-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DzYsbdQ27BwFnyfyjfxqfw/g9qLLkrV53OP4MSR9TlWcmWVTUpwMq8VOriIvDBBA fcat1HPrJ5Pv8qI6HWMuLQ== 0000905729-99-000120.txt : 19990628 0000905729-99-000120.hdr.sgml : 19990628 ACCESSION NUMBER: 0000905729-99-000120 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPARTAN STORES INC CENTRAL INDEX KEY: 0000877422 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 380593940 STATE OF INCORPORATION: MI FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-41791 FILM NUMBER: 99652745 BUSINESS ADDRESS: STREET 1: 850 76TH ST SW STREET 2: P O BOX 8700 CITY: GRAND RAPIDS STATE: MI ZIP: 49518 BUSINESS PHONE: 6168782000 MAIL ADDRESS: STREET 1: 850 76TH ST SW STREET 2: PO BOX 8700 CITY: GRAND RAPIDS STATE: MI ZIP: 49518 10-K405 1 =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 27, 1999. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________. Commission File Number: 33-41791 SPARTAN STORES, INC. (Exact Name of Registrant as Specified in Its Charter) MICHIGAN 38-0593940 (State or Other Jurisdiction) (I.R.S. Employer of Incorporation or Organization) Identification No.) 850 76TH STREET, S.W. P.O. BOX 8700 GRAND RAPIDS, MICHIGAN 49518 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (616) 878-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] (Not Applicable) The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 22, 1999, was $103,437,521. The number of shares of the registrant's Class A Common Stock, $2 par value, outstanding at May 22, 1999, was 10,266,874 shares. DOCUMENTS INCORPORATED BY REFERENCE None =========================================================================== PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Spartan Stores, Inc., and its subsidiaries, distribute grocery and related products to retail stores located in Michigan, Illinois, Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, Georgia, and West Virginia. As used in this Report on Form 10-K, the term "Spartan" refers to Spartan Stores, Inc., without its subsidiaries, and the term "Company" refers to Spartan and its subsidiaries. The owners or operators of the retail stores served by the Company are referred to as "Customers." 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. 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 expanded its strategic direction into the retail grocery industry through the acquisition of eight retail grocery stores in Fiscal 1999 and an additional 36 stores in Fiscal 2000. Spartan is authorized to sell shares of its common stock to Customers of Spartan, employees of the Company ("Associates"), and other persons designated by the Board of Directors from time to time ("Approved Holders"). In addition, pursuant to the Bylaws, Spartan may issue shares of its Class A Common Stock, $2 par value ("Class A Shares"), in connection with the acquisition of businesses, assets, or capital stock of another corporation. The Board of Directors has designated as Approved Holders (i) any shareholder or other equity owner of any Shareholder-Customer who owns 5 percent or more of the equity interests in the Shareholder-Customer; (ii) any member of the Board of Directors of Spartan; or (iii) any spouse of an Associate, any biological or adopted child of an Associate, if the child is 21 years of age or younger, or any trust created by the Associate or his or her spouse which is established for the benefit of the Associate or the spouse or any such child of the Associate. The Company operates on a 52-53 week fiscal year, with the fiscal year ending on the last Saturday in March. The principal executive offices of Spartan are located at 850 76th Street, S.W., P.O. Box 8700, Grand Rapids, Michigan 49518. Spartan's telephone number is (616) 878-2000. DESCRIPTION OF BUSINESS GENERAL The Company operates in five operating segments: grocery store distribution; convenience store distribution; retail grocery operations; insurance sales and underwriting; and 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. 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 set forth in Item 8 of this Report on Form 10-K. 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 becomes available. -2- 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 as well. In addition, Spartan believes that Customers who are also shareholders of Spartan ("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 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 -3- exceptions in the program. The second part is the "plus," which is a charge generally consisting of: (i) a fixed amount per case times the number of cases on the invoice; (ii) a percentage of the total invoice product billing; and (iii) 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 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. -4- 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 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 2008. As of the fiscal -5- 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 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, Illinois, Indiana, Kentucky, Ohio, Pennsylvania, Georgia, Tennessee, and West Virginia. United Wholesale Grocery Company ("United Wholesale") operates 13 cash and carry outlets in Michigan and Ohio serving approximately 4,700 convenience stores. RETAIL GROCERY As a result of three recent acquisitions, the Company's subsidiary, Valuland, Inc. ("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 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. -6- 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 Corporation ("Market Development"), a subsidiary of Spartan, 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 investment in shopping centers or new retail food stores through internally generated capital and borrowed funds. COMPETITION The grocery and convenience store industries are characterized by intense competition and low profit margins. The principal methods of competition in the grocery industry are price, product quality and variety, and service. The principal methods of competition in the convenience store industry are price and product quality, and to a lesser extent, service. The Company believes that the Company and its Customers are competitive in their markets. However, the Company competes with a number of grocery and convenience store wholesalers and with a number of other businesses that market their products directly to food retailers, including companies having greater assets and larger sales volume than the Company. Customers compete with other retailers and with several large chain stores 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 -7- 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. 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. -8- 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:
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 STORE ------- --------------------- ---------------------- ------------------------ 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 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.
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. The following table reflects the diversity in the Shareholder- Customer base of Spartan as of March 27, 1999: -9-
NUMBER OF SHAREHOLDER- PERCENT OF TOTAL NUMBER OF CUSTOMERS OPERATING CUSTOMERS STORES OPERATED THE NUMBER OF STORES SALES --------------- ---------------------- ---------------- 1 174 23.0% 2 24 10.0% 3 5 4.0% 4 or more 19 63.0% 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.
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. The Company considers its relations with all Associates to be satisfactory, and has not had any work stoppages in the last five years. -10- REQUIRED INVESTMENT POLICY The Board of Directors of Spartan has adopted a policy which requires Shareholder-Customers to purchase and hold a minimum investment (the "Required Investment") in the Class A Shares. From time to time, the Board may change the Required Investment and other terms of the Required Investment policy. If a Shareholder-Customer no longer purchases grocery and related products from Spartan, it is Spartan's policy (but not a contractual obligation) to redeem, at the Shareholder-Customer's request, that number of Class A Shares then held by the Shareholder-Customer with an aggregate Trading Value (see below) which equals the Shareholder-Customer's Required Investment as of the date the Shareholder-Customer ceased purchasing from Spartan. Payment for such redeemed Class A Shares is made in six equal installments over a five-year period. In addition to Class A Shares sold to Shareholder-Customers to satisfy the applicable Required Investment, Spartan offers all Shareholder- Customers the opportunity to purchase Class A Shares at any time and from time to time. Spartan sells Class A Shares at the Trading Value in effect at the time of the sale. TRADING VALUE The price at which Shareholder-Customers must acquire Class A Shares from Spartan is the "Trading Value." The Board of Directors customarily establishes the Trading Value once a year in its sole and absolute discretion, based on the Company's financial condition, the results of its operations, operating trends, market conditions, the state of the economy, and such other factors as the Board deems appropriate. No specific formula is used to set the Trading Value. Any change adopted by the Board becomes effective upon acceptance of the Trading Value by the Michigan Corporation, Securities and Land Development Bureau. Effective June 21, 1999, the Trading Value was established at $13.30 per share. During the fiscal years ended March 1999, 1998 and 1997, the Trading Value was $12.30, $11.30 and $10.50 per share, respectively, as adjusted for the ten-for-one stock split pursuant to a share dividend paid on July 15, 1997 (the "Stock Split"). TERMS OF SALE AND BAD DEBT EXPERIENCE The Company furnishes to its Customers in the 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 -11- 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. ITEM 2. 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. 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- -12- 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, 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 -13- 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 Gen'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. ITEM 3. 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 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 -14- 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION There is and has been no established public trading market for Spartan's securities, including the Class A Shares. Spartan does not expect an active market for the Class A Shares to develop. In addition, although Spartan has a policy to redeem Class A Shares under certain circumstances, Spartan is not obligated to do so and the Company's bank credit agreement limits the annual permitted redemptions. Only limited classes of persons are eligible to hold Class A Shares. A holder may transfer the Class A Shares only to: (i) a Shareholder-Customer who continues to purchase from Spartan grocery and related products; (ii) an Associate; (iii) a Qualified Holder; or (iv) an Approved Holder. A "Qualified Holder" is a person to whom Spartan issues Class A Shares in connection with the acquisition of businesses, assets, or capital stock of another corporation. The Board of Directors has designated as Approved Holders (i) any shareholder or other equity owner of any Shareholder-Customer who owns 5 percent or more of the equity interests in the Shareholder-Customer; (ii) any member of the Board of Directors of Spartan; or (iii) any spouse of an Associate, any biological or adopted child of an Associate, if the child is 21 years of age or younger, or any trust created by the Associate or his or her spouse which is established for the benefit of the Associate or the spouse or any such child of the Associate. The Board of Directors from time to time, usually on an annual basis, establishes the Trading Value for the Class A Shares. The Board -15- determines the Trading Value, in its sole and absolute discretion, based on the Company's financial condition, results of operations, operating trends, market conditions, the state of the economy, and such other factors as the Board deems appropriate. Any change adopted by the Board becomes effective upon acceptance of the Trading Value by the Michigan Corporation, Securities and Land Development Bureau. Effective June 21, 1999, the Trading Value was established at $13.30 per share. Spartan is authorized to issue 5,000,000 shares of Class B Common Stock ("Class B Shares") with such preferences, limitations, and voting, distribution, dividend, liquidation, conversion, participation, redemption, and other rights as the Board may determine before issuance of the shares. The Board of Directors may authorize and issue one or more series of Class B Shares with preferences and rights superior to the rights of the holders of the Class A Shares. As of the date of this Report, no Class B Shares are outstanding. HOLDERS As of May 22, 1999, there were approximately 515 record holders of the Company's Class A Shares. There were no holders of the Company's Class B Shares. DIVIDENDS For at least 20 years, the Board of Directors has declared, and Spartan has paid, a regular quarterly dividend. The amount of such quarterly dividends for each of the three fiscal years in the period ended March 27, 1999, was $0.0125 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 bank credit agreement contains covenants which provide that the aggregate amount of cash dividends paid in any twelve-month period shall not exceed $800,000. ITEM 6. SELECTED FINANCIAL 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, appearing elsewhere in this Report. The following data also should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Report. -16- SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA: FOR THE YEAR ENDED ------------------------------------------------------------------ MARCH 27, MARCH 28, MARCH 29, MARCH 30, MARCH 25, 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Net Sales $2,671,700 $2,489,249 $2,475,025 $2,554,688 $2,526,128 Volume Incentive Rebates $ 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 Income Taxes and Extraordinary Item $ 24,978 $ 22,243 $ 15,384 $ (32,168) $ 14,098 Extraordinary Item (Net of Income Taxes) $ 1,031 Net Earnings (Loss) $ 14,799 $ 14,234 $ 9,703 $ (21,668) $ 9,030 Basic and Diluted Net Earnings (Loss) Per Share $ 1.33 $ 1.21 $ 0.80 $ (1.74) $ 0.74
BALANCE SHEET DATA: AS OF ------------------------------------------------------------------ MARCH 27, MARCH 28, MARCH 29, MARCH 30, MARCH 25, 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- 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 -17- Book Value Per Class A Share $ 11.16 $ 9.98 $ 8.91 $ 8.23 $ 10.03 Return on Average Shareholders' Equity 12.58% 12.86% 9.26% (17.66)% 7.52% Cash Dividends $ 556 $ 587 $ 606 $ 623 $ 613 Dividends Paid Per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 Shares Outstanding 10,844 11,444 12,033 12,460 12,544 Until February 1996, Spartan's policy was to pay volume incentive rebates to its Shareholder-Customers based upon each store's order size from Spartan. Prior to June 14, 1995, volume incentive rebates were paid approximately 50 percent in cash on a quarterly basis. At Spartan's fiscal year end, the Shareholder-Customers would receive Class A Shares at the Trading Value then in effect in exchange for the remaining approximately 50 percent of the volume incentive rebate. On June 14, 1995, the Board of Directors changed the rebate policy to pay volume incentive rebates on a quarterly basis approximately 75 percent in cash, and at the fiscal year end the Shareholder-Customer received Class A Shares at the Trading Value then in effect in exchange for the remaining 25 percent of the rebate. As of February 1996, Spartan no longer pays any volume incentive rebates. 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. 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT CURRENT YEAR DEVELOPMENT During Fiscal 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 Inc., a wholly-owned subsidiary of the Company, 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. -18- 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. 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 Fiscal 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:
YEAR ENDED ---------------------------------------- MARCH 27, MARCH 28, MARCH 29, 1999 1998 1997 (52 WEEKS) (52 WEEKS) (52 WEEKS) ---------- ---------- ---------- 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 Extraordinary item (net of income taxes) ------ ------ ------ Net earnings 0.6% 0.6% 0.4% ====== ====== ======
-19- 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. 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 -20- 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. 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 -21- 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, 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 -22- 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 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 fiscal 1997 a major construction effort related to the development of retail properties in the Eastern Michigan region required interest incurred during the construction period -23- 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 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 Fiscal 2000. However, the Company will recognize a gain of approximately $2.5 million associated with the sale of common stock held in another entity during Fiscal 2000. 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 Fiscal 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 -24- 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. 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 Fiscal 2000. 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 Fiscal 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 -25- 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 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 the Year 2000 issues. The Company has delayed other non-critical development and support initiatives as a result 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 completed timely, however, or if the Company's customers, suppliers or financial institutions should fail to adequately modify their computer systems, the Year 2000 problem could have a material adverse impact on the Company's ability to order and distribute product 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. 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 -26- 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 Fiscal 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 Fiscal 1998 was 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 -27- 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:
1999 1998 ------------------------- ------------------------ 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% ============ ====== ============ ======
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, the Articles of Incorporation of the Company were amended to increase the authorized capital stock from 2,000,000 to 20,000,000 shares of Class A common stock and from 500,000 to 5,000,000 -28- shares of Class B common stock. The amendment also reduced the par value of the Class A common stock from $20 per share to $2 per share. On July 15, 1997, the Company also consummated a ten-for-one stock split pursuant to a share dividend payable to shareholders of record on May 31, 1997. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for the Company on March 28, 1999. 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 No. 133 as required no later than March 26, 2000, and is currently assessing the impact of adoption on its consolidated financial statements. CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The matters discussed in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, there are many important factors that could cause actual results to be materially different from the Company's current expectations. Anticipated future sales are subject to competitive pressures from many sources. The Company's grocery store and convenience store distribution segments compete with numerous warehouse discount stores, supermarkets, pharmacies and product manufacturers. The Company's -29- 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 SOP 98-1 and SFAS No. 133. The Company's future interest expense and income also may differ from current 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 -30- expected consolidated financial position, results of operations or liquidity. The Company disclaims any obligation to update its forward- looking statements to reflect subsequent events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. 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 derivates 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:
NOTES DEBT RECEIVABLE OUTSTANDING MATURITIES (VARIABLE RATE) (VARIABLE RATE) ---------- --------------- --------------- 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% ========== ============
-31- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Spartan Stores, Inc. Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Spartan Stores, Inc. and subsidiaries as of March 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 -32- CONSOLIDATED BALANCE SHEETS SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 27, MARCH 28, ASSETS 1999 1998 ------------ ------------ 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 ============ ============
See notes to consolidated financial statements. -33- CONSOLIDATED BALANCE SHEETS (CONTINUED) SPARTAN STORES, INC. AND SUBSIDIARIES
MARCH 27, MARCH 28, LIABILITIES AND SHAREHOLDERS EQUITY 1999 1998 ------------ ------------ 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 ============ ============
-34- CONSOLIDATED STATEMENTS OF EARNINGS SPARTAN STORES, INC. AND SUBSIDIARIES
YEAR ENDED -------------------------------------------------------- MARCH 27, MARCH 28, MARCH 29, 1999 1998 1997 -------------- -------------- -------------- 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 ============== ============== ============== -35- 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 ============== ============== ==============
See notes to consolidated financial statements. -36- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SPARTAN STORES, INC. AND SUBSIDIARIES
CLASS A ADDITIONAL RETAINED COMMON STOCK PAID-IN CAPITAL EARNINGS ------------ --------------- -------- 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 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 =========== =========== ===========
See notes to consolidated financial statements. -37- CONSOLIDATED STATEMENTS OF CASH FLOWS SPARTAN STORES, INC. AND SUBSIDIARIES
YEAR ENDED ------------------------------------------- MARCH 27, MARCH 28, MARCH 29, 1999 1998 1997 ----------- ----------- ----------- 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 Gain 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 14,694,633 (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) ----------- ----------- ----------- -38- 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 =========== =========== ===========
See notes to consolidated financial statements. -39- 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 -40- 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 -41- 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:
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
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. 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. -42- 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 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. -43- 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 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. -44-
PRO FORMA 1999 1998 1997 - ----------------------------------- -------------- -------------- -------------- 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
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. -45-
1999 ----------------------------- ESTIMATED AMORTIZED FAIR COST VALUE ----------- ----------- 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 =========== ===========
1998 ----------------------------- ESTIMATED AMORTIZED FAIR COST VALUE ----------- ----------- 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 =========== ===========
The amortized cost and estimated fair values of investments as of March 27, 1999, by contractual maturity, are shown below: -46-
ESTIMATED AMORTIZED FAIR COST VALUE ----------- ----------- 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 years through fifteen years 4,450,283 4,200,128 ----------- ----------- $21,187,917 $21,058,381 =========== ===========
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 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 -47- 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:
MARCH 27, MARCH 28, 1999 1998 ------------ ------------ 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 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 ============ ============
-48- At March 27, 1999, long-term debt and capital lease obligation are due as follows:
YEAR ENDING MARCH, ------------------ 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 ============
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. 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 -49- 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, 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: -50-
MARCH 27, MARCH 28, 1999 1998 ---------- ---------- Buildings $7,300,000 $7,300,000 Less accumulated amortization 6,901,401 6,563,456 ---------- ---------- Net buildings $ 398,599 $ 736,544 ========== ==========
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:
USED IN YEAR ENDING MARCH, OPERATIONS ------------------ ---------- 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 obligation $ 388,894 ==========
Future minimum obligations under operating leases in effect at March 27, 1999 are as follows: -51-
YEAR ENDING USED IN SUBLEASED MARCH, OPERATIONS TO OTHERS TOTAL ----------- ----------- ----------- ----------- 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 =========== =========== ===========
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 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:
MARCH 27, MARCH 28, 1999 1998 ----------- ----------- 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 property $53,059,451 $57,875,811 =========== ===========
-52- Future minimum rentals to be received under operating leases in effect at March 27, 1999 are as follows:
YEAR ENDING OWNED LEASED MARCH, PROPERTY PROPERTY TOTAL ----------- ----------- ----------- ------------ 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 =========== =========== ============
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. -53- 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 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: -54-
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- --------------------------- MARCH 27, MARCH 28, MARCH 27, MARCH 28, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- 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 $ $ =========== =========== =========== =========== 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
-55-
PENSION BENEFITS ----------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
POST-RETIREMENT BENEFITS ----------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
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: -56-
MARCH 27, MARCH 28, MARCH 29, 1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
The effective income tax rates are different from the statutory federal income tax rates for the following reasons:
1999 1998 1997 ----- ----- ----- 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% ===== ===== =====
Deferred tax assets and liabilities resulting from temporary differences and carry forwards as of March 27, 1999 and March 28, 1998 are as follows:
1999 1998 ----------- ----------- 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 -57- Restructuring charge 1,994,208 All other 318,547 441,710 ----------- ----------- Total deferred tax assets 12,956,304 12,801,559 ----------- ----------- 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 =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION Payments for interest and income taxes were as follows:
1999 1998 1997 ----------- ----------- ---------- Interest $10,896,201 $11,264,484 $8,916,115 Income taxes $15,638,456 $ 3,618,017 $2,185,507
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 -58- 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. 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:
1999 1998 1997 ----------- ----------- ---------- 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 -59- Basic and diluted earnings per share - as reported $ 1.33 $ 1.21 $ 0.80 Basic and diluted earnings per share - Pro forma $ 1.32 $ 1.20 $ 0.80
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:
1999 1998 1997 ------- ------- ------- 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.
WEIGHTED FAIR VALUE SHARES AVERAGE OF OPTIONS UNDER OPTIONS EXERCISE PRICE GRANTED ------------- -------------- ---------- 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 Exercised (3,000) 10.60 ------------- -------- ---------- OPTIONS OUTSTANDING AT MARCH 27, 1999 32,000 $10.59 ------------- -------- ------------- -------- OPTIONS EXERCISABLE AT MARCH 27, 1999 32,000 $10.59 ------------- --------
-60-
WEIGHTED AVERAGE REMAINING EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE YRS. --------------- ----------- --------------------- $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
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 operating segments were identified by products sold and customer profile -61- 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. -62- 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:
1999 1998 1997 -------------- -------------- -------------- 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 -------------- -------------- -------------- -63- Total $ (3,102,984) $ (3,324,089) $ (3,609,410) ============== ============== ============== 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 ============== ============== ==============
1999 1998 1997 -------------- -------------- -------------- 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 ============== -64- 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 ============== ============== ============== 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 60,698,644 66,345,812 74,328,798 Less - Eliminations (79,259,362) (8,524,063) (5,811,863) -------------- -------------- -------------- Total $ 538,733,868 $ 406,133,115 $ 403,731,114 ============== ============== ==============
-65- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, and principal occupations of directors, nominees for director, and executive officers of Spartan as of June 25, 1999, are set forth below. POSITION AND PRINCIPAL NAME AND AGE OCCUPATION FOR LAST FIVE YEARS 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) 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) -66- POSITION AND PRINCIPAL NAME AND AGE OCCUPATION FOR LAST FIVE YEARS 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 -67- POSITION AND PRINCIPAL NAME AND AGE OCCUPATION FOR LAST FIVE YEARS 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 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 the Company's capital stock is not registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, the directors, officers, and persons owning greater than 10 percent of any class of the Company's equity securities are not subject to Section 16 of that Act. -68- ITEM 11. EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets forth the cash and non-cash compensation earned during the fiscal years ended March 27, 1999, March 28, 1998 and March 29, 1997 by the persons who served as the Chief Executive Officer of Spartan during the last completed fiscal year, and the four most highly compensated executive officers (other than the Chief Executive Officer) of Spartan at the end of the last completed fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ALL OTHER FISCAL ----------------------- UNDERLYING COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS SATION - --------------------------- ------ ------ ---------- ------------ ----------- 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 ____________________ -69- The amounts listed in this column include bonus amounts elected under the 1991 Stock Bonus Plan, as amended, plus an amount equal to 30 percent of such bonus amounts, to be received in Class A Shares. The amounts listed in this column also include cash bonuses accrued in fiscal year 1998 and 1999 for payment in the following year pursuant to the Company's Annual Incentive Plan. All reported awards were under the 1991 Stock Option Plan, as amended (the "1991 Stock Option Plan"), and have been adjusted to reflect the results of the July 1997 ten-for-one stock split. These awards have vested and are exercisable at the date of grant. The compensation listed in this column for fiscal year 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
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. -70- OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS - ------------------------------------------------------------------------------ POTENTIAL PERCENT REALIZABLE VALUE AT NUMBER OF TOTAL ASSUMED ANNUAL OF OPTIONS RATES OF STOCK PRICE SECURITIES GRANTED TO APPRECIATION UNDERLYING EMPLOYEES EXERCISE EXPIRA- FOR OPTION TERM OPTIONS IN FISCAL PRICE PER TION -------------------- NAME GRANTED YEAR SHARE DATE 5% 10% - ------------------- ---------- ---------- --------- ------ ------- ------- 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 _____________________ 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.
-71- AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END NUMBER OF SHARES -------------------------- --------------------------- ACQUIRED VALUE NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------- ---------------- -------- ----------- ------------- ----------- ------------- 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 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.
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 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 -72- 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 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 -73- 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:
YEARS OF VESTED SERVICE PERCENTAGE OF AS OF JANUARY 1 PARTICIPANT'S COMPENSATION ----------------------- -------------------------- 0 - 5 4% 6 - 10 5 11 - 15 6 16 - 20 7 21 - 25 8 26 or more 9
-74- 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:
PARTICIPANT'S AGE PERCENTAGE OF AS OF JANUARY 1 PARTICIPANT'S COMPENSATION ----------------- -------------------------- Under 35 0% 35 - 39 2 40 - 44 4 45 - 49 6 50 - 54 8 55 and over 10
Transition credits will be available for the 1998 - 2007 calendar years. However, if a participant has fewer than ten years of benefit service as of December 31, 1997, the participant is eligible for transition credits only for the number of calendar years equal to the participant's complete years of benefit service as of December 31, 1997. In addition to the principal credits, interest credits are also added annually to a participant's "account" based upon the participant's account balance as of the last day of the immediately preceding calendar year. The interest rate used for this purpose is the average of 30-year Treasury constant maturities yields over the 12 months ending in November of the prior calendar year. Upon termination of employment, a participant will be entitled to his or her vested accrued benefit which can be distributed either in a monthly annuity or in a lump sum. If distributed in a lump sum, the participant's benefit generally will be equal to the participant's account balance. For persons who 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 -75- 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 "Item 13 - Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of the Class A Shares as of May 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. -76-
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS - ------------------------ ------------------------- ---------------- 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 James B. Meyer 46,689 Charles B. Fosnaugh 12,291 David deS. Couch 5,377 Michael D. Frank 4,536 J. Kevin Schlosser 2,447 James G. Buick 1,000 John S. Carton 1,000 Alex J. DeYonker 0 All Directors and Executive Officers as a group 1,914,773 18.54% _____________________ Less than one percent. Except for Messrs. Buick, Carton and Meyer, the Class A Shares reported as beneficially owned by each director are directly owned by a corporation that is a Customer of the Company and with whom the director is affiliated. Thus, each such director indirectly owns the Class A Shares through the corporation which he controls either individually or with others. The Class A Shares owned by each such corporation are included in the amount reported for the appropriate director. For the name of each such entity related to each director, see "Item 10 - Directors and Executive Officers of the Registrant" above. Mr. Meyer and the named executive officers directly own the Class A Shares reported to be owned by each and hold the sole voting and dispositive power with respect to those shares. 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. -77- 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
ITEM 13. 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 -78- 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 "Item 10 - Directors and Executive Officers of the Registrant." 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. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. FINANCIAL STATEMENTS. Independent Auditors' Report of Deloitte & Touche LLP dated June 4, 1999 Consolidated Balance Sheets at March 27, 1999 and March 28, 1998 Consolidated Statements of Earnings for each of the three years in the period ended March 27, 1999 -79- Consolidated Statements of Shareholders' Equity for each of the three years in the period ended March 27, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended March 27, 1999 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES. SCHEDULE DOCUMENT II Valuation and Qualifying Accounts -80- 3. EXHIBITS. EXHIBIT NUMBER DOCUMENT 2.1 Asset Purchase Agreement dated March 5, 1999 by and between Glen's Market, Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. as Sellers and Valuland, Inc. as Buyer and joined in by certain shareholders of Sellers as the Shareholders and by Universal Land Company as the Real Estate Company and by Spartan Stores, Inc. as the Parent of the Buyer. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference. 2.2 Amendment to Asset Purchase Agreement made as of May 19, 1999, by and between Valuland, Inc. and Glen's Market, Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference 3.1 Restated Articles of Incorporation of Spartan Stores, Inc. 3.2 Certificate of Amendment to Articles of Incorporation of Spartan Stores, Inc. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 3.3 Bylaws of Spartan Stores, Inc. 4.1 Articles III, V, VI and IX of the Restated Articles of Incorporation--Included in Exhibit 3.1 and incorporated herein by reference. 4.2 Articles II, III, IV, VII, VIII and IX of the Bylaws-- Included in Exhibit 3.3 and incorporated herein by reference. 4.3 Form of Spartan Stores, Inc. Stock Subscription Agreement-- Shareholder Customers. 4.4 Form of Spartan Stores, Inc. Customer Agreement. 4.5 Form of Spartan Stores, Inc. Class A Common Stock Certificate. 10.1 Warehouse Lease Agreement, dated October 14, 1975, between Connecticut Mutual Life Insurance Company and Spartan Stores, Inc. 10.2 Spartan Stores, Inc. 1991 Stock Bonus Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.3 Spartan Stores, Inc. 1991 Stock Option Plan as amended. Previously filed as an exhibit to the Registrant's Form S-1 Registration Statement filed July 23, 1993. Here incorporated by reference. -81- 10.4 Spartan Stores, Inc. 1991 Associate Stock Purchase Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.5 Spartan Stores, Inc. Supplemental Executive Retirement Plan. 10.6 Warehouse Lease Agreement, dated November 8, 1993, between Walker Realty Co. and J.F. Walker Company, Inc. Previously filed as an exhibit to the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed March 16, 1994. Here incorporated by reference. 10.7 Employment Agreement, dated August 14, 1996, between Spartan Stores, Inc. and James B. Meyer. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.8 Spartan Stores, Inc. Long-Term Incentive Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 10.9 Spartan Stores, Inc. Annual Incentive Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 10.10 Credit Agreement dated as of March 18, 1999 among Spartan Stores, Inc., ABN AMRO Bank N.V., as Arranger, Syndication Agent and Collateral Agent, Michigan National Bank, as Co- Arranger and Administrative Agent, and NBD Bank, as Document Agent. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference. 10.11 Form of Executive Severance Agreement between Spartan Stores, Inc. and certain executive officers. 10.12 Executive Severance Agreement dated February 23, 1999 between Spartan Stores, Inc. and James B. Meyer. 21 Subsidiaries of Registrant. 23 Consent and Report on Schedule of Deloitte and Touche LLP. 24 Powers of Attorney. 27 Financial Data Schedule. ____________________ Previously filed as an exhibit to the Registrant's Form S-1 Registration Statement filed July 18, 1991. Here incorporated by reference. These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K. -82- (b) Reports on Form 8-K: None. -83- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPARTAN STORES, INC. (Registrant) By /S/ JAMES B. MEYER James B. Meyer President and Chief Executive Officer Date: June 25, 1999 -84- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. June 25, 1999 By /S/ RUSSELL H. VANGILDER, JR.* Russell H. VanGilder, Jr. Chairman of the Board and Director June 25, 1999 By /S/ ROGER L. BOYD* Roger L. Boyd Secretary of the Board and Director June 25, 1999 By /S/ JAMES G. BUICK* James G. Buick Director June 25, 1999 By /S/ JOHN S. CARTON* John S. Carton Director June 25, 1999 By /S/ ALEX J. DEYONKER* Alex J. DeYonker Director June 25, 1999 By /S/ RONALD A. DEYOUNG* Ronald A. DeYoung Director June 25, 1999 By /S/ PARKER T. FELDPAUSCH* Parker T. Feldpausch Vice Chairman of the Board and Director June 25, 1999 By /S/ MARTIN P. HILL* Martin P. Hill Director June 25, 1999 By /S/ JAMES B. MEYER James B. Meyer Director -85- June 25, 1999 By /S/ DAN R. PREVO* Dan R. Prevo Director June 25, 1999 By /S/ CHARLES B. FOSNAUGH Charles B. Fosnaugh Vice President Development (Principal Financial and Accounting Officer) June 25, 1999 *By /S/ JAMES B. MEYER James B. Meyer Attorney-in-Fact -86- SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. In Appendix A to this Form 10-K, Spartan is furnishing supplementally to the Securities and Exchange Commission a copy of the Proxy Statement, form of Proxy, and other proxy soliciting material sent by Spartan to its shareholders in connection with the Annual Meeting of Shareholders to be held on July 21, 1999. As of the date of this Form 10-K, Spartan has not yet furnished, for the fiscal year ending March 27, 1999, an annual report to its shareholders. Spartan plans to furnish an annual report to its shareholders subsequent to the filing of this Form 10-K. Spartan shall furnish copies of such annual report to the Securities and Exchange Commission when it is sent to the shareholders. The foregoing material shall not be deemed to be "filed" with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. -87- SCHEDULE II SPARTAN STORES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D COLUMN E - ----------------- ---------- ---------- ---------- --------------- ----------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR - ------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended 3/29/97 $2,635,000 $1,710,556 $1,186,588 $3,158,968 Year ended 3/28/98 $3,158,968 $2,024,205 $3,037,691 $1,810,000 Year ended 3/27/99 $1,810,000 $1,534,842 $1,009,842 $2,335,000 Represents the write-off of uncollectible accounts
F-1 SUPPLEMENTAL INFORMATION FURNISHED PURSUANT TO THE INSTRUCTIONS TO FORM 10-K APPENDIX A June 22, 1999 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders of Spartan Stores, Inc., to be held on JULY 21, 1999, AT THE GRAND TRAVERSE RESORT, 100 GRAND TRAVERSE VILLAGE BOULEVARD, ACME, MICHIGAN, commencing at 10:00 a.m., local time. Your Board of Directors looks forward to greeting personally those shareholders able to attend. At the meeting, you will be asked to elect four directors to terms of three years each. Enclosed are the Notice of the Meeting and the Proxy Statement, which includes information about each of the nominees for the Board of Directors. Regardless of the size of your holdings, it is important that your shares are represented and voted at the meeting. To ensure a quorum, please take a moment now to sign and date the enclosed Proxy and return it to us in the enclosed self-addressed envelope. If you attend the meeting and request us to do so, we will return the Proxy to you to vote your shares at the meeting. Thank you. Sincerely, /s/ James B. Meyer James B. Meyer President and Chief Executive Officer A-1 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To the Shareholders: The Annual Meeting of Shareholders of Spartan Stores, Inc., will be held at the Grand Traverse Resort, 100 Grand Traverse Village Boulevard, Acme, Michigan, on July 21, 1999, at 10 a.m., local time, to consider and vote upon: 1. The election of four directors to terms of three years each; 2. The ratification of the acts or proceedings, or both, of the directors and officers of Spartan Stores that may be submitted to the meeting; and 3. Any other business as may properly come before the meeting. Shareholders of record at the close of business on May 22, 1999, are entitled to notice of and to vote at the meeting and any adjournment thereof. The following Proxy Statement and enclosed Proxy are being furnished to shareholders on or about June 22, 1999. BY ORDER OF THE BOARD OF DIRECTORS /s/ Alex J. DeYonker Alex J. DeYonker Assistant Secretary June 22, 1999 IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EVEN IF YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY. A-2 SPARTAN STORES, INC. 850 76TH STREET, S.W. POST OFFICE BOX 8700 GRAND RAPIDS, MICHIGAN 49518 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 21, 1999 INTRODUCTION The Board of Directors of Spartan Stores, Inc. ("Spartan Stores" or the "Company") solicits your proxy for use at the Annual Meeting of Shareholders to be held at the Grand Traverse Resort, 100 Grand Traverse Village Boulevard, Acme, Michigan, on Wednesday, July 21, 1999, at 10:00 a.m., local time, and any adjournment thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. A form of proxy is enclosed. Shares of Spartan Stores' Class A Common Stock, $2 par value ("Class A Shares"), represented by a proxy in the enclosed form that is properly signed and returned to Spartan Stores will be voted at the meeting and any adjournment thereof. If a shareholder specifies a choice, the shares represented by the proxy will be voted as specified. If no choice is specified, the shares represented by the proxy will be voted for the election of the four director nominees named in this Proxy Statement for three-year terms; for the ratification of the acts or proceedings, or both, of the directors and officers of Spartan Stores that may be submitted to the meeting; and in accordance with the judgment of the designated proxies with respect to any other matter that may come before the meeting or any adjournment thereof. A proxy may be revoked at any time before it is voted at the Annual Meeting by giving notice in writing to the Secretary of Spartan Stores, by submitting a proxy bearing a later date, or by attending the meeting, requesting a return of the proxy and voting in person. Spartan Stores will return the proxy to each shareholder who attends the meeting and notifies the Company that the shareholder intends to vote in person. This Proxy Statement is being mailed on or about June 22, 1999 to the shareholders of Spartan Stores. A-3 VOTING RIGHTS Holders of record of Class A Shares at the close of business on May 22, 1999 will be entitled to notice of and vote at the Annual Meeting of Shareholders to be held July 21, 1999, and any adjournment thereof. As of May 22, 1999, 10,266,874 Class A Shares were issued and outstanding. Each Class A Share issued and outstanding entitles its holder to one vote on each matter presented for shareholder action at the Annual Meeting of Shareholders. ELECTION OF DIRECTORS The Board consists of ten directors and is divided into three classes, with the term of one class expiring in each successive year. Three current directors are serving terms that will expire in 2000 and three current directors are serving terms that will expire in 2001. At the Annual Meeting of Shareholders, four directors are to be elected for terms of three years each and until their successors are elected and qualified. The persons designated as proxies intend to vote for the election of the four nominees named below. Each of the nominees is willing to be elected and to serve. If any nominee should become unable to serve or is otherwise unavailable for election, which is not expected, the incumbent Board of Directors may or may not select a substitute nominee. If a substitute nominee is selected, the proxies will be voted for the election of the substitute nominee selected by the incumbent Board of Directors. If a substitute nominee is not selected, all proxies will be voted for the election of the remaining nominees. Proxies will not be voted for a number of persons greater than the number of nominees named in this Proxy Statement. Directors will be elected by a plurality of the votes cast by shareholders who are present in person or represented by proxy at the meeting. For the purpose of counting votes on the election of directors, abstentions and other shares not voted will not be counted as shares voted and the number of shares of which a plurality is required will be reduced by the number of shares not voted. The following table shows certain information as of May 22, 1999, supplied by each director whose term will continue and each nominee for director. A-4 POSITION AND PRINCIPAL NAME AND AGE OCCUPATION FOR LAST 5 YEARS NOMINEES TO BE ELECTED TERMS EXPIRING IN 2002 James G. Buick (age 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) Martin P. Hill (age 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 (age 49) Director since 1996; President, Prevo's Family Market, Inc. (retail grocery chain) Russell H. VanGilder, Jr. (age 65) Chairman of the Board since December 1998; Vice Chairman of the Board from 1992-1998 and director since 1970; Chairman of the Board, V.G.'s Food Center, Inc. (retail grocery chain) INCUMBENT DIRECTORS TERMS EXPIRING IN 2000 Parker T. Feldpausch (age 67) Vice Chairman of the Board since December 1998 and director since 1990; President, G & R Felpausch Co. (retail grocery chain) James B. Meyer (age 53) Chief Executive Officer of the Company 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 A-5 POSITION AND PRINCIPAL NAME AND AGE OCCUPATION FOR LAST 5 YEARS Secretary from October 1990 to August 1996; Senior Vice President from 1981 to 1994 Alex J. DeYonker (age 49) Director since March 1999; General Counsel and Assistant Secretary since May 1995; partner of Warner Norcross & Judd LLP (law firm) INCUMBENT DIRECTORS TERMS EXPIRING IN 2001 Roger L. Boyd (age 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) John S. Carton (age 58) Director since 1995; Chairman of the Board, Pine View Golf Club, Inc., and Turfside, Inc. (golf course and restaurant) Ronald A. DeYoung (age 65) Director since 1974; President, Great Day, Inc. (retail grocery chain) YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF ALL NOMINEES AS DIRECTORS BOARD COMMITTEES AND MEETINGS During fiscal year 1999, there were eight meetings of the Board of Directors. The Board of Directors has four standing committees: the Executive Committee, the Audit Committee, the Compensation Committee and the Nominating Committee. Each of the incumbent directors attended at least 75 percent of the aggregate number of meetings of the Board of Directors and meetings of committees on which he served during fiscal year 1999. Mr. Donald J. Koop resigned from the Board of Directors on December 9, 1998 and Mr. Glen A. Catt resigned from the Board of Directors on April 5, 1999. Mr. Alex J. DeYonker was appointed to the Board of Directors on March 31, 1999. A-6 EXECUTIVE COMMITTEE. The Executive Committee has the full power and authority of the Board of Directors to manage the business affairs and property of the Company between meetings of the full Board. The Executive Committee can also declare distributions and dividends and authorize the issuance of stock, as permitted by the Company's Bylaws and applicable laws. In addition, the Executive Committee recommends to the Board of Directors a successor to the Chief Executive Officer when a vacancy occurs. Messrs. Boyd, DeYonker, Feldpausch, Meyer and VanGilder currently serve on the Executive Committee. Mr. VanGilder is Chairman of the Executive Committee. The Executive Committee met nine times during fiscal year 1999. AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors the employment of independent accountants; consults with the internal auditor, if any, and independent accountants regarding the adequacy of the Company's internal financial controls; reviews the compensation, terms of engagement and independence of independent accountants; reviews the results of audits by independent accountants; reviews the appointment and replacement of the internal auditor; and reviews the Company's annual financial statements and any disputes between management and the independent accountants. Messrs. Carton, DeYoung, Feldpausch and Prevo currently serve on the Audit Committee. Mr. DeYoung is Chairman of the Audit Committee. The Audit Committee met four times during fiscal year 1999. COMPENSATION COMMITTEE. The Compensation Committee administers the stock option, bonus and purchase plans of the Company; reviews the salaries, bonuses, stock options and other benefits of executive officers; authorizes the issuance of stock pursuant to the stock plans of the Company; and reviews policies regarding and the operation of the Company's executive compensation programs. Messrs. Buick, DeYoung and Hill currently serve on the Compensation Committee. Mr. Buick is Chairman of the Compensation Committee. The Compensation Committee met one time during fiscal year 1999. NOMINATING COMMITTEE. The Nominating Committee identifies potential nominees for election as directors, reviews their qualifications and recommends to the Board of Directors qualified candidates; recommends to the Board of Directors the directors to be selected for membership on the various Board of Directors' committees; and establishes standards for membership on the Board of Directors and any committee of the Board of Directors. Messrs. Boyd, Prevo and VanGilder currently serve on the Nominating Committee. Mr. VanGilder is Chairman of the Nominating Committee. The Nominating Committee met one time during fiscal year 1999. A-7 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 Stores, (ii) each of the named executive officers of Spartan Stores, and (iii) all directors and executive officers of Spartan Stores as a group.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS - ------------------------ ------------------------- ---------------- 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 James B. Meyer 46,689 Charles B. Fosnaugh 12,291 David deS. Couch 5,377 Michael D. Frank 4,536 J. Kevin Schlosser 2,447 James G. Buick 1,000 John S. Carton 1,000 Alex J. DeYonker 0 All Directors and Executive Officers as a group 1,914,773 18.54% _____________________ Less than one percent. 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 "ELECTION OF DIRECTORS," 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. A-8 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. 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
EXECUTIVE COMPENSATION AND OTHER BENEFITS 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 Spartan Stores during the last completed fiscal year, and the four most highly compensated executive officers (other than the Chief Executive Officer) of Spartan Stores at the end of the last completed fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ALL OTHER FISCAL ----------------------- UNDERLYING COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS SATION - --------------------------- ------ ------ ---------- ------------ ----------- 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 A-9 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 ____________________ The amounts listed in this column include bonus amounts elected under the Company's 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. All reported awards were under the Company's 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. The compensation listed in this column for fiscal year 1999 consists of: (i) amounts paid by Spartan Stores for split dollar and term life insurance; (ii) Spartan Stores' 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
STOCK OPTIONS Under the 1991 Stock Option Plan, options to purchase Class A Shares may be granted to officers of Spartan Stores. 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. A-10 OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS - ------------------------------------------------------------------------------ POTENTIAL PERCENT REALIZABLE VALUE AT NUMBER OF TOTAL ASSUMED ANNUAL OF OPTIONS RATES OF STOCK PRICE SECURITIES GRANTED TO APPRECIATION UNDERLYING EMPLOYEES EXERCISE EXPIRA- FOR OPTION TERM OPTIONS IN FISCAL PRICE PER TION -------------------- NAME GRANTED YEAR SHARE DATE 5% 10% - ------------------- ---------- ---------- --------- ------ ------- ------- 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 J. Kevin Schlosser 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 ____________________ 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.
A-11 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END NUMBER OF SHARES -------------------------- --------------------------- ACQUIRED VALUE NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------- ---------------- -------- ----------- ------------- ----------- ------------- 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 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.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS The officers of Spartan Stores 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 Stores, and as of that date Mr. Meyer entered into an employment agreement with Spartan Stores. As of July 1997, he became the President and Chief Executive Officer of Spartan Stores, pursuant to the terms of 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 Stores and Mr. Meyer on a year-to-year basis. Under the employment agreement, Spartan Stores 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 Stores 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 A-12 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 Stores 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 Stores. Under these agreements, if the executive's employment with Spartan Stores 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 Stores), 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 Stores' Annual Incentive Plan pro rated for the time the executive was employed in the fiscal year of termination; (4) a bonus under Spartan Stores' 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 Stores 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 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 A-13 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 Stores 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 Stores, (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 Stores' assets. PENSION PLAN Effective as of April 1, 1998, the Company's 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:
YEARS OF VESTED SERVICE PERCENTAGE OF AS OF JANUARY 1 PARTICIPANT'S COMPENSATION ----------------------- -------------------------- 0 - 5 4% 6 - 10 5 11 - 15 6 16 - 20 7 21 - 25 8 26 or more 9
A-14 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:
PARTICIPANT'S AGE PERCENTAGE OF AS OF JANUARY 1 PARTICIPANT'S COMPENSATION ----------------- -------------------------- Under 35 0% 35 - 39 2 40 - 44 4 45 - 49 6 50 - 54 8 55 and over 10
Transition credits are available for the 1998 - 2007 calendar years. However, if a participant had 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 twelve months ending in November of the prior calendar year. Upon termination of employment, a participant will be entitled to his or her vested accrued benefit, which can be distributed either in a monthly annuity or in a lump sum. If distributed in a lump sum, the participant's benefit generally will be equal to the participant's account balance. For persons who 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. The Company also maintains the SERP, which provides nonqualified deferred compensation benefits to the Company'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 A-15 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 the Company'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 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." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Spartan's directors (except Messrs. Buick, Carton, DeYonker and Meyer) have ownership interests in businesses which are customers of the Company 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. A-16 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. Mr. DeYonker is a partner with the law firm of Warner Norcross & Judd LLP. During the past year and the current year, Spartan Stores has retained Warner Norcross & Judd LLP for certain legal services. APPOINTMENT OF AUDITORS AND OTHER MATTERS The Board of Directors has appointed Deloitte & Touche LLP as the Company's independent auditors for fiscal year 2000. Representatives of Deloitte & Touche LLP are expected to be present at the annual meeting, will have the opportunity to make a statement if they desire to do so, and are expected to be available to answer appropriate questions. The Company will bear the cost of soliciting proxies. The Company expects to solicit proxies primarily by mail, but certain directors and officers may solicit proxies personally or by telephone. The Company does not expect to engage anyone for the purpose of soliciting proxies. OTHER BUSINESS At the date of this Proxy Statement, the management of Spartan Stores has no knowledge of any business, other than that described above, that will be presented at the meeting. If any other business should come A-17 before the meeting, the proxies named in the enclosed form of proxy will have discretionary authority to vote on those matters. By the Order of the Board of Directors, /s/ Alex J. DeYonker Grand Rapids, Michigan Alex J. DeYonker June 22, 1999 Assistant Secretary A-18 SPARTAN STORES, INC. PROXY The undersigned acknowledges receipt of a Notice of Annual Meeting and a Proxy Statement dated June 22, 1999, and appoints Ronald A. DeYoung or James B. Meyer, and each of them, attorneys and proxies of the undersigned, each with full power of substitution, to vote all stock that the undersigned is entitled to vote at the ANNUAL MEETING OF SHAREHOLDERS OF SPARTAN STORES, INC. at the Grand Traverse Resort, 100 Grand Traverse Village Boulevard, Acme, Michigan 49610-0404, on July 21, 1999, at 10:00 a.m., local time, and any adjournment thereof. This Proxy is solicited on behalf of the Board of Directors. I. ELECTION OF DIRECTORS [ ] For all nominees listed below for three-year terms [ ] Withhold authority to vote for all nominees listed below JAMES G. BUICK, MARTIN P. HILL, DAN R. PREVO AND RUSSELL H. VANGILDER, JR. (Instruction: To withhold authority to vote for any individual nominee, write the nominee's name in the space provided below.) II. IN THEIR DISCRETION, TO RATIFY THE ACTS OR PROCEEDINGS, OR BOTH, OF THE DIRECTORS OR OFFICERS OF SPARTAN STORES THAT MAY BE SUBMITTED TO THE MEETING. [ ] For discretionary authority [ ] Withhold discretionary authority III IN THEIR DISCRETION, TO VOTE IN ACCORDANCE WITH THEIR JUDGMENT ON ANY OTHER MATTER THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. [ ] For discretionary authority [ ] Withhold discretionary authority THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO DIRECTION IS INDICATED, THEY WILL BE VOTED FOR THE ELECTION OF ALL OF THE DIRECTORS NOMINATED BY THE BOARD, FOR RATIFICATION OF THE ACTS OR PROCEEDINGS SUBMITTED TO THE MEETING, AND IN THE DISCRETION OF THE PERSONS NAMED AS PROXIES ON ANY OTHER MATTER THAT MAY COME BEFORE THE MEETING. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF SUCH ITEMS. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY. A-19 Dated: ___________________________, 1999 Note: Signature(s) should be identical with the name(s) appearing on the certificates that you own. Joint owners should each sign personally. Persons signing as attorney, executor, administrator, trustee, or guardian should indicate their capacity as such. If a corporation, please sign in full corporate name by President or other authorized officer, and indicate full title as such. If a partnership, please sign in partnership name by authorized person. Store No. ______________________________________ Total Number of Shares _________________________ X_______________________________________________ Signature of Shareholder X_______________________________________________ (Joint Owner, if applicable) A-20 EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT 2.1 Asset Purchase Agreement dated March 5, 1999 by and between Glen's Market, Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. as Sellers and Valuland, Inc. as Buyer and joined in by certain shareholders of Sellers as the Shareholders and by Universal Land Company as the Real Estate Company and by Spartan Stores, Inc. as the Parent of the Buyer. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference. 2.2 Amendment to Asset Purchase Agreement made as of May 19, 1999, by and between Valuland, Inc. and Glen's Market, Inc., Catt's Realty Co. and Glen's Pharmacy, Inc. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference 3.1 Restated Articles of Incorporation of Spartan Stores, Inc. 3.2 Certificate of Amendment to Articles of Incorporation of Spartan Stores, Inc. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 3.3 Bylaws of Spartan Stores, Inc. 4.1 Articles III, V, VI and IX of the Restated Articles of Incorporation--Included in Exhibit 3.1 and incorporated herein by reference. 4.2 Articles II, III, IV, VII, VIII and IX of the Bylaws-- Included in Exhibit 3.3 and incorporated herein by reference. 4.3 Form of Spartan Stores, Inc. Stock Subscription Agreement-- Shareholder Customers. 4.4 Form of Spartan Stores, Inc. Customer Agreement. 4.5 Form of Spartan Stores, Inc. Class A Common Stock Certificate. 10.1 Warehouse Lease Agreement, dated October 14, 1975, between Connecticut Mutual Life Insurance Company and Spartan Stores, Inc. 10.2 Spartan Stores, Inc. 1991 Stock Bonus Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.3 Spartan Stores, Inc. 1991 Stock Option Plan as amended. Previously filed as an exhibit to the Registrant's Form S-1 Registration Statement filed July 23, 1993. Here incorporated by reference. -1- 10.4 Spartan Stores, Inc. 1991 Associate Stock Purchase Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.5 Spartan Stores, Inc. Supplemental Executive Retirement Plan. 10.6 Warehouse Lease Agreement, dated November 8, 1993, between Walker Realty Co. and J.F. Walker Company, Inc. Previously filed as an exhibit to the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed March 16, 1994. Here incorporated by reference. 10.7 Employment Agreement, dated August 14, 1996, between Spartan Stores, Inc. and James B. Meyer. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1997. Here incorporated by reference. 10.8 Spartan Stores, Inc. Long-Term Incentive Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 10.9 Spartan Stores, Inc. Annual Incentive Plan. Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1998. Here incorporated by reference. 10.10 Credit Agreement dated as of March 18, 1999 among Spartan Stores, Inc., ABN AMRO Bank N.V., as Arranger, Syndication Agent and Collateral Agent, Michigan National Bank, as Co- Arranger and Administrative Agent, and NBD Bank, as Document Agent. Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated June 3, 1999. Here incorporated by reference. 10.11 Form of Executive Severance Agreement between Spartan Stores, Inc. and certain executive officers. 10.12 Executive Severance Agreement dated February 23, 1999 between Spartan Stores, Inc. and James B. Meyer. 21 Subsidiaries of Registrant. 23 Consent and Report on Schedule of Deloitte and Touche LLP. 24 Powers of Attorney. 27 Financial Data Schedule. ____________________ Previously filed as an exhibit to the Registrant's Form S-1 Registration Statement filed July 18, 1991. Here incorporated by reference. These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K. -2- EX-10 2 EXHIBIT 10.5 SPARTAN STORES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ____________________________________ ARTICLE I ESTABLISHMENT OF THE PLAN 1.1 HISTORY OF THE PLAN. Spartan Stores, Inc., a Michigan corporation, established a retirement benefit plan to be known as the Spartan Stores, Inc. Supplemental Executive Retirement Plan. The Plan was established effective as of April 1, 1990 and has been periodically amended. 1.2 PURPOSE. Employer desires to retain the services of a select group of executives who contribute to the profitability and success of Employer. Employer adopted the Plan to provide additional retirement income to the executives who participate in the Plan. 1.3 THIS DOCUMENT. Employer is redesigning, amending and restating the Pension Plan as of April 1, 1998. By this document, Employer is amending and restating this Plan as of the same date - April 1, 1998. The Plan shall be comprised of this Plan document and the Appendices. 1.4 STATUS OF PLAN UNDER ERISA. The Plan is intended to be "unfunded" and maintained "primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" for purposes of ERISA. Accordingly, the Plan is not intended to be covered by Parts 2 through 4 of Subtitle B of Title I of ERISA. ARTICLE II DEFINITIONS The following terms shall have the meanings described in this Article unless the context clearly indicates another meaning. All references in the Plan to specific Articles or Sections shall refer to Articles or Sections of the Plan unless otherwise stated. 2.1 ACCRUED BENEFIT. "Accrued Benefit" has the same meaning as in the Pension Plan. 2.2 ACTUARIAL EQUIVALENT. "Actuarial Equivalent" means the equality in value of the aggregate amount of benefits to be received under different forms of payment. Actuarially Equivalent benefits shall be determined using actuarial assumptions used for determining actuarially equivalent benefits in the Pension Plan. 2.3 ANNUITY STARTING DATE. "Annuity Starting Date" has the same meaning as in the Pension Plan. 2.4 BENEFICIARY. "Beneficiary" has the same meaning as in the Pension Plan. 2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended. 2.6 DEATH BENEFIT. "Death Benefit" has the same meaning as in the Pension Plan. 2.7 DISABILITY RETIREMENT BENEFIT. "Disability Retirement Benefit" has the same meaning as in the Pension Plan. 2.8 EARLY RETIREMENT BENEFIT. "Early Retirement Benefit" has the same meaning as in the Pension Plan. -2- 2.9 EMPLOYEE. "Employee" means any common-law employee of Employer. An individual who is treated by Employer as an independent contractor or self- employed individual for purposes of income tax withholding by Employer is not an Employee. 2.10 EMPLOYER. "Employer" means Spartan Stores, Inc. 2.11 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.12 NORMAL RETIREMENT BENEFIT. "Normal Retirement Benefit" has the same meaning as in the Pension Plan. 2.13 PARTICIPANT. "Participant" means an Employee or former Employee of Employer who has met the requirements for participation under Article III, and who is or may become eligible to receive a retirement benefit from the Plan. 2.14 PENSION PLAN. "Pension Plan" means the Spartan Stores, Inc. Cash Balance Pension Plan (formerly, the Spartan Stores, Inc. Pension Plan), as currently in effect as of April 1, 1998 and as it may be amended in the future. 2.15 PLAN. "Plan" means the Spartan Stores, Inc. Supplemental Executive Retirement Plan. 2.16 PLAN ADMINISTRATOR. "Plan Administrator" means the named fiduciary responsible for the operation and administration of the Plan as provided in Article VII. 2.17 SINGLE LIFE ANNUITY. "Single Life Annuity" has the same meaning as in the Pension Plan. -3- 2.18 SPOUSE. "Spouse" has the same meaning as in the Pension Plan. 2.19 STATUTORY LIMITS. "Statutory Limits" mean any limits imposed by the Code on benefits under the Pension Plan. This includes, but is not limited to, the limits imposed by Sections 401(a)(17) and 415 of the Code. ARTICLE III PARTICIPATION 3.1 ELIGIBILITY FOR PARTICIPATION. The Plan Administrator may periodically designate, in writing, Employees to participate in the Plan. It is intended that participation be limited to Employees who are participants in the Pension Plan and who will qualify as members of a "select group of management or other highly compensated employees" under Title I of ERISA. An Employee shall begin to participate in the Plan upon the date designated by the Plan Administrator. Upon becoming eligible to participate, each Employee shall complete and submit to Employer the application for participation form attached to the Plan as Appendix A. 3.2 TERMINATION OF ACTIVE PARTICIPATION. The Plan Administrator may remove an Employee from further active participation in the Plan. If this occurs, the Employee shall not earn any additional benefits under the Plan. The amount of the Employee's benefits, if any, under the Plan shall be determined as of the date he ceases active participation. The Employee's benefits shall be paid only if he satisfies the other requirements of the Plan. ARTICLE IV BENEFITS 4.1 ELIGIBILITY. A Participant shall be eligible for a benefit under the Plan if he terminates employment with Employer and receives one of the following types of benefits from the Pension Plan: Normal Retirement Benefit, Early Retirement Benefit, or Disability Retirement Benefit. Further, a -4- Participant shall be eligible for a benefit under the Plan if he terminates employment with Employer on or after June 1, 1998 and receives a Deferred Vested Benefit from the Pension Plan. Similarly, the Spouse or Beneficiary of a Participant shall be eligible for a benefit under the Plan if the Participant dies before his Annuity Starting Date under the Pension Plan and his Spouse or Beneficiary is eligible for a Death Benefit under the Pension Plan. 4.2 AMOUNT OF BENEFIT. Except as otherwise provided in an Appendix, the benefits payable to an eligible Participant or Spouse or Beneficiary shall be equal to the amount, if any, by which (a) exceeds (b): (a) The Accrued Benefit that would have been payable to the Participant or Spouse or Beneficiary under the Pension Plan, but for the operation of the Statutory Limits. (b) The Accrued Benefit payable to the Participant or Spouse or Beneficiary from the Pension Plan. For this purpose, the Participant's Accrued Benefit shall be calculated in accordance with the Pension Plan as in effect as of April 1, 1998 and as it may be amended in the future. The Participant's Accrued Benefit shall be converted to a lump sum amount for purposes of Section 4.3, in accordance with the Actuarial Equivalent principles set forth in the Pension Plan. 4.3 PAYMENT. (a) BENEFIT PAYMENT TO PARTICIPANT. Prior to April 1, 1998 (when the Plan was amended and restated), a Participant's benefit was distributed in a Single Life Annuity (if to a unmarried Participant) or a joint and 50% survivor annuity (if to a married Participant). However, the Participant could waive the automatic form and elect a ten-year certain and life annuity. Effective as of April 1, 1998, the Participant may elect to receive his benefit in one of the following forms: (i) SINGLE LUMP SUM PAYMENT. A lump sum distribution of the Participant's benefit under the Plan. (ii) FIVE ANNUAL INSTALLMENT PAYMENTS. Five annual installment payments of the Participant's benefit under the Plan. If a Participant dies before receiving all of the installments, -5- the remaining installments shall be paid to his Beneficiary. After the first annual installment, each subsequent installment shall be increased annually for interest. For this purpose, the interest rate shall equal the yield on five-year Treasury notes on the date the first annual installment is paid. (iii) TEN ANNUAL INSTALLMENT PAYMENT. Ten annual installment payments of the Participant's benefit under the Plan. If a Participant dies before receiving all of the installments, the remaining installments shall be paid to his Beneficiary. After the first annual installment, each subsequent installment shall be increased annually for interest. For this purpose, the interest rate shall equal the yield on ten-year Treasury notes on the date the first annual installment is paid. Each Participant must make an irrevocable election regarding the form in which his benefit shall be paid. For Employees who become Participants in the Plan on or before October 13, 1998, this election must be made by no later than November 13, 1998. For Employees who become Participants after October 13, 1998, an irrevocable election must be made within 30 days of becoming a Participant. An irrevocable election must be made by completing an Employer-provided distribution election form and returning the form to Employer. Notwithstanding the provisions of the immediately preceding paragraph, after the date of the Participant's election and before the date benefits are payable, the Participant may submit a written request to an administrative committee appointed by Employer's Board of Directors to change the form in which his Plan benefits are distributed. The Participant's request shall not be binding on the administrative committee nor shall the Participant have any ability to require the administrative committee to grant his request. Rather, the administrative committee will act in its sole discretion in granting or denying the request. If the Participant is a member of the administrative committee, the Participant shall abstain from voting and shall take no action with respect to his request for a change in the form in which his benefits are payable. If the administrative committee approves the request, benefits shall be payable in the alternate form. Benefits shall be paid to the Participant as of the first day of the month following the month during which the Participant terminates employment with Employer. For purposes of (ii) and (iii), the Participant's Beneficiary shall be designated in accordance with the rules in the Pension Plan and shall be the same individual the Participant has -6- designated as his Beneficiary under the Pension Plan UNLESS the Participant completes a separate Employer-provided Beneficiary designation form with respect to the distribution of this Plan's benefit and returns it to Employer. The Participant may change his Beneficiary designation at any time prior to death by completing a new Beneficiary designation form and filing it with Employer. (b) BENEFIT PAYMENT TO SPOUSE OR BENEFICIARY. If the Participant dies before his Annuity Starting Date under the Plan, his Spouse or Beneficiary may be eligible for a Death Benefit under this Plan. The Death Benefit under this Plan shall be paid in the form of a single lump sum payment (which shall be the Actuarial Equivalent of a Single Life Annuity) and shall be made as of the first day of the month following the month of the Participant's death. The Beneficiary of the Death Benefit shall be the same individual the Participant has designated as his Beneficiary under the Pension Plan UNLESS the Participant completes a separate Employer-provided Beneficiary designation form with respect to the distribution of this Plan's Death Benefit and returns it to Employer. The Participant may change his Beneficiary designation at any time prior to death by completing a new Beneficiary designation form and filing it with Employer. 4.4 TAX WITHHOLDING. Benefit payments from the Plan shall be subject to all applicable tax withholdings. ARTICLE V CHANGE IN CONTROL 5.1 ELIGIBILITY FOR BENEFIT. A Participant shall have a nonforfeitable, fully vested right to the benefit the Participant shall have earned under the Plan from and after the date Employer has a change in control. For purposes of this Article, the term "change in control" means: (a) The acquisition by any individual, entity, or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of Employer (the "Outstanding Employer Common Stock") or (ii) the combined voting power of the then outstanding securities of Employer -7- entitled to vote generally in the election of directors (the "Outstanding Employer Voting Securities"); provided, however, that the following acquisitions shall not constitute a change in control: (A) any acquisition by Employer, (B) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by Employer or any corporation controlled by Employer, (C) any acquisition by any corporation pursuant to a reorganization, merger, or consolidation involving Employer, if, immediately after such reorganization, merger, or consolidation, each of the conditions described in (i), (ii), and (iii) of subsection (c) shall be satisfied, or (D) with respect to an individual Participant, any acquisition by the Participant or any group of persons including the Participant; and provided further that, for purposes of (A), if any Person (other than Employer or any employee benefit plan (or related trust) sponsored or maintained by Employer or any corporation controlled by Employer) shall become the beneficial owner of 20% or more of the Outstanding Employer Common Stock or 20% or more of the Outstanding Employer Voting Securities by reason of an acquisition by Employer and such Person shall, after such acquisition by Employer, become the beneficial owner of any additional shares of the Outstanding Employer Common Stock or any additional Outstanding Employer Voting Securities, such additional beneficial ownership shall constitute a change in control; (b) Individuals who, as of April 1, 1998, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of Employer subsequent to April 1, 1998 whose election, or nomination for election by Employer's shareholders, was approved by the vote of at least two-thirds of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of Employer in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of Employer as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board, shall be deemed to have been a member of the Incumbent Board; (c) Approval by the shareholders of Employer of a reorganization, merger, or consolidation unless, in any such case, immediately after such reorganization, merger, or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, or consolidation and more than 50% of the combined voting power of the -8- then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Employer Common Stock and the Outstanding Employer Voting Securities immediately prior or such reorganization, merger, or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger, or consolidation, of the Outstanding Employer Common Stock and the Outstanding Employer Voting Securities, as the case may be, (ii) no Person (other than: (A) Employer, any employee benefit plan (or related trust) sponsored or maintained by Employer or the corporation resulting from such reorganization, merger, or consolidation (or any corporation controlled by Employer), or (B) any Person which beneficially owned, immediately prior to such reorganization, merger, or consolidation, directly or indirectly, 20% or more of the Outstanding Employer Common Stock or the Outstanding Employer Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger, or consolidation; or (d) Approval by the shareholders of Employer of (i) a plan of complete liquidation or dissolution of Employer or (ii) the sale or other disposition of all or substantially all of the assets of Employer other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Employer Common Stock and the Outstanding Employer Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Employer Common Stock and the Outstanding Employer Voting Securities, as the case may be, (B) no Person (other than Employer, any employee benefit plan (or related trust) sponsored or maintained by Employer or such corporation (or any corporation controlled by Employer), or any Person -9- which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Employer Common Stock or the Outstanding Employer Voting Securities as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of Common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. 5.2 AMOUNT OF BENEFITS. A Participant's benefit shall be the amount determined under Section 4.2, subject to Section 5.1, as of the date of the Participant's termination of employment. 5.3 PAYMENT. Benefits shall be paid in accordance with Section 4.3. 5.4 FUNDING OF BENEFITS. If a change in control occurs, Employer shall establish a grantor trust of the type referred to as a "rabbi trust" to fully fund all Participants' vested Plan benefits, the assets of which will be subject to the claims of creditors of Employer in the event of its insolvency. The benefits that become payable under the Plan to a Participant or his Beneficiary shall be paid from the assets of that trust to the extent they are not paid directly by Employer. ARTICLE VI OTHER TERMINATION OF EMPLOYMENT AND NONCOMPETITION 6.1 OTHER TERMINATION OF EMPLOYMENT. Notwithstanding any other provisions of the Plan, no benefits shall be payable to the Participant or his Spouse or Beneficiary under the Plan in either of the following situations: (a) If the Participant terminates employment before becoming entitled to benefits under the Plan; or -10- (b) If the Participant's employment with Employer is terminated by Employer for cause, as defined in Section 6.2. 6.2 TERMINATION OF EMPLOYMENT FOR CAUSE. (a) For purposes of Section 6.1, a Participant is terminated for "cause" if his employment is terminated for any of the reasons set forth in this Section. (i) GENERAL DEFINITION OF CAUSE. Except upon a change in control (see (ii) below), a Participant is terminated for "cause" if his employment is terminated for any of the following reasons: (A) Gross negligence, fraud, dishonesty or willful violation of any law or significant Employer policy, committed in connection with his employment and resulting in a material adverse effect on Employer; or (B) Failure to substantially perform (for reasons other than disability) the duties reasonably assigned to him in a manner consistent with prior practice. (ii) DEFINITION OF CAUSE UPON A CHANGE IN CONTROL. Notwithstanding (i) above, upon a change in control, a Participant is terminated for "cause" if his employment is terminated for any of the following reasons: (A) The willful and continued failure by the Participant to substantially perform his duties with Employer (other than any such failure resulting from Participant's incapacity due to physical or mental injury or illness, or any such actual or anticipated failure resulting from Participant's termination for "good reason" (as that term is defined in the Participant's Executive Severance Agreement with Employer) after a demand for substantial performance is delivered to the Participant by the Board of Directors (which demand shall specifically identify the manner in which the Board of Directors believes that the Participant has not substantially performed his duties); or (B) The willful engaging by the Participant in gross misconduct materially and demonstrably injurious to Employer. For this purpose, no act or failure to act on the part of the Participant shall be considered "willful" unless done or -11- omitted to be done by the Participant not in good faith and without reasonable belief that his action(s) or omission(s) was in the best interests of Employer. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for cause unless and until Employer provides Participant with a copy of a resolution adopted by an affirmative vote of not less than two-thirds of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for the purpose (after reasonable notice to the Participant and an opportunity for the Participant, with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors the Participant has been guilty of conduct set forth in (i) or (ii) above, setting forth the particulars in detail. A determination for cause by the Board of Directors shall not be binding upon or entitled to deference by any finder of fact in the event of a dispute, it being the intent of the parties that such finder of fact shall make an independent determination of whether the termination was for "cause" as defined in (i) or (ii) above. (b) The definition of "cause" in this Section is relevant only for purposes of eligibility for benefits under this Plan, and is not intended to change the status of a Participant as an "at will" Employee of Employer. (c) If Employer determines that a Participant is ineligible for benefits because the Participant's employment was terminated for cause and the Participant disputes that determination, the Participant's sole remedy after exhausting the claims procedure of Section 7.5 shall be arbitration. The arbitration procedure is attached to the Plan as Appendix B. 6.3 NONCOMPETITION. Any Participant who retires under the Plan shall not engage in "competition" with Employer within three years after retirement. For this purpose, a Participant is engaged in "competition" if he accepts employment, is retained as a consultant or receives any consideration, financial or otherwise, by or from a competing business (as determined by Employer's Board of Directors). If a Participant violates this noncompetition provision, his benefits under the Plan shall be reduced by the amount of "compensation" received from the competing business during the three-year noncompetition period described in the immediately preceding paragraph. For this purpose, "compensation" includes the total value of any monetary compensation and nonmonetary compensation, including any amounts deferred during the three- -12- year noncompetition period. If the Participant is self-employed, "compensation" means gross income before expenses. Employer shall have the right to obtain sufficient information regarding compensation from a competing retail business to calculate the reduction in benefits described in this Section. If the Participant fails to provide timely or complete information, benefit payments shall be ceased until such information is provided. However, in the event of a change in control, as described in Section 5.1, this Section shall be deleted and shall have no effect. ARTICLE VII ADMINISTRATION 7.1 PLAN ADMINISTRATOR. Employer shall have the sole responsibility for the administration of the Plan and is designated as named fiduciary and Plan Administrator. 7.2 APPOINTMENT OF ADMINISTRATIVE COMMITTEE. Employer may delegate all or a portion of its duties as Plan Administrator to an Administrative Committee. The members of the administrative committee shall be selected by Employer. If an administrative committee is appointed, it shall have the power and duties of the Plan Administrator which are described in this Article and which are delegated to the administrative committee. 7.3 POWERS OF PLAN ADMINISTRATOR. The Plan Administrator shall have all discretionary powers necessary to administer, and satisfy its obligations under the Plan, including, but not limited to, the following: (a) Maintain records pertaining to the Plan. (b) Interpret the terms and provisions of the Plan. (c) Establish procedures by which Participants may apply for pension benefits under the Plan and appeal a denial of pension benefits. (d) Determine the rights under the Plan of any Participant applying for or receiving pension benefits. -13- (e) Administer the claims procedure provided in this Article. (f) Perform all acts necessary to meet the reporting and disclosure obligations imposed by Sections 101 through 111 of ERISA. (g) Delegate specific responsibilities for the operation and administration of the Plan to such employees or agents as it deems advisable and necessary. 7.4 STANDARD OF CARE. The Plan Administrator shall administer the Plan solely in the interest of Participants and for the exclusive purposes of providing pension benefits to such Participants and their beneficiaries. The Plan Administrator shall administer the Plan with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims. The Plan Administrator shall not be liable for any act or omission relating to its duties under the Plan, unless the act or omission violates the standard of care described in this Section. 7.5 CLAIMS PROCEDURE. Any Participant whose application for benefits under the Plan has been denied, in whole or in part, shall be given written notice of the denial of benefits by the Plan Administrator. The notice shall be in easily understood language and shall indicate the reasons for denial and the specific provisions of the Plan on which the denial is based. The notice shall explain that the Participant may request a review of the denial and the procedure for requesting review. The notice shall describe any additional information necessary to perfect the Participant's claim and explain why such information is necessary. A Participant may make a written request to the Plan Administrator for a review of any denial of benefits under this Plan. The request for review must be in writing and must be made within 90 days after the mailing date of the notice of denial. The request shall refer to the provisions of the Plan on which it is based and shall set forth the facts relied upon as justifying a reversal or modification of the determination being appealed. A Participant who requests a review of a denial of benefits in accordance with this claims procedure may examine pertinent documents and submit pertinent issues and comments in writing. A Participant may have a -14- duly authorized representative act on his behalf in exercising his right to request a review and any other rights granted by this claims procedure. The Plan Administrator shall provide a review of the decision denying the claim for benefit within 60 days after receiving the written request for review. However, in the event of a change in control as described in Section 5.1, the dispute resolution procedure set forth in Schedule 11(c) of the Participant's Executive Severance Agreement with Employer shall be substituted for the claims procedure set forth in this Section and in Appendix B. Further, in the event of a change in control as described in Section 5.1 and a dispute between the Participant and Employer and/or the Plan Administrator, the determinations of Employer and/or the Plan Administrator shall not be entitled to deference, it being the intent of the parties that there shall be independent determinations of any disputed fact or issue through the dispute resolution procedure. ARTICLE VIII MISCELLANEOUS 8.1 FUNDING OF BENEFITS. The Plan shall be unfunded, except as provided in Section 5.4. Although Employer may make corporate investments to fund its potential liability under the Plan, all benefits shall be paid directly by Employer from its general assets to Participants who qualify for benefits. Employer's obligation to pay benefits under the Plan shall be unsecured. 8.2 SPENDTHRIFT PROVISION. No benefit or interest under the Plan is subject to assignment or alienation, whether voluntary or involuntary. Any assignment or alienation of benefits shall be void. 8.3 EMPLOYMENT RIGHTS. The existence of the Plan shall not grant a Participant any legal right to continue as an Employee nor affect the right of Employer to discharge a Participant. 8.4 AMENDMENT OR TERMINATION. Employer shall have the right to amend or terminate the Plan at any time by action of its Board of Directors. However, no amendment or termination shall reduce a Participant's benefits to an amount less than -15- the benefit to which the Participant would be entitled under the Plan if he had terminated employment as of the date of the amendment or termination. The effect of Employer's amendment or termination of the Plan on a Participant's benefit, as set forth in the immediately preceding sentence, is subject to Section 5.1 (which requires a Participant's benefits to be nonforfeitable and fully vested upon a change in control) and the terms of any applicable employment agreement between Employer and a Participant. 8.5 CONSTRUCTION. Words used in the masculine shall apply to the feminine where applicable; and wherever the context of the Plan dictates, the plural shall be read as the singular and the singular as the plural. 8.6 EXECUTIVE SEVERANCE AGREEMENT. Each Participant shall enter into an Executive Severance Agreement with Employer. It is intended that the terms of the Plan with respect to a Participant be interpreted in a manner consistent with that Participant's Executive Severance Agreement. Thus, with respect to a Participant, in the event of a conflict between the terms of the Plan and the terms of the Participant's Executive Severance Agreement, the terms of the Executive Severance Agreement shall control. 8.7 GOVERNING LAW. To the extent that Michigan law is not preempted by ERISA, the provisions of the Plan shall be governed by the laws of the state of Michigan. IN WITNESS OF WHICH, Employer has adopted the Plan this 23RD day of FEBRUARY, 1999. SPARTAN STORES, INC. By /S/ RUSSELL H. VANGILDER, JR. Its Chairperson of the Board of Directors -16- APPENDIX A SPARTAN STORES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN APPLICATION FOR PARTICIPATION [Omitted.] APPENDIX B SPARTAN STORES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARBITRATION PROCEDURE [Omitted.] APPENDIX C SPARTAN STORES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BENEFIT FOR JAMES B. MEYER [Omitted.] EX-10 3 EXHIBIT 10.11 Spartan Stores, Inc. entered into the following Executive Severance Agreement with the following executives on the dates indicated: EXECUTIVE DATE Charles B. Fosnaugh February 22, 1999 David deS. Couch February 22, 1999 Michael D. Frank February 22, 1999 Richard C. Deming February 22, 1999 J. Kevin Schlosser February 22, 1999 EXECUTIVE SEVERANCE AGREEMENT THIS AGREEMENT is entered into as of the ___ day of _________, 1999 (the "Effective Date"), by and between SPARTAN STORES, INC. a Michigan corporation ("Company"), and _______________________ ("Executive"). W I T N E S S E T H: WHEREAS, Executive currently serves as a key employee of the Company and/or its subsidiaries and his services and knowledge are valuable to the Company in connection with the management of one or more of the Company's principal operating facilities, divisions, or subsidiaries; and WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Board has determined that it is in the best interests of the Company and its shareholders to secure Executive's continued services and to ensure Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as hereafter defined) of the Company, without concern as to whether Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage Executive's full attention and dedication to the Company and/or its subsidiaries, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, COMPANY AND EXECUTIVE AGREE AS FOLLOWS: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means (1) the willful and continued failure by Executive to substantially perform his duties with Company (other than any such failure resulting from Executive's incapacity due to physical or mental injury or illness, or any such actual or anticipated failure resulting from Executive's termination for Good Reason) after a demand for substantial performance is delivered to Executive by the Board (which demand shall specifically identify the manner in which the Board believes that Executive has not substantially performed his or her duties); or (2) the willful engaging by Executive in gross misconduct materially and demonstrably injurious to the Company. For purposes of this Section, no act or failure to act on the part of Executive shall be considered "willful" unless done or omitted to be done by Executive not in good faith and without reasonable belief that his action(s) or omission(s) was in the best interests of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until the Company provides Executive with a copy of a resolution adopted by an affirmative vote of not less than two- thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, with counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive has been guilty of conduct set forth in subsections (1) or (2) above, setting forth the particulars in detail. A determination for Cause by the Board shall not be binding upon or entitled to deference by any finder of fact in the event of a dispute, it being the intent of the parties that such finder of fact shall make an independent determination of whether the termination was for "Cause" as defined in (1) or (2) above. (c) "Change in Control" means: (1) the acquisition by any individual, entity, or group (a "Person"), including any "person" within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition by the Company, (B) any acquisition by an employee benefit plan (or -2- related trust) sponsored or maintained by the Company or any Person controlled by the Company, (C) any acquisition by any corporation pursuant to a reorganization, merger, or consolidation involving the Company, if, immediately after such reorganization, merger, or consolidation, each of the conditions described in clauses (i), (ii), and (iii) of subsection (c)(3) shall be satisfied, or (D) any acquisition by the Executive or any group of persons including the Executive; and provided further that, for purposes of clause (A), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by the vote of at least two-thirds of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board, shall be deemed to have been a member of the Incumbent Board; (3) approval by the shareholders of the Company of a reorganization, merger, or consolidation unless, in any such case, immediately after such reorganization, merger, or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from -3- such reorganization, merger, or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger, or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger, or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than (A) the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger, or consolidation (or any corporation controlled by the Company), or (B) any Person which beneficially owned, immediately prior to such reorganization, merger, or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger, or consolidation; or (4) approval by the shareholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the -4- same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of Common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change in Control and Executive reasonably demonstrates that such termination was at the request of or in response to a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who subsequently effectuates a Change in Control, then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of Executive's employment. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Common Stock" means the common stock of the Company, $2.00 par value per share. (f) "Company" means Spartan Stores, Inc., a Michigan corporation, and any corporation or other entity in which Spartan Stores, Inc. has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of such corporation or other entity entitled to vote generally in the election of directors. (g) "Date of Termination" means the effective date on which Executive's employment by the Company terminates as specified in a Notice of Termination by the Company or Executive, as the case may be. Notwithstanding the previous sentence, (i) if the Executive's employment is terminated for Disability, as defined -5- in Section 1(h), then such Date of Termination shall be no earlier than thirty (30) days following the date on which a Notice of Termination is received, and (ii) if the Executive's employment is terminated by the Company other than for Cause, then such Date of Termination shall be no earlier than thirty (30) days following the date on which a Notice of Termination is received. (h) "Disability" means Executive's failure to be available to substantially perform his duties with the Company on a full- time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to mental or physical illness. (i) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following events after or in connection with a Change in Control: (1) (i) the assignment to Executive of any duties inconsistent in any material adverse respect with Executive's position(s), duties, responsibilities, or status with the Company immediately prior to such Change in Control, (ii) a material adverse change in Executive's reporting responsibilities, titles or offices with the Company as in effect immediately prior to such Change in Control, (iii) any removal or involuntary termination of Executive by the Company otherwise than as expressly permitted by this Agreement (including any purported termination of employment which is not effected by a Notice of Termination), or (iv) any failure to re-elect Executive to any position with the Company held by Executive immediately prior to such Change in Control; (2) a reduction by the Company in Executive's rate of annual base salary as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter; (3) any requirement of the Company that Executive (i) be based anywhere other than the facility where Executive is located at the time of the Change in Control or reasonably equivalent facilities within Kent County, Michigan or (ii) engage in business travel to an extent substantially more burdensome than the travel obligations of Executive immediately prior to such Change in Control; (4) the failure of the Company to continue the Company's executive incentive plans or bonus plans in which Executive is participating immediately prior to such Change -6- in Control or a reduction of the Executive's target incentive award opportunity under any such bonus plan, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent economic benefit; (5) the failure of the Company to (i) continue in effect any employee benefit plan or compensation plan in which Executive is participating immediately prior to such Change in Control, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent after-tax economic benefit, or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan, (ii) provide Executive and Executive's dependents with welfare benefits (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) in accordance with the most favorable plans, practices, programs, and policies of the Company in effect for Executive immediately prior to such Change in Control, (iii) provide other fringe benefits in accordance with the most favorable plans, practices, programs, and policies of the Company in effect for Executive immediately prior to such Change in Control, or (iv) provide Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company as in effect for Executive immediately prior to such Change in Control; (6) the failure of the Company to pay any amounts owed Executive as salary, bonus, deferred compensation or other compensation; (7) the failure of the Company to obtain any assumption agreement contemplated in Section 9(b); (8) any purported termination of Executive's employment which is not effected pursuant to a Notice of Termination which satisfies the requirements of a Notice of Termination; or (9) any other material breach by Company of its obligations under this Agreement. -7- For purposes of this Agreement, any good faith determination of Good Reason made by Executive shall be conclusive on the parties; provided, however, that an isolated and insubstantial action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Any event or condition described in this Section 1(i) which occurs prior to a Change in Control, but which Executive reasonably demonstrates was at the request of or in response to a Third Party who effectuates a Change in Control or who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, shall constitute Good Reason following a Change in Control for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. Executive may not terminate the employment for "Good Reason" unless: (i) Executive notifies the Board of Directors in writing, within 60 days after Executive becomes aware of the act or omission constituting Good Reason that the act or omission in question constitutes Good Reason and explaining why the Executive considers it to constitute Good Reason; (ii) the Company fails, within 10 days after notice from Executive under (i) above, to revoke the action or correct the omission and make the Executive whole; and (iii) Executive gives notice of termination within 30 days after expiration of the 10-day period under (ii) above. Executive's failure to give notice as provided in (i) above will not waive Executive's right to resign with Good Reason, provided that he follows the above procedure, with regard to any subsequent act or omission constituting Good Reason. Executive need not fulfill the above conditions a second time if the Company repeats the act or omission constituting Good Reason. (j) "Nonqualifying Termination" means a termination of Executive's employment (1) by the Company for Cause, (2) by Executive for any reason other than for Good Reason with Notice of Termination, (3) as a result of Executive's death, (4) by the Company due to Executive's Disability, unless within thirty (30) days after Notice of Termination is provided to Executive, Executive shall have returned (or offered to return, if not permitted by the Company to do so) to substantial performance of -8- Executive's duties on a full-time basis, or (5) as a result of Executive's Retirement. (k) "Notice of Termination" means a written notice by the Company or Executive, as the case may be, to the other, which (1) indicates the specific reason for Executive's termination, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment, and (3) specifies the termination date. The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (l) "Retirement" means termination of employment by either the Executive or the Company on or after the Executive's normal retirement date under the terms of retirement plans of the Company, but not earlier than the age of 65. (m) "SERP" means the Spartan Stores, Inc. Supplemental Executive Retirement Plan, as amended from time to time. (n) "Termination Period" means the period of time beginning with a Change in Control and ending 18 months following such Change in Control. 2. TERM OF AGREEMENT. This Agreement shall commence on the Effective Date and shall continue in effect until the Company has fulfilled all of its obligations under this Agreement following any termination of Executive's employment with the Company. 3. SEVERANCE BENEFITS. If the employment of Executive with the Company shall terminate during the Termination Period, other than by reason of a Nonqualifying Termination, then Executive shall receive the following severance benefits as compensation for services rendered: (a) LUMP SUM CASH PAYMENT. Within five (5) days after the Date of Termination, Executive shall receive a lump sum cash payment in an amount equal to the sum of the following: (1) Executive's unpaid base salary from the Company through the Date of Termination at the rate in effect (without taking into account any reduction of base salary constituting Good Reason), just prior to the time a Notice of Termination is given plus any benefit awards (including both the cash and stock components) and bonus payments which -9- pursuant to the terms of any plans have been earned or become payable, to the extent not theretofore paid; (2) A bonus will be paid under the Company's Annual Incentive Plan or any successor plan ("Annual Plan") for the time Executive was employed by the Company in the fiscal year of termination, in an amount equal to the product of (i) the number of days Executive was employed by the Company prior to the Date of Termination in the year of termination divided by the number of days in the year, multiplied by (ii) 100% of the Executive's current year target bonus (with such calculations to be made as though the target level has been achieved for each Performance Goal (as defined in the Annual Plan)). (3) A bonus will be paid under the Long Term Incentive Plan or any successor Plan ("Long Term Plan"), in an amount equal to the payment called for under the Long Term Plan (as in effect on the date of this Agreement) upon termination of Executive's employment without Cause during a year. (4) An amount equal to the number of years remaining in the Termination Period (counting each full or partial month as 1/12th of a year, and rounded to the nearest 1/100th of a year) times the sum of (i) the higher of the Executive's annual rate of base salary from the Company in effect on the Date of Termination or in effect on the day before the Change in Control; and (ii) the higher of the (A) payment to Executive under Section 3(a)(2) above adjusted to be an annualized bonus or (B) the bonus awarded to the Executive under the Annual Plan for the fiscal year immediately preceding the Change in Control. (b) BENEFITS. Except for any retirement plans covered by Section 4 below, the Company shall maintain in full force and effect for the benefit of 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. If the participation of the Executive and his spouse and covered dependents in any such plans or programs is not permitted by the terms of any such plans or programs, or would cause the Executive to experience adverse tax consequences, the Company shall provide comparable benefits eliminating the adverse tax consequences but providing substantially the same after-tax -10- benefit levels as the Executive, spouse and covered dependents previously received under such plans and programs. (c) AUTOMOBILE. The Company shall cause the title to Executive's Company-provided automobile to be transferred to Executive, free and clear. (d) OUTPLACEMENT SERVICES. The Company will provide the Employee with outplacement services through an outplacement services firm selected by the Company with the Employee's approval, which shall not be withheld if the firm selected is reputable at a cost not to exceed an amount equal to 15 percent of the Executive's base salary at the time of the termination. (e) CERTAIN REDUCTIONS DISREGARDED. In computing the payments under sections (a) through (d) above, any reduction in Executive's base salary, bonus or fringe benefits shall be disregarded if such reduction constituted "Good Reason" as defined in this Agreement. 4. RETIREMENT BENEFITS. (a) The Executive is a Participant in the SERP. If the employment of Executive with the Company shall terminate during the Termination Period other than by reason of a Nonqualifying Termination, then Executive shall receive (as a lump sum, to be paid within five (5) days after the Date of Termination) an amount equal to the difference between (i) the total amounts the Executive is eligible to receive as of the Date of Termination under the Spartan Stores, Inc. Cash Balance Pension Plan and any successor plan ("Pension Plan") and the SERP (assuming election by Executive of the lump sum payment options under the Pension Plan and SERP); and (ii) the total amounts the Executive would have been eligible to receive under the Pension Plan and SERP had the Executive's employment continued until the end of the Termination Period. (b) The payments to Executive under this Section 4 shall be in addition to any payments under Section 3 of this Agreement and any payments under the Pension Plan and SERP. 5. ACCELERATION OF VESTING UPON CHANGE IN CONTROL. Effective at the time of a Change in Control, all unvested stock options and stock previously issued to Executive as to which rights of ownership are subject to forfeiture shall immediately vest; all risk of forfeiture of the ownership of stock or stock options and restrictions on the exercise of options shall lapse; and, Executive shall be entitled to -11- exercise any or all options, such that the underlying shares will be considered outstanding at the time of the Change in Control. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, if any payments or distributions by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise ("Payments")) trigger application of the excise tax imposed by Section 4999 of the Code, or any successor Code provision (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), or any interest or penalties are incurred by Executive with respect to Excise Tax on such amount, then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments, it being the intent of this section that the Executive shall be held harmless from all Excise Tax and interest and penalties on Excise Tax. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company or Executive (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity, or group affecting the Change in Control, Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross- Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to Executive within five (5) days of the receipt of the Determination. If the Accounting Firm determines -12- that no Excise Taxes are payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Executive; however, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6(c) and Executive thereafter is required to make payment of any Excise Tax that qualifies for a Gross-Up Payment in accordance with this Section 6, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim; -13- provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income or employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6, Executive becomes entitled to receive, and receives, any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 6) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the -14- amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. WITHHOLDING TAXES. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local, or other law, the Company is required to withhold therefrom. 8. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise under or related to this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute regardless of the result thereof. 9. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 9, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation, or transfer of assets shall be a breach of this Agreement and shall constitute Good Reason hereunder and shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment were terminated following a Change in Control other than by reason of a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any such merger, consolidation, or transfer becomes effective shall be deemed the date Good Reason occurs, and shall be the Date of Termination if requested by Executive. -15- (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 10. NOTICE. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or received by facsimile transmission or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: ________________________ ________________________ ________________________ If to the Company: Spartan Stores, Inc. 850 76th Street, S.W. P. O. Box 8700 Grand Rapids, Michigan 49518 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not Executive obtains other employment. -16- (b) If there shall be any dispute between the Company and Executive in the event of any termination of Executive's employment then, until there is a final, nonappealable, determination pursuant to arbitration declaring that such termination was for Cause, that the determination by Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to Executive and his dependents or other beneficiaries, as the case may be, under Sections 3 and 4, the Company shall pay all amounts, and provide all benefits, to Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Sections 3 and 4 as though such termination were by the Company without Cause or by Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this Section 11 except upon receipt of an undertaking by or on behalf of Executive to repay all such amounts to which Executive is ultimately determined by the arbitrator not to be entitled. (c) ARBITRATION. Any dispute or controversy under this Agreement shall be settled exclusively by arbitration in Grand Rapids, Michigan, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid pursuant to Section 11(b) during a dispute. Judgment may be entered on the arbitration award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 11(c). 12. GOVERNING LAW; VALIDITY. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Michigan without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which other provisions shall remain in full force and effect. 13. ESTABLISHMENT OF TRUST. Immediately prior to a Change in Control, the Company shall establish and maintain a Trust in the form attached as Exhibit A. Upon the occurrence of a Change in Control the Company shall pay into the Trust the amounts called for under Exhibit A, and shall thereafter make such additional payments as called for under Exhibit A. No payment to the Trust by the Company shall reduce the Company's obligations to make payments to Executive under this Agreement. -17- 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 15. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such modification is agreed to in writing and signed by Executive and by a duly authorized officer of the Company, or such waiver is signed by the waiving party. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including without limitation, the right of Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. The rights of, and benefits payable to, Executive, his estate, or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate, or his beneficiaries under any other employee benefit plan or compensation program of the Company, except that no benefits pursuant to any other employee plan or compensation program that become payable or are paid in accordance with this Agreement shall be duplicated by operation of this Agreement. No agreements or representations, oral or otherwise, express or implied, with regard to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company. Executive has executed this Agreement as of the day and year written below. SPARTAN STORES, INC. By: ______________________________________ James B. Meyer President and Chief Executive Officer "Company" AGREED TO THIS ____ DAY OF _________, 1999 __________________________________________ "Executive" -18- EXHIBIT A SPARTAN STORES, INC. EXECUTIVE SEVERANCE AGREEMENT AND SERP TRUST [Omitted.] -19- EX-10 4 EXHIBIT 10.12 EXECUTIVE SEVERANCE AGREEMENT THIS AGREEMENT is entered into as of the 23rd day of February, 1999 (the "Effective Date"), by and between SPARTAN STORES, INC. a Michigan corporation ("Company"), and JAMES B. MEYER ("Executive"). W I T N E S S E T H: WHEREAS, Executive currently serves as a key employee of the Company and/or its subsidiaries and his services and knowledge are valuable to the Company in connection with the management of one or more of the Company's principal operating facilities, divisions, or subsidiaries; and WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Board has determined that it is in the best interests of the Company and its shareholders to secure Executive's continued services and to ensure Executive's continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as hereafter defined) of the Company, without concern as to whether Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage Executive's full attention and dedication to the Company and/or its subsidiaries, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, COMPANY AND EXECUTIVE AGREE AS FOLLOWS: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means (1) the willful and continued failure by Executive to substantially perform his duties with Company (other than any such failure resulting from Executive's incapacity due to physical or mental injury or illness, or any such actual or anticipated failure resulting from Executive's termination for Good Reason) after a demand for substantial performance is delivered to Executive by the Board (which demand shall specifically identify the manner in which the Board believes that Executive has not substantially performed his or her duties); or (2) the willful engaging by Executive in gross misconduct materially and demonstrably injurious to the Company. For purposes of this Section, no act or failure to act on the part of Executive shall be considered "willful" unless done or omitted to be done by Executive not in good faith and without reasonable belief that his action(s) or omission(s) was in the best interests of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until the Company provides Executive with a copy of a resolution adopted by an affirmative vote of not less than two- thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, with counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive has been guilty of conduct set forth in subsections (1) or (2) above, setting forth the particulars in detail. A determination for Cause by the Board shall not be binding upon or entitled to deference by any finder of fact in the event of a dispute, it being the intent of the parties that such finder of fact shall make an independent determination of whether the termination was for "Cause" as defined in (1) or (2) above. (c) "Change in Control" means: (1) the acquisition by any individual, entity, or group (a "Person"), including any "person" within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition by the Company, (B) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any Person controlled by the Company, (C) any acquisition by any corporation pursuant to a reorganization, merger, or consolidation involving the Company, if, immediately after such reorganization, merger, or consolidation, each of the conditions described in clauses (i), (ii), and (iii) of subsection (c) (3) shall be satisfied, or (D) any acquisition by the Executive or any group of persons including the Executive; and provided further that, for purposes of clause (A), if any Person (other than the -2- Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by the vote of at least two-thirds of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board, shall be deemed to have been a member of the Incumbent Board; (3) approval by the shareholders of the Company of a reorganization, merger, or consolidation unless, in any such case, immediately after such reorganization, merger, or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger, or consolidation and in substantially the same proportions relative to each other as -3- their ownership, immediately prior to such reorganization, merger, or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than (A) the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger, or consolidation (or any corporation controlled by the Company), or (B) any Person which beneficially owned, immediately prior to such reorganization, merger, or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger, or consolidation; or (4) approval by the shareholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% -4- or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of Common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. Notwithstanding anything contained in this Agreement to the contrary, if Executive's employment is terminated prior to a Change in Control and Executive reasonably demonstrates that such termination was at the request of or in response to a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who subsequently effectuates a Change in Control, then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of Executive's employment. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Common Stock" means the common stock of the Company, $2.00 par value per share. (f) "Company" means Spartan Stores, Inc., a Michigan corporation, and any corporation or other entity in which Spartan Stores, Inc. has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of such corporation or other entity entitled to vote generally in the election of directors. (g) "Date of Termination" means the effective date on which Executive's employment by the Company terminates as specified in a Notice of Termination by the Company or Executive, as the case may be. Notwithstanding the previous sentence, (i) if the Executive's employment is terminated for Disability, as defined in Section 1(h), then such Date of Termination shall be no earlier than thirty (30) days following the date on which a Notice of Termination is received, and (ii) if the Executive's employment is terminated by the Company other than for Cause, then such Date of Termination shall be no earlier than thirty (30) days following the date on which a Notice of Termination is received. -5- (h) "Disability" means Executive's failure to be available to substantially perform his duties with the Company on a full- time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to mental or physical illness. (i) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following events after or in connection with a Change in Control: (1) (i) the assignment to Executive of any duties inconsistent in any material adverse respect with Executive's position(s), duties, responsibilities, or status with the Company immediately prior to such Change in Control, (ii) a material adverse change in Executive's reporting responsibilities, titles or offices with the Company as in effect immediately prior to such Change in Control, (iii) any removal or involuntary termination of Executive by the Company otherwise than as expressly permitted by this Agreement (including any purported termination of employment which is not effected by a Notice of Termination), or (iv) any failure to re-elect Executive to any position with the Company held by Executive immediately prior to such Change in Control; (2) a reduction by the Company in Executive's rate of annual base salary as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter; (3) any requirement of the Company that Executive (i) be based anywhere other than the facility where Executive is located at the time of the Change in Control or reasonably equivalent facilities within Kent County, Michigan or (ii) engage in business travel to an extent substantially more burdensome than the travel obligations of Executive immediately prior to such Change in Control; (4) the failure of the Company to continue the Company's executive incentive plans or bonus plans in which Executive is participating immediately prior to such Change in Control or a reduction of the Executive's target incentive award opportunity under any such bonus plan, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent economic benefit; -6- (5) the failure of the Company to (i) continue in effect any employee benefit plan or compensation plan in which Executive is participating immediately prior to such Change in Control, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent after-tax economic benefit, or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan, (ii) provide Executive and Executive's dependents with welfare benefits (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) in accordance with the most favorable plans, practices, programs, and policies of the Company in effect for Executive immediately prior to such Change in Control, (iii) provide other fringe benefits in accordance with the most favorable plans, practices, programs, and policies of the Company in effect for Executive immediately prior to such Change in Control, or (iv) provide Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company as in effect for Executive immediately prior to such Change in Control; (6) the failure of the Company to pay any amounts owed Executive as salary, bonus, deferred compensation or other compensation; (7) the failure of the Company to obtain any assumption agreement contemplated in Section 9(b); (8) any purported termination of Executive's employment which is not effected pursuant to a Notice of Termination which satisfies the requirements of a Notice of Termination; or (9) any other material breach by Company of its obligations under this Agreement. For purposes of this Agreement, any good faith determination of Good Reason made by Executive shall be conclusive on the parties; provided, however, that an isolated and insubstantial action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Any event or condition described in this Section 1(i) which occurs prior to a -7- Change in Control, but which Executive reasonably demonstrates was at the request of or in response to a Third Party who effectuates a Change in Control or who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, shall constitute Good Reason following a Change in Control for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. Executive may not terminate the employment for "Good Reason" unless: (i) Executive notifies the Board of Directors in writing, within 60 days after Executive becomes aware of the act or omission constituting Good Reason that the act or omission in question constitutes Good Reason and explaining why the Executive considers it to constitute Good Reason; (ii) the Company fails, within 10 days after notice from Executive under (i) above, to revoke the action or correct the omission and make the Executive whole; and (iii) Executive gives notice of termination within 30 days after expiration of the 10-day period under (ii) above. Executive's failure to give notice as provided in (i) above will not waive Executive's right to resign with Good Reason, provided that he follows the above procedure, with regard to any subsequent act or omission constituting Good Reason. Executive need not fulfill the above conditions a second time if the Company repeats the act or omission constituting Good Reason. (j) "Nonqualifying Termination" means a termination of Executive's employment (1) by the Company for Cause, (2) by Executive for any reason other than for Good Reason with Notice of Termination, (3) as a result of Executive's death, (4) by the Company due to Executive's Disability, unless within thirty (30) days after Notice of Termination is provided to Executive after such Disability Executive shall have returned (or offered to return, if not permitted by the Company to do so) to substantial performance of Executive's duties on a full-time basis, or (5) as a result of Executive's Retirement. (k) "Notice of Termination" means a written notice by the Company or Executive, as the case may be, to the other, which (1) indicates the specific reason for Executive's termination, -8- (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment, and (3) specifies the termination date. The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (l) "Retirement" means termination of employment by either the Executive or the Company on or after the Executive's normal retirement date under the terms of retirement plans of the Company, but not earlier than the age of 65. (m) "SERP" means the Spartan Stores, Inc. Supplemental Executive Retirement Plans, as amended from time to time. (n) "Target Amount" means the amount set forth in Column 1 of the Table to Appendix C of the SERP for the "Date of Termination of Employment with Eligibility for Plan Benefit" as designated in the Table that applies to the Employee for his termination of employment as of the Date of Termination, as the Table may be amended from time to time. (o) "Termination Period" means the period of time beginning with a Change in Control and ending 3 years following such Change in Control. 2. TERM OF AGREEMENT. This Agreement shall commence on the Effective Date and shall continue in effect until the Company has fulfilled all of its obligations under this Agreement following any termination of Executive's employment with the Company. 3. SEVERANCE BENEFITS. If the employment of Executive with the Company shall terminate during the Termination Period, other than by reason of a Nonqualifying Termination, then Executive shall receive the following severance benefits as compensation for services rendered: (a) LUMP SUM CASH PAYMENT. Within five (5) days after the Date of Termination, Executive shall receive a lump sum cash payment in an amount equal to the sum of the following: (1) Executive's unpaid base salary from the Company through the Date of Termination at the rate in effect (without taking into account any reduction of base salary constituting Good Reason), just prior to the time a Notice of Termination is given plus any benefit awards (including -9- both the cash and stock components) and bonus payments which pursuant to the terms of any plans have been earned or become payable, to the extent not theretofore paid; (2) A bonus will be paid under the Company's Annual Incentive Plan or any successor plan ("Annual Plan") for the time Executive was employed by the Company in the fiscal year of termination, in an amount equal to the product of (i) the number of days Executive was employed by the Company prior to the Date of Termination in the year of termination divided by the number of days in the year, multiplied by (ii) 100% of the Executive's current year target bonus (with such calculations to be made as though the target level has been achieved for each Performance Goal (as defined in the Annual Plan)) . (3) A bonus will be paid under the Long Term Incentive Plan or any successor Plan ("Long Term Plan"), in an amount equal to the payment called for under the Long Term Plan (as in effect on the date of this Agreement) upon termination of Executive's employment without Cause during a year. (4) An amount equal to the number of years remaining in the Termination Period (counting each full or partial month as 1/12th of a year, and rounded to the nearest 1/100th of a year) times the sum of (i) the higher of the Executive's annual rate of base salary from the Company in effect on the Date of Termination or in effect on the day before the Change in Control; and (ii) the higher of the (A) payment to Executive under Section 3(a)(2) above adjusted to be an annualized bonus or (B) the bonus awarded to the Executive under the Annual Plan for the fiscal year immediately preceding the Change in Control. (b) BENEFITS. Except for any retirement plans covered by Section 4 below, the Company shall maintain in full force and effect for the benefit of 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. If the participation of the Executive and his spouse and covered dependents in any such plans or programs is not permitted by the terms of any such plans or programs, or would cause the Executive to experience adverse tax consequences, the -10- Company shall provide comparable benefits eliminating the adverse tax consequences but providing substantially the same after-tax benefit levels as the Executive, spouse and covered dependents previously received under such plans and programs. (c) AUTOMOBILE. The Company shall cause the title to Executive's Company-provided automobile to be transferred to Executive, free and clear of all liens or encumbrances. (d) CERTAIN REDUCTIONS DISREGARDED. In computing the payments under sections (a) through (c) above, any reduction in Executive's base salary, bonus or fringe benefits shall be disregarded if such reduction constituted "Good Reason" as defined in this Agreement. 4. RETIREMENT BENEFITS. (a) The Executive is a Participant in the SERP. If the employment of Executive with the Company shall terminate at any time after a Change in Control other than by reason of a Nonqualifying Termination, then Executive shall receive (as a lump sum, to be paid within five (5) days after the Date of Termination) an amount equal to the Target Amount for the date of termination designated under the SERP, as the Target Amount is adjusted by Exhibit A to this Agreement, to the extent the Target Amount is not paid under the Spartan Stores, Inc. Cash Balance Pension Plan and any successor plan ("Pension Plan") and the SERP (assuming election by Executive of the lump sum payment options under the Pension Plan and SERP). (b) If the employment of Executive with the Company shall terminate at any time after a Change in Control for any reason (including but not limited to a Nonqualifying Termination), then Executive shall receive (as a lump sum, to be paid within five (5) days after the Date of Termination) an amount equal to the Target Amount for the date of termination designated under the SERP that applies to the Date of Termination to the extent the Target Amount is not paid under the terms of the Pension Plan and any successor plan and the SERP on the Date of Termination (assuming election by Executive of the lump sum payment options under the Pension Plan and SERP) or under Subsection 4(a) above. (c) The payments to Executive under this Section 4 shall be in addition to any payments under Section 3 of this Agreement and any payments under the Pension Plan and SERP. 5. ACCELERATION OF VESTING UPON CHANGE IN CONTROL. Effective at the time of a Change in Control, all unvested stock options and stock -11- previously issued to Executive as to which rights of ownership are subject to forfeiture shall immediately vest; all risk of forfeiture of the ownership of stock or stock options and restrictions on the exercise of options shall lapse; and, Executive shall be entitled to exercise any or all options, such that the underlying shares will be considered outstanding at the time of the Change in Control. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, if any payments or distributions by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise ("Payments")) trigger application of the excise tax imposed by Section 4999 of the Code, or any successor Code provision (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), or any interest or penalties are incurred by Executive with respect to Excise Tax on such amount, then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments, it being the intent of this section that the Executive shall be held harmless from all Excise Tax and interest and penalties on Excise Tax. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company or Executive (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity, or group affecting the Change in Control, Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the -12- Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross- Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to Executive within five (5) days of the receipt of the Determination. If the Accounting Firm determines that no Excise Taxes are payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Executive; however, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6(c) and Executive thereafter is required to make payment of any Excise Tax that qualifies for a Gross-Up Payment in accordance with this Section 6, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -13- (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income or employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income or employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6, Executive becomes entitled to receive, and receives, any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 6) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the -14- receipt by Executive of an amount advanced by the Company pursuant to Section 6, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. WITHHOLDING TAXES. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local, or other law, the Company is required to withhold therefrom. 8. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise under or related to this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute regardless of the result thereof. 9. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 9, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation, or transfer of assets shall be a breach of this Agreement and shall constitute Good Reason hereunder and shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment were terminated following a Change in Control other than by reason of -15- a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any such merger, consolidation, or transfer becomes effective shall be deemed the date Good Reason occurs, and shall be the Date of Termination if requested by Executive. (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 10. NOTICE. For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or received by facsimile transmission or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: James B. Meyer 4529 Hidden Ridge Drive Hudsonville, Michigan 49426 If to the Company: Spartan Stores, Inc. 850 76th Street, S.W. P. O. Box 8700 Grand Rapids, Michigan 49518 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall -16- Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not Executive obtains other employment. (b) If there shall be any dispute between the Company and Executive in the event of any termination of Executive's employment then, until there is a final, nonappealable, determination pursuant to arbitration declaring that such termination was for Cause, that the determination by Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to Executive and his dependents or other beneficiaries, as the case may be, under Sections 3 and 4, the Company shall pay all amounts, and provide all benefits, to Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Sections 3 and 4 as though such termination were by the Company without Cause or by Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this Section 11 except upon receipt of an undertaking by or on behalf of Executive to repay all such amounts to which Executive is ultimately determined by the arbitrator not to be entitled. (c) ARBITRATION. Any dispute or controversy under this Agreement shall be settled exclusively by arbitration in Grand Rapids, Michigan, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid pursuant to Section 11(b) during a dispute. Judgment may be entered on the arbitration award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 11(c). 12. GOVERNING LAW; VALIDITY. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Michigan without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which other provisions shall remain in full force and effect. 13. ESTABLISHMENT OF TRUST. Immediately prior to a Change in Control, the Company shall establish and maintain a Trust in the form attached as -17- Exhibit B. Upon the occurrence of a Change in Control, the Company shall pay into the Trust the amounts called for under Exhibit B, and shall thereafter make such additional payments as called for under Exhibit B. No payment to the Trust by the Company shall reduce the Company's obligations to make payments to Executive under this Agreement. 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 15. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such modification is agreed to in writing and signed by Executive and by a duly authorized officer of the Company, or such waiver is signed by the waiving party. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including without limitation, the right of Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. The rights of, and benefits payable to, Executive, his estate, or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate, or his beneficiaries under any other employee benefit plan or compensation program of the Company, except that no benefits pursuant to any other employee plan or compensation program that become payable or are paid in accordance with this Agreement shall be duplicated by operation of this Agreement. No agreements or representations, oral or otherwise, express or implied, with regard to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 16. EMPLOYMENT AGREEMENT. This Agreement shall not affect the Employment Agreement dated August 14, 1996 between Executive and the Company, except that (a) only the terms of this Agreement shall control in determining whether Executive is entitled to the payments, benefits and protections of this Agreement; and (b) if Executive receives the severance benefits provided under Section 3 of this Agreement the Executive will not be entitled to the severance benefits that would otherwise be due under Section 7(a)(i), (ii), (iii), (iv) and (vi) of the Employment Agreement; and (c) if Executive receives the payments provided under Section 4 of this Agreement but is not entitled to the payments provided under Section 3 of this Agreement the Executive will -18- not be entitled to the benefits that would otherwise be due under Section 7(a)(v) of the Employment Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company. Executive has executed this Agreement as of the day and year written below. SPARTAN STORES, INC. By:/S/RUSSELL H. VAN GILDER, JR. Russell H. Van Gilder, Jr. Its: Chairman of the Board "Company" /S/JAMES B. MEYER James B. Meyer "Executive" -19- EXHIBIT A If, after a Change in Control, The following years shall be added the Date of Termination to the "Date of Termination of occurs within the following year: Employment with Eligibility for Plan Benefit" in the Table to Appendix C of the SERP: Year 1999 5 years Year 2000 4 years Year 2001 3 years Year 2002 and each year thereafter until Year 2009 2 years Year 2010 1 year -20- EXHIBIT B SPARTAN STORES, INC. EXECUTIVE SEVERANCE AGREEMENT AND SERP TRUST [Omitted.] -21- EX-21 5 EXHIBIT 21 LIST OF SUBSIDIARIES OF SPARTAN STORES, INC.
1. UNITED WHOLESALE GROCERY COMPANY Jurisdiction of Incorporation: Michigan Names under which business is conducted: United Wholesale Grocery Company 2. L & L/JIROCH DISTRIBUTING COMPANY Jurisdiction of Incorporation: Michigan Names under which business is conducted: L & L/Jiroch Distributing Company Thrifty Leasing Company 3. SHIELD INSURANCE SERVICES, INC. (Formerly Shield Insurance Agency, Inc.) Jurisdiction of Incorporation: Michigan Names under which business is conducted: Shield Insurance Services, Inc. Shield Insurance Services, Inc. also has a wholly owned subsidiary, Shield Benefit Administrators, Inc., which is incorporated in Michigan. 4. SPARTAN INSURANCE COMPANY LTD. Jurisdiction of Incorporation: Bermuda Names under which business is conducted: Spartan Insurance Company Ltd. 5. VALULAND, INC. Jurisdiction of Incorporation: Michigan Names under which business is conducted: Valuland, Inc. Glen's Markets Ashcraft's Markets Valuland, Inc. also has three wholly owned subsidiaries as follows, each of which conducts business under its official name: a. Jurisdiction of Incorporation: Michigan Name: Family Fare, Inc. b. Jurisdiction of Incorporation: Michigan Name: Family Fare Management Services, Inc. c. Jurisdiction of Incorporation: Michigan Name: Family Fare Trucking, Inc. Furthermore, Valuland, Inc. has a 65% interest in MDP, L.L.C., a Michigan limited liability company. 6. MARKET DEVELOPMENT CORPORATION Jurisdiction of Incorporation: Michigan Names under which business is conducted: Market Development Corporation 7. J.F. WALKER COMPANY, INC. Jurisdiction of Incorporation: Michigan Names under which business is conducted: J. F. Walker Company, Inc.
EX-23 6 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES Board of Directors of Spartan Stores, Inc. Grand Rapids, Michigan We consent to the incorporation by reference in Registration Statement No. 33-47442 Spartan Stores, Inc. 1991 Stock Bonus Plan, Registration Statement No. 33-47493 Spartan Stores, Inc. 1991 Stock Option Plan and Registration Statement No. 33-49074 Spartan Stores, Inc. 1991 Associate Stock Purchase Plan on Form S-8 of our repot dated June 4, 1999, appearing in this Annual Report on Form 10-K of Spartan Stores, Inc. for the year ended March 27, 1999. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Spartan Stores, Inc. (the "Company"), listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP June 25, 1999 EX-24 7 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 18, 1999 /S/ROGER L. BOYD Roger L. Boyd, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 17, 1999 /S/JAMES G. BUICK James G. Buick, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 17, 1999 /S/JOHN S. CARTON John S. Carton, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 25, 1999 /S/ALEX J. DEYONKER Alex J. DeYonker, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 18, 1999 /S/RONALD A. DEYOUNG Ronald A. DeYoung, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 20, 1999 /S/PARKER T. FELDPAUSCH Parker T. Feldpausch, Vice Chairman of the Board and Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 18, 1999 /S/MARTIN P. HILL Martin P. Hill, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE May 18, 1999 /S/DAN R. PREVO Dan R. Prevo, Director FORM 10-K POWER OF ATTORNEY The undersigned, in his capacity as a director or officer, or both, as the case may be, of Spartan Stores, Inc., does hereby appoint JAMES B. MEYER or ALEX J. DEYONKER, and both of them severally, his attorneys or attorney to execute in his name, place, and stead, a Form 10-K Annual Report of Spartan Stores, Inc. for its fiscal year ended March 27, 1999, and any and all amendments thereto, and to file it or them with the Securities and Exchange Commission. DATE SIGNATURE June 24, 1999 /S/Russell H. VanGilder, Jr. Russell H. VanGilder, Jr. Chairman of the Board and Director EX-27 8 ART. 5 FDS FOR 1999 FORM 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SPARTAN STORES, INC. AND SUBSIDIARIES FOR THE YEAR ENDED MARCH 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-27-1999 MAR-29-1998 MAR-27-1999 44,112 21,058 78,276 (2,335) 82,186 235,285 316,016 (157,668) 538,734 133,301 269,522 21,689 0 0 99,373 538,734 2,671,700 2,671,700 2,397,818 2,397,818 241,264 1,535 6,105 24,978 9,148 15,830 0 1,031 0 14,799 1.33 1.33 52 Weeks Net of interest income of $3,103
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