UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 17, 2000.
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number: 000-31127
SPARTAN STORES, INC.(Exact Name of Registrant as Specified in Its Charter)
Michigan(State or Other Jurisdictionof Incorporation or Organization)
38-0593940(I.R.S. EmployerIdentification No.)
850 76th Street, SWP.O. Box 8700Grand Rapids, Michigan(Address of Principal Executive Offices)
49518(Zip Code)
(616) 878-2000(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No
As of July 28, 2000, the registrant had 9,970,770 outstanding shares of Class A Common Stock, $2 par value.
PART IFINANCIAL INFORMATION
ITEM 1.
Financial Statements
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Balance Sheets(In thousands, except per share data)(Unaudited)
ASSETS
June 17,2000
March 25,2000
Current assets
Cash and cash equivalents
$
48,071
36,422
Marketable securities
20,984
20,628
Accounts receivable, net
84,610
83,998
Inventories
105,787
105,587
Prepaid expenses
5,810
4,736
Deferred taxes on income
5,716
5,409
Total current assets
270,978
256,780
Other assets
Goodwill, net
98,868
99,075
Other
36,168
36,127
Total other assets
135,036
135,202
Property and equipment
Land and improvements
32,598
32,152
Buildings and improvements
141,024
141,461
Equipment
182,288
179,746
Total property and equipment
355,910
353,359
Less accumulated depreciation and amortization
181,035
174,768
Net property and equipment
174,875
178,591
Total assets
580,889
570,573
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
83,712
82,186
Accrued payroll and benefits
21,981
24,530
Insurance reserves
15,012
14,718
Other accrued expenses
30,077
23,036
Current maturities of long-term debt
23,588
23,862
Total current liabilities
174,370
168,332
5,212
Postretirement benefits other than pensions
4,981
4,951
Long-term debt
266,010
266,071
Commitments and contingencies
-
Shareholders' equity
Class A common stock, voting, par value $2 a share;
20,000 shares authorized; 9,971 and 9,919 outstanding
19,942
19,838
Class B common stock, no par value; 5,000 shares authorized;
no shares issued or outstanding
Additional paid-in capital
14,825
14,240
Retained earnings
95,549
91,929
Total shareholders' equity
130,316
126,007
Total liabilities and shareholders' equity
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Earnings(In thousands, except per share data)(Unaudited)
First Quarter (12 Weeks) Ended
June 19,1999
Net sales
725,560
684,370
Cost of sales
630,797
600,724
Gross profit
94,763
83,646
Operating expenses
Selling, general and administrative
83,752
73,282
Restructuring charge
396
Total operating expenses
73,678
Operating income
11,011
9,968
Non-operating expense (income)
Interest expense
6,659
6,204
Interest income
(1,446
)
(1,183
Other gains
(6
(2,621
Total non-operating expense, net
5,207
2,400
Earnings before income taxes
5,804
7,568
Income taxes
2,059
2,638
Net earnings
3,745
4,930
Basic and diluted earnings per share
0.38
0.48
Weighted average shares outstanding
- Basic
9,954
10,268
- Diluted
9,960
10,273
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Shareholders' Equity(In thousands, except per share data)(Unaudited)
Class ACommonStock
AdditionalPaid-InCapital
RetainedEarnings
Balance - March 28, 1999
21,689
13,815
85,558
Class A common stock transactions
1,225 shares purchased
(2,451
(2,908
(10,320
300 shares issued
600
3,333
17,194
Cash dividends - $0.05 per share
(503
Balance - March 25, 2000
1 shares purchased
(2
(10
53 shares issued
106
595
Cash dividends - $0.0125 per share
(125
Balance - June 17, 2000
SPARTAN STORES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(In thousands)(Unaudited)
Cash flows from operating activities
Adjustments to reconcile net earnings to
Depreciation and amortization
7,338
6,502
Post-retirement benefits other than pensions
30
60
(307
(159
Change in assets and liabilities, net of acquisitions:
(356
2,932
Accounts receivable
(612
(5,082
(200
(3,110
(1,074
1,383
1,526
235
(2,549
(1,770
294
144
7,041
11,928
Net cash provided by operating activities
14,870
15,768
Cash flows from investing activities
Purchases of property and equipment
(2,666
(3,770
Proceeds from the sale of property and equipment
6
24
Decrease in restricted cash
78,144
Acquisitions, net of cash acquired and deposits
(82,583
(790
(1,984
Net cash used in investing activities
(3,450
(10,169
Cash flows from financing activities
Proceeds from long-term borrowings
332
759
Repayment of long-term debt
(667
(2,636
Proceeds from sale of common stock
701
691
Common stock purchased
(12
(737
Dividends paid
(128
Net cash provided by (used in) financing activities
229
(2,051
Net increase in cash and cash equivalents
11,649
3,548
Cash and cash equivalents at beginning of year
44,112
Cash and cash equivalents at end of period
47,660
SPARTAN STORES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Note 1Accounting Policies
The consolidated financial statements include the accounts of Spartan Stores, Inc. and its subsidiaries ("Spartan Stores"). All significant intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is unaudited. The statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal, recurring nature.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented in Note 1 to the Consolidated Financial Statements included in Spartan Stores' Annual Report on Form 10-K for the fiscal year ended March 25, 2000, filed with the Securities and Exchange Commission on June 20, 2000.
Certain prior year amounts have been reclassified to conform to current year classifications.
Note 2New Accounting Standards
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 has not yet determined the effect of adopting SAB No. 101.
Note 3Contingencies
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
Note 4Operating 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."
(In thousands)
June 17, 2000(Unaudited)
June 19, 1999(Unaudited)
Retail grocery
148,037
93,058
Grocery store distribution
360,044
369,342
Convenience store distribution
211,476
215,395
Insurance
3,417
3,996
Real estate
2,586
2,579
Total
2,522
3,525
2,166
1,791
2,190
116
282
374
408
March 25, 2000(Unaudited)
204,067
203,270
431,958
428,358
86,701
80,949
29,618
28,987
56,277
63,374
Less - eliminations
(227,732
(234,365
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth Spartan Stores' Consolidated Statements of Earnings as percentages of net sales:
June 17,2000(Unaudited)
June 19,1999(Unaudited)
100.0
%
86.9
87.8
13.1
12.2
11.6
10.6
.1
10.7
1.5
.9
(.2
(.3
.7
.4
.8
1.1
.3
.5
Net Sales
Net sales for the quarter ended June 17, 2000 increased 6.0 percent or $41.2 million compared to the quarter ended June 19, 1999.
Net sales in the retail grocery segment increased 59.1 percent or $55.0 million compared to last year reflecting additional sales from the acquisition of retail stores during the first and third quarters of fiscal 2000, including a 4.4 percent increase in same store sales.
Net sales in the grocery distribution segment declined 2.5 percent or $9.3 million primarily as a result of Spartan Stores' acquisition of grocery distribution segment customers during fiscal 2000. The segment also experienced 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 pharmacy and delicatessen products.
Net sales in the convenience store distribution segment decreased 1.8 percent or $3.9 million compared to last year primarily due to the acquisition of retail locations and a decline in cigarette sales volume. Partially offsetting this decline was the carryover impact of cigarette price increases from fiscal 2000.
Gross Profit
Gross profit as a percentage of net sales was 13.1 percent compared to 12.2 percent last year. The increase is primarily attributable to Spartan Stores' entrance into the retail grocery segment, for which gross margins as a percentage of sales are typically higher than in wholesale 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 on a dollar for dollar basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 10.6 percent of net sales compared to 9.7 percent last year. The increase was primarily due to the increasing proportion of Spartan Stores' retail grocery segment, which operates at a higher selling, general and administrative expense as a percentage of net sales than the distribution segments.
Other Gains
During 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 were $3.7 million or $.38 per share compared with last year's net earnings of $4.9 million or $.48 per share. Last year's quarter 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 a $.4 million restructuring charge in the grocery distribution segment. Weighted average shares outstanding decreased to 10.0 million compared with last year's 10.3 million due to the redemption of stock associated with Spartan Stores' acquisition of retail grocery stores that were shareholder-customers of Spartan Stores.
Liquidity and Capital Resources
Spartan Stores' principal sources of liquidity are cash flows generated from operations and borrowings under a senior secured credit facility. 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 June 17, 2000, $249.5 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 increased to 1.55 to 1.00 compared with 1.53 to 1.00 at March 25, 2000 and working capital increased 9.2 percent or $8.2 million. The increases were primarily the result of an $11.7 million increase in cash. Net cash provided by operating activities was $14.9 million for the quarter ended June 17, 2000.
Spartan Stores' long-term debt to equity ratio decreased to 2.04 to 1.00 compared with 2.11 to 1.00 at March 25, 2000 primarily due to scheduled principal payments and current earnings. Management continues to evaluate other acquisition opportunities, which if consummated could increase Spartan Stores' current leverage position.
Subsequent Event
On July 18, 2000, the shareholders of Seaway Food Town, Inc. ("Seaway"), during a special meeting of shareholders, approved the previously announced merger with Spartan Stores. Later this same day, the shareholders of Spartan Stores, during the annual meeting of shareholders, approved the amendments to Spartan Stores' articles of incorporation and bylaws necessary to consummate the merger. Closing of the merger is anticipated to occur on or about August 1, 2000, upon satisfaction of closing conditions.
Recent Accounting Pronouncements
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 the proposed merger with Seaway and about Spartan Stores' other 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 Seaway; 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
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 date of this Report.
PART IIOTHER INFORMATION
Legal Proceedings
For a discussion of certain litigation, see Note 3 ("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.
ITEM 6.
Exhibits and Reports on Form 8-K
(a)
Exhibits: The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
Exhibit Number
Document
27
Financial Data Schedule
(b)
Reports on Form 8-K:
During the quarter ended June 17, 2000, Spartan Stores filed a Report on Form 8-K, which was dated April 7, 2000. That Form 8-K included as an exhibit a press release, also dated April 7, 2000, announcing Spartan Stores' anticipated merger with Seaway Food Town, Inc. The press release also discussed Spartan Stores' application for listing on the Nasdaq Stock Market. No financial statements were included or required to be included in that Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 28, 2000
SPARTAN STORES, INC.(Registrant)By /s/ David M. Staples
EXHIBIT INDEX