility bearing interest
at 9.75% per annum. The credit facilities contain covenants which include
the maintenance of certain financial ratios, restrictions on additional
indebtedness and payment of cash dividends (restricted to $800,000 in any
twelve-month period). The senior secured credit facilities are secured by
substantially all of the Company's assets.
The weighted average interest rates for 1999 and 1998 were 6.14% and 6.25%,
respectively.
On March 18, 1999, the Company prepaid amounts borrowed under senior
unsecured notes in the amount of $21.5 million. The Company incurred a
pre-payment penalty of approximately $1.6 million which is presented as an
extraordinary item, net of income taxes, on the Statement of Earnings.
The Company's long-term debt and capital lease obligation consists of the
following:
<TABLE>
<CAPTION>
MARCH 27, MARCH 28,
1999 1998
------------ ------------
<S> <C> <C>
Senior notes, unsecured, paid in 1999 $ 27,000,000
Senior credit facility, Term Loan A, due
March, 2005, quarterly principal payments
of $5,000,000 commencing June, 2000 $ 100,000,000
Senior credit facility, Term Loan B, due
March, 2007, semi-annual principal payments
of $250,000 commencing September, 1999 150,000,000
Bank credit agreement, unsecured, paid in 1999 62,800,000
F-15
<PAGE>
Variable Rate Promissory Notes, unsecured,
due March 31, 2001, interest payable
quarterly at 1% below the prime rate 14,390,036 14,056,389
Other, including capital lease obligation 10,858,265 10,353,933
------------ ------------
275,248,301 114,210,322
Less current portion 5,726,153 6,544,777
------------ ------------
Total long-term debt and capital lease obligation $269,522,148 $107,665,545
============ ============
</TABLE>
At March 27, 1999, long-term debt and capital lease obligation are due as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH,
------------------
<S> <C> <C>
2000 $ 5,726,153
2001 34,519,242
2002 21,030,721
2003 15,816,927
2004 21,106,159
Later 177,049,099
------------
$275,248,301
============
</TABLE>
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, although the Company's bank
credit agreement restricts the total amount outstanding under the offering
to approximately $16.1 million. As of March 27, 1999, approximately $51.4
million of these notes have been issued and approximately $15.9 million
were outstanding. Issued notes are redeemed on March 31 of every other
calendar year after March 31, 1993.
F-16
<PAGE>
COMMITMENTS AND CONTINGENCIES
The Company has guaranteed payment of indebtedness to financial
institutions aggregating $16,420,000 at March 27, 1999, on behalf of
certain Customers. The Company 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.
On August 21, 1996, the Attorney General for the State of Michigan filed an
action in Michigan circuit court against the leading cigarette
manufacturers operating in the United States, twelve wholesalers and
distributors of tobacco products in Michigan (including three Company
subsidiaries) and others seeking certain injunctive relief, the
reimbursement of $4 billion in Medicaid and other expenditures incurred or
to be incurred by the State of Michigan to treat diseases allegedly caused
by cigarette smoking and punitive damages of $10 billion. In July 1998,
the court dismissed the claim for punitive damages. On December 7, 1998,
the State of Michigan and the cigarette manufacturers settled the remaining
claims and the case was dismissed by the court without any payment by the
Company or its subsidiaries. Thirty actions have been filed in state
courts in Pennsylvania against the leading cigarette manufacturers
operating in the United States and certain wholesalers and distributors,
including a subsidiary of the Company. All of the Pennsylvania actions
were filed by individual plaintiffs pursuant to a special notice procedure
which does not include any formal complaint. In these separate cases, the
Company expects that the plaintiffs are seeking compensatory, punitive and
other damages, reimbursement of medical and other expenditures and
equitable relief. The Company believes that its subsidiaries have valid
defenses to these legal actions. These actions are being vigorously
defended. All but two of the Pennsylvania actions have been dismissed
without prejudice pursuant to a Dismissal and Tolling Agreement under which
the defendants have agreed not to raise the defense of statute of
limitations or laches if an action is filed by a plaintiff before April 1,
1999. It is anticipated that the Dismissal and Tolling Agreement will be
extended to October 1, 1999, with respect to certain defendants, including
the Company's subsidiaries. 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,
F-17
<PAGE>
management believes that their outcome will not result in a material
adverse effect on the consolidated financial position, operating results or
liquidity of the Company.
LEASES
The Company and certain subsidiaries lease equipment and warehouse and
store facilities. Many of these leases include renewal options. The
following represents property which is leased under a capital lease and
included in property and equipment:
<TABLE>
<CAPTION>
MARCH 27, MARCH 28,
1999 1998
---------- ----------
<S> <C> <C> <C>
Buildings $7,300,000 $7,300,000
Less accumulated amortization 6,901,401 6,563,456
---------- ----------
Net buildings $ 398,599 $ 736,544
========== ==========
</TABLE>
Amortization of property under the capital lease was $337,945 in 1999 and
$294,618 in 1998 and 1997.
Future minimum obligations under capital leases in effect at March 27, 1999
are as follows:
F-18
<PAGE>
<TABLE>
<CAPTION>
USED IN
YEAR ENDING MARCH, OPERATIONS
------------------ ----------
<S> <C> <C>
2000 $ 793,872
2001 396,937
----------
Total future minimum obligations 1,190,809
Less interest 79,415
----------
Present value of net future minimum obligations 1,111,394
Less current portion 722,500
----------
Long-term obligations $ 388,894
==========
</TABLE>
Future minimum obligations under operating leases in effect at March 27,
1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING USED IN SUBLEASED
MARCH, OPERATIONS TO OTHERS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
2000 $ 5,373,350 $ 2,307,288 $ 7,680,638
2001 4,691,436 2,307,288 6,998,724
2002 3,537,336 2,249,967 5,787,303
2003 2,609,542 1,820,007 4,429,549
2004 2,004,090 1,692,456 3,696,546
Later 11,210,834 10,436,208 21,647,042
---------- ----------- -----------
Total future minimum
obligations $29,426,588 $20,813,214 $50,239,802
========== =========== ===========
</TABLE>
Rental expense under those leases which are classified as operating leases
amounted to $9,800,000, $8,400,000, and $9,690,000 in 1999, 1998 and 1997,
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
F-19
<PAGE>
operating leases. Substantially all of the leases provide for minimum and
contingent rentals based upon stipulated sales volumes.
Owned assets, included in property and equipment, which are leased to
others are as follows:
<TABLE>
<CAPTION>
MARCH 27, MARCH 28,
1999 1998
----------- -----------
<S> <C> <C> <C>
Land and improvements $14,091,261 $15,100,926
Buildings 55,249,280 58,116,191
----------- -----------
69,340,541 73,217,117
Less accumulated depreciation 16,281,090 15,341,306
----------- -----------
Net land and buildings $53,059,451 $57,875,811
=========== ===========
</TABLE>
Future minimum rentals to be received under operating leases in effect at
March 27, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OWNED LEASED
MARCH, PROPERTY PROPERTY TOTAL
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
2000 $ 7,312,457 $ 2,439,332 $ 9,751,789
2001 7,273,103 2,439,332 9,712,435
2002 7,007,125 2,381,556 9,388,681
2003 6,640,558 1,929,977 8,570,535
2004 6,401,179 1,794,773 8,195,952
Later 53,054,799 10,911,642 63,966,441
------------ ----------- ------------
Total future minimum
rentals $ 87,689,221 $21,896,612 $109,585,833
============ =========== ============
</TABLE>
F-20
<PAGE>
ASSOCIATE RETIREMENT PLANS
The Company's retirement programs include pension plans providing
non-contributory benefits and profit sharing plans providing contributory
benefits. Substantially all of the Company's associates not covered by
collective bargaining agreements are covered by either a non-contributory
cash balance pension plan (Company Plan), a defined contribution plan or
both. Associates covered by collective bargaining agreements are included
in multi-employer pension plans.
Effective as of April 1, 1998, the Company Plan's benefit formula was
redesigned, utilizing a cash balance approach. Under the new cash balance
formula, credits are added annually to a participant's "account" based on a
percentage of the participant's compensation and years of vested service at
the beginning of each calendar year. 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.
Transition credits are also added to a participant's account until the year
2007 if certain age requirements are met. 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.
Company Plan assets consist principally of common stocks and U.S.
Government and corporate obligations. At March 27, 1999 and March 28,
1998, Company Plan assets included Class A common shares of the Company
valued at $1,722,000 and $1,582,000, respectively.
Matching contributions made by the Company to salary reduction defined
contribution plans aggregated $2,030,000, $1,600,000 and $1,371,000 in
1999, 1998 and 1997, 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 $5,250,000 in 1999,
$4,932,000 in 1998 and $4,740,000 in 1997.
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.
Spartan 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
F-21
<PAGE>
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 post-retirement 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 1992 through
December 1997 the Company supplemented the retiree portion of the premium
which was reflected in the computation of the post-retirement 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 following tables set forth the change in benefit obligation, change in
plan assets, weighted average assumptions used in actuarial calculations
and components of net periodic benefit costs for the Company's pension and
post-retirement benefit plans:
<TABLE>
<CAPTION>
PENSION BENEFITS POST-RETIREMENT BENEFITS
-------------------------- --------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 52,553,318 $ 44,707,977 $ 4,838,885 $ 4,545,483
Service cost 3,605,230 2,014,359 206,562 170,911
Interest cost 3,174,330 3,335,534 322,270 311,168
Plan amendments (8,324,381)
Actuarial loss (gain) 2,515,958 3,981,951 (110,257) 23,919
Benefits paid (3,714,946) (1,486,503) (319,482) (212,596)
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 49,809,509 $ 52,553,318 $ 4,937,978 $ 4,838,885
============ ============ ============ ============
CHANGE IN PLAN ASSETS
Plan assets at fair value at beginning of year $ 50,929,661 $ 38,952,059
Actual return on plan assets 4,983,865 11,780,859
Company contributions 54,616 1,683,246 $ 319,482 $ 212,596
Benefits paid (3,714,946) (1,486,503) (319,482) (212,596)
------------ ------------ ------------ ------------
Plan assets at fair value at end of year $ 52,253,196 $ 50,929,661 $ $
============ ============ ============ ============
F-22
<PAGE>
Funded status $ (2,443,687) $ 1,623,657 $ 4,937,978 $ 4,838,885
Unrecognized net gain/(loss) 1,577,681 3,152,866 (1,284,737) (1,437,724)
Unrecognized prior service cost 6,134,152 (1,827,109) 1,317,180 1,383,039
Unrecognized net transition obligation (37,076) (42,373)
------------ ------------ ------------ ------------
Accrued benefit cost $ 5,231,070 $ 2,907,041 $ 4,970,421 $ 4,784,200
============ ============ ============ ============
WEIGHTED AVERAGE ASSUMPTIONS AS OF MARCH 31
Discount rate 7.00% 7.00% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% N/A N/A
Rate of compensation increase 4.75% 4.75% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPONENTS OF NET PERIOD BENEFIT COST
Service cost $ 3,605,230 $ 2,014,359 $ 2,214,766
Interest cost 3,174,330 3,335,534 3,121,058
Annual return on plan assets (4,067,172) (11,785,386) (3,579,463)
Net amortization and deferral (333,743) 8,642,024 1,011,568
------------ ------------ ------------
Net periodic benefit cost $ 2,378,645 $ 2,206,531 $ 2,767,929
============ ============ ============
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
POST-RETIREMENT BENEFITS
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPONENTS OF NET PERIOD BENEFIT COST
Service cost $ 206,562 $ 170,911 $ 294,630
Interest cost 322,270 311,168 393,971
Net amortization and deferral (23,129) (30,766) 50,532
------------ ------------ ------------
Net periodic benefit cost $ 505,703 $ 451,313 $ 739,133
============ ============ ============
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post-retirement plan. The assumed health care
cost trend rate used in measuring the accumulated post-retirement benefit
obligation was 5% for the fiscal year ended March 27, 1999 and remains at
that level thereafter. A 1% increase in the assumed health care cost trend
rate would increase the accumulated post-retirement benefit obligation by
1.6% and the periodic post-retirement benefit cost by 1.0%. A 1% decrease
in the assumed health care cost trend rate would decrease the accumulated
post-retirement benefit obligation by 1.4% and periodic post-retirement
benefit cost by .9%.
TAXES ON INCOME
The income tax provision is summarized as follows:
<TABLE>
<CAPTION>
MARCH 27, MARCH 28, MARCH 29,
1999 1998 1997
---------- ---------- ------------
<S> <C> <C> <C>
Currently payable $7,967,000 $8,592,000 $ 1,646,000
Net deferred 627,000 (583,000) 4,035,000
---------- ---------- ------------
$8,594,000 $8,009,000 $ 5,681,000
========== ========== ============
</TABLE>
F-24
<PAGE>
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
Amortization of goodwill 0.1 2.4
State income taxes 0.9 0.2 0.2
Other 0.8 0.7 (0.7)
---- ---- -----
Effective income tax rate 36.7% 36.0% 36.9%
==== ==== =====
</TABLE>
Deferred tax assets and liabilities resulting from temporary differences
and carry forwards as of March 27, 1999 and March 28, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Employee benefits $ 6,595,660 $ 5,598,245
Depreciation 314,739 1,119,330
Inventory 974,871 1,231,200
Accounts receivable 813,750 630,000
Lease transactions 383,171 494,000
Insurance reserves 251,883 557,165
Research and development credit 1,309,475 2,729,909
Restructuring charge 1,994,208
All other 318,547 441,710
----------- -----------
Total deferred tax assets 12,956,304 12,801,559
----------- -----------
F-25
<PAGE>
Deferred tax liabilities:
Depreciation 8,017,235 7,053,895
Inventory 1,641,896 1,040,199
All other 397,173 1,180,465
----------- -----------
Total deferred tax liabilities 10,056,304 9,274,559
----------- -----------
Net deferred tax asset $ 2,900,000 $ 3,527,000
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest $10,896,201 $11,264,484 $ 8,916,115
Income taxes $15,638,456 $ 3,618,017 $ 2,185,507
</TABLE>
During 1999, the Company refinanced $99,350,0000 of bank borrowings in
connection with the $425 million senior secured credit facility. In
conjunction with the acquisition of Ashcraft's Market, Inc., the Company
assumed certain liabilities approximating $2,600,000. Finally, the Company
received restricted cash of $78,143,825 from proceeds from long-term
borrowings.
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 27, 1999, there were no Class
B shares outstanding.
F-26
<PAGE>
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. 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 27, 1999, there were 8,021,000
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 Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting For Stock-Based Compensation," and as allowed by this statement
the Company recognizes expense using the intrinsic value method prescribed
by 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.
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 and earnings per share would have been adjusted to
the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ------------
<S> <C> <C> <C>
Net earnings as reported $14,798,986 $14,233,981 $ 9,702,725
Net earnings - Pro forma $14,771,426 $14,191,627 $ 9,660,475
Basic and diluted earnings per share -
as reported $ 1.33 $ 1.21 $ 0.80
Basic & diluted earnings per share -
Pro forma $ 1.32 $ 1.20 $ 0.80
</TABLE>
F-27
<PAGE>
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividend yield 0.10% 0.11% 0.12%
Expected volatility 8.79% 7.60% 5.04%
Risk-free interest rate 5.87% 6.88% 6.82%
Expected life of option 10 yrs. 10 yrs. 10 yrs.
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED FAIR VALUE
SHARES AVERAGE OF OPTIONS
UNDER OPTION EXERCISE GRANTED
------------ -------- ----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING AT MARCH 31, 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
Granted 8,000 12.30 $5.30
Terminated (3,000) 10.60
------- ------ -----
OPTIONS OUTSTANDING AT MARCH 27, 1999 32,000 $10.59
------- ------
------- ------
OPTIONS EXERCISABLE AT MARCH 27, 1999 32,000 $10.59
------- ------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE YRS.
--------------- ----------- -----------------------
<S> <C> <C> <C>
$ 8.40 3,000 3.1
8.80 3,000 4.1
9.30 3,000 5.1
10.00 4,000 6.1
10.50 4,000 7.1
11.30 7,000 8.2
12.30 8,000 9.1
------------ ------ ---
$8.40-$12.30 32,000 6.89
</TABLE>
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 27, 1999, 383,103
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 27, 1999, 469,330 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.
OPERATING SEGMENT INFORMATION
Using the management approach as required by SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," the Company's
F-29
<PAGE>
operating segments were identified by products sold and customer profile
and include grocery store distribution, convenience store distribution,
insurance and real estate.
The Company's grocery store distribution operating segment includes the
sale 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 to both independently owned and Company owned
retail grocery stores located in Michigan, Indiana and Ohio. The grocery
store distribution operating segment also includes the sales of Company
owned retail grocery stores located in Michigan. Sales in the grocery store
distribution operating segment are presented after the elimination of
intra-segment sales. The Company ships the products from its main
warehouse and distribution center in Grand Rapids, Michigan, and from a
warehouse in Plymouth, Michigan. The Company also provides its Customers
with a broad spectrum of additional services. Revenue is recognized when
the product is shipped or service provided.
The Company's convenience store distribution operating segment includes the
sale of confections, tobacco products, specialty foods, and other grocery
products to convenience stores and other retail locations in Michigan,
Illinois, Indiana, Kentucky, Ohio, Pennsylvania, Georgia, Tennessee, and
West Virginia. Additionally, the Company operates 13 cash and carry
outlets in Michigan and Ohio serving convenience stores. Revenue is
recognized when the product is shipped.
The Company's insurance operating segment offers commercial insurance
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. The insurance business segment also provides
insurance brokerage services and third-party claims administration and
services. Additionally, the insurance business segment provides insurance
underwriting for Customers. The underwriting operations are incorporated
and licensed in Bermuda and issue policies of another carrier through a
fronting agreement. Under this agreement, the Company insures some of the
coverage limits and reinsures with reinsurance companies the balance of the
coverage limit. Commissions are recognized as of the policy billing dates,
which approximate effective dates of the applicable policies. Third-party
claims administration revenues are recognized as services are performed and
underwriting revenues are recognized over the life of the policies.
The Company's real estate business segment owns retail grocery store
facilities that are leased to Customers and other retailers and leases
other sites that are subleased to Customers. The real estate properties
are located in Michigan, Indiana and Ohio. Revenue is recognized according
to the terms of the lease or loan.
F-30
<PAGE>
Identifiable assets represent total assets directly associated with the
various operating segments. Eliminations in assets identified to segments
include intercompany receivables, payables and investments.
Sales and interest between segments are eliminated upon consolidation.
The following table sets forth, for each of the last three fiscal years,
information required by SFAS No. 131:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES
Grocery store distribution $1,838,122,873 $1,800,428,294 $1,797,217,868
Convenience store distribution 841,793,241 696,088,886 686,145,991
Insurance 15,845,415 15,943,559 16,620,923
Real estate 10,509,850 11,899,971 11,994,849
Less - Eliminations (34,571,601) (35,111,241) (36,954,389)
-------------- -------------- --------------
Total $2,671,699,778 $2,489,249,469 $2,475,025,242
============== ============== ==============
RESTRUCTURING CHARGE
Grocery store distribution $ 5,697,738
===============
INTEREST EXPENSE
Grocery store distribution $ 5,309,442 $ 6,135,951 $ 6,676,950
Convenience store distribution 2,293,673 2,724,633 2,127,563
Insurance 25 3,171,389 1,133
Real estate 2,364,906 0 2,199,634
Less - Eliminations (760,342) (1,097,939) (1,304,840)
-------------- -------------- --------------
Total $ 9,207,704 $ 10,934,034 $ 9,700,440
============== ============== ==============
INTEREST INCOME
Grocery store distribution $ (2,149,065) $ (3,163,967) $ (3,935,458)
Convenience store distribution (435,855) (110,970) (415,607)
Insurance (1,389,977) (1,318,214) (1,383,315)
Real estate (27,700) (29,670) (126,167)
Less - Eliminations 899,613 1,298,732 2,251,137
-------------- -------------- --------------
Total $ 3,102,984 $ (3,324,089) $ (3,609,410)
============== ============== ==============
F-31
<PAGE>
DEPRECIATION AND AMORTIZATION
Grocery store distribution $ 16,372,532 $ 16,377,316 $ 15,245,648
Convenience store distribution 2,523,312 2,524,726 2,476,767
Insurance 167,695 153,137 181,905
Real estate 2,349,400 2,584,287 2,270,890
-------------- -------------- --------------
Total $ 21,412,939 $ 21,639,466 $ 20,175,210
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM
Grocery store distribution $ 2,327,793 $ 6,543,232 $ 1,944,333
Convenience store distribution 15,323,540 6,105,477 6,643,022
Insurance 3,527,381 3,592,234 3,881,824
Real estate and finance 3,798,910 6,002,038 2,914,546
-------------- -------------- --------------
Total $ 24,977,624 $ 22,242,981 $ 15,383,725
============== ============== ==============
INCOME TAXES
Grocery store distribution $ 1,014,000 $ 2,327,000 $ 917,000
Convenience store distribution 5,526,000 2,282,000 2,281,000
Insurance 1,239,000 1,299,000 1,455,000
Real estate and finance 1,369,000 2,101,000 1,028,000
-------------- -------------- --------------
Total $ 9,148,000 $ 8,009,000 $ 5,681,000
============== ============== ==============
EXTRAORDINARY ITEM (NET OF
INCOME TAXES OF $554,000)
Grocery store distribution $ 1,030,698
==============
CAPITAL EXPENDITURES
Grocery store distribution $ 12,061,163 $ 18,948,363 $ 21,362,152
Convenience store distribution 2,692,108 1,534,410 1,115,895
Insurance 185,744 425,136 126,596
Real estate and finance 1,479,512 3,089,475 23,632,869
-------------- -------------- --------------
Total $ 16,418,527 $ 23,997,384 $ 46,237,512
============== ============== ==============
F-32
<PAGE>
TOTAL ASSETS
Grocery store distribution $ 442,247,305 $ 231,337,933 $ 237,105,654
Convenience store distribution 84,693,147 87,180,899 69,420,897
Insurance 30,354,134 29,792,534 28,687,628
Real estate and finance 60,698,644 66,345,812 74,328,798
Less - Eliminations (79,259,362) (8,524,063) (5,811,863)
-------------- -------------- --------------
Total $ 538,733,868 $ 406,133,155 $ 403,731,114
============== ============== ==============
</TABLE>
F-33
<PAGE>
=====================================================================
No person has been authorized to give any information or to make any
representations or projections of future performance other than those
contained in this Prospectus. If a person has given or made any such other
information, projections, or representations, you should not rely on them.
The delivery of this Prospectus or any sale hereunder at any time does not
imply that the information in the Prospects is correct as of any time subse-
quent to its date. This Prospectus does not constitute an offer to sell or
a solicitation of any offer to buy any of the securities offered in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation.
---------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY................................................. 3
RISK FACTORS....................................................... 6
THE COMPANY........................................................ 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 23
MANAGEMENT......................................................... 31
EXECUTIVE COMPENSATION AND OTHER BENEFITS.......................... 33
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS............................................... 39
PRINCIPAL SHAREHOLDERS............................................. 40
DESCRIPTION OF CAPITAL STOCK....................................... 41
DIVIDEND POLICY.................................................... 46
PLAN OF DISTRIBUTION............................................... 46
USE OF PROCEEDS.................................................... 46
LEGAL MATTERS...................................................... 46
EXPERTS............................................................ 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................... 47
=====================================================================
<PAGE>
=====================================================================
3,500,000 Shares
Class A Common Stock
_____________
PROSPECTUS
_____________
SPARTAN STORES, INC.
August 5, 1999
=====================================================================
