SpartanNash - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

OR

Commission File Number:  000-31127

SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

As of October 24, 2000, the registrant had 19,585,284 outstanding shares of common stock, no par value.

PART I
FINANCIAL INFORMATION

related transactions costs and the retirement of Food Town's total debt outstanding through the acquisition facility within Spartan's senior secured bank credit facility. As of September 9, 2000, interest under the acquisition facility was at the 90-day Eurodollar rate plus 2.5%. Additionally, the company assumed certain operating liabilities approximating $97.3 million. Included in these liabilities is approximately $5.6 million in severance costs. Severance costs consist of obligations to employees who were terminated or were notified of termination under a plan authorized by senior management. The excess of the purchase price over the valuation of Food Town's tangible assets and liabilities amounted to approximately $24.7 million and was assigned to goodwill. Goodwill is being amortized on a straight-line basis over the estimated period benefited of forty years.

The operations of Food Town are included in the accompanying Consolidated Statements of Earnings from the date of acquisition. The following unaudited pro forma information presents summary Consolidated Statements of Earnings data of Spartan Stores as if the acquisition of Food Town had occurred at the beginning of the earliest period presented. The pro forma information has also been adjusted to give effect to acquisitions previously made by Spartan Stores as if the transactions had occurred at the beginning of the periods presented. 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 of Food Town taken place on the dates indicated or which may be reported in the future.

Note 4 Leases

In connection with Spartan Stores' acquisition of Food Town, Spartan Stores assumed a number of operating leases. Future minimum obligations under those operating leases are as follows:

Rent expense for the year-to-date period ended September 9, 2000 under these leases amounted to approximately $.9 million.

Note 5 Operating Segment Information

The following tables set forth information required by Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information."

Note 6 Shareholders' Equity

On July 18, 2000, the shareholders approved a proposal to amend Spartan Stores' articles of incorporation and bylaws in connection with the merger with Food Town. On August 1, 2000, the date of the merger, Spartan Stores filed the amendment to its articles of incorporation with the Michigan Corporation, Securities and Land Development Bureau. Upon this filing, each outstanding share of Spartan Stores Class A common stock, $2.00 par value, was converted into one share of Spartan Stores common stock, no par value.

On August 1, 2000, 6.7 million shares of outstanding Food Town common stock were converted into the right to receive one share of Spartan Stores common stock and $5.00 in cash. The holders of 448,835 shares of Food Town common stock provided notice of dissent from the merger. In addition, Spartan Stores declared a stock split pursuant to a dividend of 0.336 shares of Spartan Stores' common stock for each share outstanding immediately prior to the merger. Accordingly, per share amounts have been restated throughout the consolidated financial statements. On August 2, 2000, Spartan Stores obtained a listing on the NASDAQ National Market under the stock-trading symbol of "SPTN" for all shares of its common stock issued and outstanding.

On September 12, 2000, the company announced that it has been authorized by its board of directors to purchase up to $5 million of the corporation's common stock over a twelve-month period.

Note 7 Contingencies

On June 20, 2000, an amended complaint was refiled in a Tennessee state court by individual plaintiffs on behalf of the state of Tennessee and its taxpayers against the leading cigarette manufacturers operating in the United States and certain wholesalers and distributors, including J.F. Walker Company, Inc. ("J.F. Walker"), a subsidiary of Spartan Stores. This case was initially filed in May 1997, removed to the United States District Court for the Eastern District of Tennessee, and on June 16, 1998, J.F. Walker was voluntarily dismissed as a defendant. The federal district court then dismissed the case for lack of standing. The United States Court of Appeals for the Sixth Circuit affirmed the district court decision with instructions to remand the case back to state court. The plaintiffs then filed an amended complaint including J.F. Walker as a defendant. In this case, the plaintiffs are seeking compensatory, punitive and other damages, reimbursement of medical and other expenditures and equitable relief. Spartan Stores believes that J.F. Walker has valid defenses to this legal action, which is being vigorously defended. One of the cigarette manufacturers named as a defendant in this action has agreed to indemnify J.F. Walker from damages arising out of this action. Management believes that the ultimate outcome of this action should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Spartan Stores.

Results of Operations

The following table sets forth Spartan Stores' Consolidated Statements of Earnings as percentages of net sales:

Net Sales

Net sales for the quarter and year-to-date periods ended September 9, 2000 increased 9.2 and 7.6 percent or $65.9 and $107.0 million, respectively, compared to the quarter and year-to-date periods ended September 11, 1999.

Net sales for the quarter and year-to-date periods ended September 9, 2000 in the retail grocery segment increased 71.9 and 66.8 percent or $101.0 and $156.0 million, respectively, compared to last year. The increase reflects additional sales from the acquisition of retail stores during the first and third quarters of fiscal 2000, the merger with Food Town in the second quarter of fiscal year 2001 and a 5.0 percent increase year-to-date in same store sales.

Net sales for the quarter and year-to-date periods ended September 9, 2000 in the grocery distribution segment declined 9.4 and 5.9 percent or $32.8 and $42.1 million, respectively, compared to last year. The decrease primarily resulted from Spartan Stores' acquisition of grocery distribution segment customers during fiscal 2000, requiring the elimination of sales to these customers, the loss of D&W Food Centers pharmacy business and declines in sales of grocery and general merchandise products due to continued competitive market conditions. Partially offsetting these declines were increases in sales of perishable commodities, as well as increases in direct sales of merchandise. D&W Food Centers announced on September 13, 2000 that Spartan Stores would no longer be its supplier for grocery and perishable products for all but five of its twenty-six locations beginning in mid-October. The five locations remaining with Spartan Stores are subject to real estate leases with Spartan

Stores and require certain levels of minimum purchases. Sales of grocery and perishable products to D&W Food Centers represent less than four percent of the company's total annual revenue.

Net sales in the convenience store distribution segment were comparable to the prior year quarter and declined $4.3 million on a year-to-date basis. The decline was primarily due to the acquisition of distribution segment customers, requiring the elimination of sales to these customers, declines in cigarette sales volume due to higher prices and higher gasoline prices, which reduce overall customer spending.

Gross Profit

Gross profit, as a percentage of net sales, for the quarter and year-to-date periods ended September 9, 2000, was 15.9 and 14.5 percent, respectively, compared to 13.8 and 13.0 percent last year. The increase reflects the increased percentage of retail sales in the business mix and improvements in the gross margin of existing retail operations. This increase was partially offset by a lower convenience store distribution gross profit percentage, primarily due to increased cigarette cost passed along to customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter and year-to-date periods ended September 9, 2000, were 13.6 and 12.6 percent of net sales, respectively, compared to 12.0 and 11.4 percent last year. The increase was primarily due to the growth of Spartan Stores' retail grocery segment, which generates a higher selling, general and administrative expense percentage than the distribution segments. This increase was partially offset by improvements in the efficiency of the company's wholesale distribution operations.

Interest Expense

Interest expense was .9 percent of net sales for the quarter and year-to-date periods ended September 9, 2000 compared to .7 and .8 percent last year. The increase is primarily the result of an increase in average borrowings resulting from the merger with Food Town.

Other Gains

During the second quarter of fiscal 2001, the real estate segment recognized gains of $3.2 million on the sale of two properties. In the first quarter of fiscal 2000, the retail grocery segment recognized a gain of $2.6 million on the sale of an investment in the common stock of a supplier.

Net Earnings

Net earnings for the quarter and year-to-date periods ended September 9, 2000 were $9.0 and $12.7 million or $0.55 and $0.86 per share, respectively, compared with net earnings of $5.1 and $10.1 million or $0.38 and $0.74 per share for the corresponding periods last year.

Current year earnings were positively impacted by the merger with Food Town, the acquisition of Great Day consummated in the third quarter of last fiscal year, improved margins in the retail grocery segment and improved efficiencies in the company's distribution operations. Additionally, current year-to-date net earnings include gains of $3.2 million on the sale of two properties in the real estate

segment. Offsetting these increases was a decline in gross profit in the Company's convenience store distribution segment.

Last year's year-to-date net earnings included a one-time gain of $2.6 million in the retail grocery segment related to the sale of an investment in the common stock of a supplier that was partially offset by $.8 million in restructuring charges in the grocery distribution segment.

Liquidity and Capital Resources

Spartan Stores' principal sources of liquidity are cash flows generated from operations and borrowings under a senior secured credit facility dated March 18, 1999. The credit facility consists of (1) a Revolving Credit Facility in the amount of $100.0 million with a term of six years, (2) a Term Loan A in the amount of $100.0 million with a term of six years, (3) an Acquisition Facility in the amount of $75.0 million with a term of seven years and (4) a Term Loan B in the amount of $150.0 million with a term of eight years. At September 9, 2000, $308.3 million was outstanding under this credit facility. Management believes that cash flows generated from operations and available borrowings under the Revolving Credit Facility will be sufficient to support operations in the foreseeable future. Available borrowings under the credit facility are based on stipulated levels of earnings before interest, taxes, depreciation and amortization as defined in the agreement.

Spartan Stores' current ratio at September 9, 2000 decreased to 1.43 to 1.00 compared with 1.53 to 1.00 at March 25, 2000. However, working capital increased 29.8 percent or $26.4 million due primarily to the merger with Food Town.

Spartan Stores' long-term debt to equity ratio at September 9, 2000 decreased to 1.53 to 1.00 compared with 2.11 to 1.00 at March 25, 2000. The decrease was due primarily to the issuance of 6.2 million shares of common stock to facilitate the Food Town merger and the lower leverage position associated with these operations. Management continues to evaluate other acquisition opportunities, which if consummated could increase Spartan Stores' leverage position.

Recent Accounting Pronouncements

In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on recognition, presentation, and disclosure of revenue in financial statements. Spartan Stores will adopt SAB No. 101 as required no later than December 31, 2000. Management does not believe adoption of SAB No. 101 will have a material impact on Spartan Stores' financial position and results of operations.

Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

The matters discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" about Spartan Stores' plans, strategies, objectives, goals, expectations or projections. These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores 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. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, Spartan Stores' Annual Report on Form 10-K for the year ended March 25, 2000 and other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to be materially different from Spartan Stores' current expectations.

Anticipated future sales are subject to competitive pressures from many sources. Spartan Stores' grocery store and convenience store retail and distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Additionally, future sales will be dependent on the number of retail stores owned and operated by Spartan Stores and competitive pressures in the retail industry. Sales volumes in Spartan Stores' convenience store distribution segment may continue to be negatively impacted by increased cigarette prices. Spartan Stores' insurance segment competes with many 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.

Spartan Stores' operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: the merger with Food Town; the integration of the business operations of the retail stores and other businesses acquired by Spartan Stores; future business acquisitions, including additional retail stores; unanticipated difficulties in the operation of the retail grocery segment, which is a new line of business; difficulties in assimilation of acquired personnel, operations, systems or procedures; inability to realize synergies in the amounts or within the time frame expected by management; adverse effects on existing business relationships with independent retail grocery store customers; unexpected difficulties in the retention or hiring of employees for the acquired businesses; unanticipated labor shortages, stoppages or disputes; business divestitures; increased transportation or fuel costs; and current or future lawsuits and administrative proceedings.

Spartan Stores' future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings necessary for retail store acquisitions; interest rate changes; cigarette inventory levels; retail property sales; the volume of notes receivable; and the amount of fees received on delinquent accounts.

This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all economic, competitive, governmental, technological and other factors that could adversely affect Spartan Stores' expected consolidated financial position, results of operations or liquidity. Spartan Stores disclaims any obligation or intention to update its forward-looking statements to reflect events or circumstances that occur after the date of this Report.

There were no material changes in market risk of the company in the period covered by this report.

PART II
OTHER INFORMATION

For a discussion of certain litigation, see Note 7 ("Contingencies") to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

On July 18, 2000, at the 2000 annual meeting of shareholders of Spartan Stores, the shareholders voted to elect five persons to the board of directors effective upon the merger with Food Town. The following directors were duly elected:

As required by the Agreement and Plan of Merger between Spartan Stores and Food Town, two former directors of Food Town, Richard B. Iott and Joel A. Levine, were appointed to Spartan Stores' Board of Directors, to serve terms ending in 2003 and 2001, respectively.

At the same meeting, the shareholders also approved proposals to amend Spartan Stores' Articles of Incorporation and Bylaws in connection with the merger with Food Town and to confirm the appointment of Deloitte & Touche, LLP as Spartan Stores' independent auditors for the current fiscal year. The voting results were as follows:

There were no broker non-votes on any matter submitted to a vote of the shareholders.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX