<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 10, 1998
Commission File Number 0-1532
MARSH SUPERMARKETS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0918179
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9800 CROSSPOINT BOULEVARD
INDIANAPOLIS, INDIANA 46256-3350
(Address of principal executive offices) (Zip Code)
(317) 594-2100
(Registrant's telephone number, including area code)
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 twelve
months and (2) has been subject to such filing requirements for at least the
past 90 days.
Number of shares outstanding of each class of the registrant's common
stock as of October 30, 1998:
Class A Common Stock - 3,951,733 shares
Class B Common Stock - 4,488,765 shares
---------
8,440,498 shares
=========
<PAGE> 2
This Quarterly Report on Form 10-Q/A (Amendment No. 1) amends and
supercedes, to the extent set forth herein, Part I of the
Registrant's Quarterly Report on Form 10-Q filed November 24, 1998.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
16 Weeks Ended 28 Weeks Ended
--------------------------- -----------------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and other revenues $ 488,483 $ 465,650 $ 849,105 $ 809,574
Cost of merchandise sold, including
warehousing and transportation 367,555 350,779 638,768 610,926
--------- --------- --------- ---------
Gross profit 120,928 114,871 210,337 198,648
Selling, general and administrative 104,446 100,446 180,151 172,709
Depreciation and amortization 6,712 5,935 11,609 10,311
--------- --------- --------- ---------
Operating income 9,770 8,490 18,577 15,628
Interest and debt expense amortization 6,120 5,822 10,404 8,885
--------- --------- --------- ---------
Income before income taxes
and extraordinary item 3,650 2,668 8,173 6,743
Income taxes 1,194 843 2,689 2,019
--------- --------- --------- ---------
Income before extraordinary item 2,456 1,825 5,484 4,724
Extraordinary item, net of tax -- (3,278) -- (3,278)
Net income (loss) $ 2,456 $ (1,453) $ 5,484 $ 1,446
========= ========= ========= =========
Earnings (loss) per common share
Before effect of extraordinary item $ .30 $ .22 $ .66 $ .56
Extraordinary item -- (.39) -- (.39)
--------- --------- --------- ---------
Net income (loss) $ .30 $ (.17) $ .66 $ .17
========= ========= ========= =========
Earnings (loss) per common share
- assuming dilution:
Before effect of extraordinary item $ .28 $ .21 $ .61 $ .53
Extraordinary item -- (.38) -- (.33)
--------- --------- --------- ---------
Net income (loss) $ .28 $ (.17) $ .61 $ .20
========= ========= ========= =========
Dividends per share $ .11 $ .11 $ .22 $ .22
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 10, March 28, October 11,
1998 1998 1997
----------- --------- -----------
(Unaudited) (Note A) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 29,554 $ 33,546 $ 47,467
Accounts receivable 36,013 27,315 27,286
Inventories, less LIFO reserve: October 10, 1998 - $15,223 103,195 98,828 97,440
March 28, 1998 - $15,084; October 11, 1997 - $17,754
Prepaid expenses 3,989 4,477 3,864
Recoverable income taxes 474 3,867 1,508
--------- --------- ---------
Total current assets 173,225 168,033 177,565
Property and equipment, less allowances for depreciation 264,287 248,795 234,434
Other assets 52,819 43,211 38,243
--------- --------- ---------
$ 490,331 $ 460,039 $ 450,242
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 8,458 $ -- $ --
Accounts payable 67,022 60,503 58,264
Accrued liabilities 45,538 45,294 42,696
Current maturities of long-term liabilities 2,924 2,806 2,802
--------- --------- ---------
Total current liabilities 123,942 108,603 103,762
Long-term liabilities:
Long-term debt 214,650 206,004 208,139
Capital lease obligations 8,939 6,457 3,923
--------- --------- ---------
Total long-term liabilities 223,589 212,461 212,062
Deferred items:
Income taxes 10,413 10,219 7,686
Other 12,758 12,677 12,445
--------- --------- ---------
Total deferred items 23,171 22,896 20,131
Shareholders' Equity:
Common stock, Classes A and B (Note B) 25,172 24,784 24,784
Retained earnings 104,558 100,917 98,074
Cost of common stock in treasury (8,053) (7,268) (5,909)
Deferred cost - restricted stock (1,707) (2,022) (2,337)
Notes receivable - stock options (341) (332) (325)
--------- --------- ---------
Total shareholders' equity 119,629 116,079 114,287
--------- --------- ---------
$ 490,331 $ 460,039 $ 450,242
========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
28 Weeks Ended
----------------------------
October 10, October 11,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,484 $ 1,446
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,609 10,311
Amortization of other assets 2,281 2,755
Debt extinguishment costs -- 3,278
Changes in operating assets and liabilities 1,211 (4,741)
Other operating activities (645) (1,787)
--------- ---------
Net cash provided by operating activities 19,940 11,262
INVESTING ACTIVITIES
Net acquisition of property, equipment and land (30,511) (12,726)
Other investing activities (7,891) (3,403)
--------- ---------
Net cash used for investing activities (38,402) (16,129)
FINANCING ACTIVITIES
Proceeds (payments) of short-term borrowing 8,458 (10,755)
Proceeds of long-term borrowing 10,000 172,000
Repayments of long-term debt and capital leases (1,351) (109,662)
Debt acquisition costs -- (5,718)
Debt extinguishment costs -- (3,278)
Purchase of shares for treasury (1,181) (1,817)
Stock options exercised 395 881
Cash dividends paid (1,851) (1,846)
--------- ---------
Net cash provided by financing activities 14,470 39,805
--------- ---------
Net increase (decrease) in cash and equivalents (3,992) 34,938
Cash and equivalents at beginning of period 33,546 12,529
--------- ---------
Cash and equivalents at end of period $ 29,554 $ 47,467
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
MARSH SUPERMARKETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts or as otherwise noted)
OCTOBER 10, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Marsh
Supermarkets, Inc. and subsidiaries were prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q. Accordingly, they do not include all the information
and footnotes necessary for a fair presentation of financial position, results
of operations, and cash flows in conformity with generally accepted accounting
principles. This report should be read in conjunction with the Company's
Consolidated Financial Statements for the year ended March 28, 1998. The
balance sheet at March 28, 1998, has been derived from the audited financial
statements at that date.
The Company's fiscal year ends on Saturday of the thirteenth week of each
calendar year. All references herein to "1999" and "1998" relate to the fiscal
years ending March 27, 1999 and March 28, 1998, respectively.
The condensed consolidated financial statements for the sixteen and
twenty-eight week periods ended October 10, 1998 and October 11, 1997,
respectively, were not audited by independent auditors. Preparation of the
financial statements requires management to make estimates that affect the
reported amounts of assets, liabilities, revenues and expenses for the
reporting periods. In the opinion of management, the statements reflect all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly, on a condensed basis, the financial position, results of
operations and cash flows for the periods presented.
Operating results, for the twenty-eight week period ended October 10, 1998, are
not necessarily indicative of the results that may be expected for the full
fiscal year ending March 27, 1999.
NOTE B -- COMMON STOCK
Class A Common Stock and Class B Common Stock each have 15 million shares
authorized. On October 10, 1998, March 28, 1998 and October 11, 1997, there
were 3,937,883, 3,944,387 and 3,994,529 shares of Class A Common Stock
outstanding and 4,483,863, 4,485,101 and 4,514,790 shares of Class B Common
Stock outstanding, respectively.
In November 1997, the Company authorized an increase in its previously
announced stock repurchase plan from $4.0 million to $6.0 million. Through
October 10, 1998, the Company has repurchased 442,308 shares at an aggregate
cost of $6.0 million. The total number of shares repurchased under the plan
represents approximately 5.3% of the currently outstanding common stock.
NOTE C -- RESTRICTED STOCK
In September 1997, 150,750 shares of restricted Class A Common Stock were
granted to certain key employees under the 1991 Employee Stock Incentive Plan.
The shares will vest ratably on each of the first four anniversaries of the
date of grant and are subject to restrictions on their sale or transfer.
5
<PAGE> 6
NOTE D - LONG-TERM DEBT AND GUARANTOR SUBSIDIARIES
In August 1997, the Company sold $150.0 million of 8 7/8% Senior Subordinated
Notes, Series A (the "144A Notes") in a private offering under Rule 144A of the
Securities Act of 1933. The proceeds were used to repay senior unsecured
indebtedness and related prepayment fees, all borrowings then outstanding under
revolving credit agreements and all borrowings then outstanding under notes
payable to banks, with $42.2 million of net proceeds remaining for general
corporate purposes. Subsequent to the offering, the Company and guarantor
subsidiaries filed a registration statement on Form S-4 to enable the Company to
offer to exchange its 8 7/8% Senior Subordinated Notes, Series B (the "Exchange
Notes" and, together with the 144A Notes, the "Notes") for all outstanding 144A
Notes.
Other than three inconsequential subsidiaries, all of the Company's
subsidiaries (the "Guarantors") have fully and unconditionally guaranteed on a
joint and several basis the Company's obligations under the Notes. The
Guarantors are 100% wholly-owned subsidiaries of the Company. The Guarantors
comprise all of the direct and indirect subsidiaries of the Company (other than
three inconsequential subsidiaries). The Company has not presented separate
financial statements and other disclosures concerning each Guarantor because
management has determined that such information is not material to investors.
Summarized combined financial information (in accordance with rule 1-02(bb) of
Regulation S-X) for the Guarantors is set forth below:
<TABLE>
<CAPTION>
October 10, March 28, October 11,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current assets $ 169,409 $ 164,316 $ 175,946
Current liabilities 117,570 104,486 99,304
Noncurrent assets 269,593 244,400 222,579
Noncurrent liabilities 51,411 49,188 44,320
<CAPTION>
16 Weeks Ended 28 Weeks Ended
---------------------------- ----------------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues $ 488,478 $ 465,648 $ 849,097 $ 809,572
Gross profit 120,923 114,869 210,329 198,646
Net income 6,902 1,844 13,254 5,933
</TABLE>
NOTE E -- INCOME TAXES
During fiscal 1997, the Company implemented a corporate restructuring pursuant
to which the Company's retail operations were organized as wholly-owned limited
liability companies and their intellectual property was transferred to a
passive investment company. As a result of the restructuring, the prior year
effective tax rate was significantly lower than the statutory rate due to the
reversal of a portion of deferred tax accruals.
6
<PAGE> 7
NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information" (FAS 131).
FAS 130 requires separate reporting of certain items already disclosed by the
Company. FAS 131 establishes requirements for reporting information about
operating segments in annual and interim reports and is effective for the
Company in 1999, but need not be applied to interim financial statements in the
initial year of application. FAS 131 may require a change in the Company's
financial reporting; however, the extent of the change, if any, has not been
determined.
In February 1998, the FASB issued Statement No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". The Statement does not
change the recognition or measurement of pension or postretirement benefit
plans, but standardizes disclosure requirements, requires some additional
information be disclosed and eliminates certain unnecessary disclosures. The
Statement is effective for the Company in 1999 and may require a change in the
Company's financial reporting; however, the extent of the change, if any, has
not been determined.
NOTE G - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued FAS 128, "Earnings per
Share". FAS 128 simplifies the standards for computing earnings per share by
replacing primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Earnings per share amounts for the sixteen and
twenty-eight weeks ended October 11, 1997 presented on the income statement
have been restated to conform to FAS 128.
The following table sets forth the computation of the numerators and
denominators used in the computation of basic and diluted earnings per share
(amounts in thousands):
<TABLE>
<CAPTION>
16 Weeks Ended 28 Weeks Ended
------------------------- --------------------------
October 10, October 11, October 10, October 11,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 2,456 $ 1,825 $ 5,484 $ 4,724
Extraordinary item, net of tax -- (3,278) -- (3,278)
------- ------- ------- -------
Numerator for basic earnings (loss) per share 2,456 (1,453) 5,484 1,446
Effect of convertible debentures 289 --(a) 505 523
------- ------- ------- -------
Numerator for diluted earnings (loss) per share
- income (loss) after assumed conversions $ 2,745 $(1,453) $ 5,989 $ 1,969
======= ======= ======= =======
Weighted average shares outstanding 8,412 8,418 8,416 8,408
Non-vested restricted shares (142) (35) (146) (20)
------- ------- ------- -------
Denominator for basic earnings (loss) per share 8,270 8,383 8,270 8,388
Effect of dilutive securities:
Non-vested restricted shares 142 35 146 20
Employee stock options 113 133 110 97
Convertible debentures 1,290 --(a) 1,290 1,290
------- ------- ------- -------
Denominator for diluted earnings (loss) per share
- adjusted weighted average shares 9,815 8,551 9,816 9,795
======= ======= ======= =======
</TABLE>
(a) convertible debentures excluded because the effect would have been
antidilutive
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements. Actual
results could differ materially from those reflected by the forward-looking
statements in the discussion, and a number of factors could adversely affect
future results, liquidity and capital resources. These factors include softness
in the general retail food industry, the entry of new competitive stores in the
Company's market, the stability of distribution incentives from suppliers, the
level of discounting by competitors, the timely and on budget completion of
store construction, expansion, conversion and remodeling, uncertainties
relating to tobacco and environmental regulations, the ability of the Company
and significant third parties with whom it does business to effect conversions
to new technological systems, including being Year 2000 compliant, and the
level of margins achievable in the Company's operating divisions and their
ability to minimize operating expenses. Although management believes it has the
business strategy and resources needed for improved operations, future revenue
and margin trends cannot be reliably predicted. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect
subsequent events or circumstances.
Results of operations for interim periods do not necessarily reflect the
results that may be expected for the fiscal year.
The following table sets forth certain income statement components, expressed
as a percentage of sales and other revenues, and the percentage change in such
components:
<TABLE>
<CAPTION>
Second Quarter Year - to - Date
-------------------------------- ---------------------------------
Percent of Revenues Percent of Revenues
-------------------- Percent --------------------- Percent
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues 100.0% 100.0% 4.9% 100.0% 100.0% 4.9%
Gross profit 24.8% 24.7% 5.3% 24.8% 24.5% 5.9%
Selling, general and administrative 21.4% 21.6% 4.0% 21.2% 21.3% 4.3%
Depreciation and amortization 1.4% 1.3% 13.1% 1.4% 1.3% 12.6%
Operating income 2.0% 1.8% 15.1% 2.2% 1.9% 18.9%
Interest and debt expense amortization 1.3% 1.3% 5.1% 1.2% 1.1% 17.1%
Income taxes 0.2% 0.2% 41.6% 0.3% 0.2% 33.2%
Income before extraordinary item 0.5% 0.4% 34.6% 0.6% 0.6% 16.1%
Extraordinary item, net of tax -- (0.7%) (100.0%) -- (0.4%) (100.0%)
Net income (loss) 0.5% (0.3%) n/m 0.6% 0.2% 279.3%
n/m = non-meaningful comparison
</TABLE>
SALES AND OTHER REVENUES
In the second quarter of 1999, consolidated sales and other revenues of $488.5
million increased $22.8 million, or 4.9%, compared to the same quarter of 1998.
Supermarket revenues increased $10.8 million and Convenience Store Distributing
Company (CSDC) revenues increased $12.2 million. Crystal Food Services revenues
were essentially the same as the prior year, while Village Pantry revenues
decreased $1.7 million. Retail sales (excluding fuel sales) increased 3.7%.
Sales in comparable supermarkets and convenience stores (including replacement
stores and format conversions) increased 3.5% from the second quarter of 1998.
The increase in supermarket revenues was attributable to same store sales
gains, the replacement of one Indianapolis store and the addition of pharmacies
in three existing stores. Approximately $9.3 million of the increase in CSDC
revenues resulted from passing on higher manufacturer cigarette prices to
customers. Village Pantry inside store revenues increased $1.5 million, but
fuel sales declined $3.2 million primarily as a result of average retail pump
prices $.19 per gallon lower than the same quarter of 1998 and, to a lesser
extent, due to the closing of fuel operations at six stores.
8
<PAGE> 9
For the twenty-eight weeks ended October 10, 1998, consolidated sales and other
revenues of $849.1 million increased $39.5 million, or 4.9%, compared to the
same twenty-eight weeks of the prior year. Supermarket revenues increased $19.6
million and CSDC revenues increased $21.2 million, while Crystal Food Services
revenues decreased $0.4 million and Village Pantry revenues decreased $3.3
million. Retail sales (excluding fuel sales) increased 3.7%. Sales in
comparable stores (including replacement stores and format conversions)
increased 3.5% from the prior year. The increase in supermarket revenues
resulted from same store sales gains, the replacement of one Indianapolis store
and the addition of pharmacies in three existing stores. The increase in CSDC
revenues resulted primarily from passing on higher manufacturer cigarette
prices to customers. Village Pantry inside same store revenues increased 2.5%,
but fuel sales declined due to average retail pump prices $.16 per gallon lower
than the year earlier period. Also, Village Pantry opened three new generation
stores and closed ten older, smaller stores during 1999, contributing nominally
to the total sales decrease.
GROSS PROFIT
Gross profit is calculated net of warehousing, transportation, and promotional
expenses. In the second quarter of 1999, consolidated gross profit increased
$6.1 million, or 5.3%, to $120.9 million from the comparable quarter of 1998.
As a percentage of revenues, consolidated gross profit increased to 24.8% from
24.7%. Gross profit increased in all divisions and, as a percentage of
revenues, increased in supermarkets, Village Pantry and Crystal Food Services,
but declined slightly in CSDC.
For the twenty-eight weeks ended October 10, 1998, consolidated gross profit
increased $11.7 million, or 5.9%, to $210.3 million, from the comparable year
earlier period. As a percentage of revenues, consolidated gross profit
increased to 24.8% from 24.5%. Gross profit increased in supermarkets, Village
Pantry and CSDC, but declined slightly in Crystal Food Services. As a
percentage of revenues, gross profit increased in all divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the second quarter of 1999, selling, general and administrative expenses
(SG&A) increased $4.0 million, or 4.0%, to $104.4 million from $100.4 million
in the second quarter of 1998. As a percentage of revenues, SG&A expenses
decreased to 21.4% from 21.6% in the comparable year earlier quarter. The
higher current quarter expenses were attributable to increases of $3.3 million
in wage and fringe benefit costs, $1.4 million in store occupancy and other
store costs, $1.1 million in advertising and $0.2 million in other general and
administrative costs, net of a $0.6 million credit from the reduction of
environmental liability reserves. Additionally, $1.4 million of cost reduction
related consulting fees expensed in the year earlier quarter did not recur in
the current quarter. Wage expense in stores open both quarters, excluding
supermarket conversions to the LoBill format, increased 1.9%. The Company
believes that labor scheduling techniques implemented in the current year
resulted in the reduction of labor hours without adversely affecting customer
service levels.
For the twenty-eight weeks in 1999, SG&A increased $7.4 million, or 4.3%, to
$180.1 million from $172.7 million for the comparable twenty-eight weeks of
1998. As a percentage of revenues, consolidated SG&A expenses decreased to
21.2% from 21.3% in 1998. The increase in 1999 is attributable to increases in
wages and fringe benefit costs of $4.3 million, store occupancy and other store
costs of $2.2 million, advertising $1.3 million and other general and
administrative costs $1.7 million, net of a $0.7 million credit from the
reduction of environmental liability reserves. Additionally, $1.4 million of
cost reduction related consulting fees expensed in the year earlier period did
not recur in the current year period. In identical stores, wages increased 2.5%
from the comparable twenty-eight weeks of the prior year.
9
<PAGE> 10
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the second quarter of 1999 was $6.7
million, compared to $5.9 million for the year earlier quarter. As a percentage
of revenues, depreciation and amortization expense was 1.4% for the second
quarter of 1999, compared to 1.3% for the second quarter of 1998.
For the twenty-eight weeks in 1999, depreciation and amortization expense was
$11.6 million, compared to $10.3 million for the prior year period. As a
percentage of revenues, depreciation and amortization expense was 1.4% for the
twenty-eight weeks in 1999, compared to 1.3% for the comparable weeks of the
prior year.
OPERATING INCOME
Operating income (income from continuing operations before interest, taxes and
debt extinguishment costs) increased to $9.8 million for the second quarter of
1999 from $8.5 million for the year earlier quarter. Gains from sales of real
estate accounted for $1.2 million of 1999 operating income. Operating income,
as a percentage of revenues, was 2.0% in 1999, compared to 1.8% for the
comparable period in 1998.
For the twenty-eight weeks in 1999, operating income was $18.6 million,
compared to $15.6 million in 1998. Operating divisions accounted for $1.1
million of the increase, gains on real estate sales contributed $1.2 million of
the increase, and the remaining $0.7 million increase resulted from the release
from liability under a guarantor arrangement. Operating income, as a percentage
of revenues, was 2.2% in 1999, compared to 1.9% for the comparable period in
1998.
INTEREST EXPENSE
Interest expense for the second quarter of 1999 was $6.1 million, compared to
$5.8 million for the second quarter of 1998. For the twenty-eight weeks in
1999, interest expense was $10.4 million, compared to $8.9 million in 1998.
Both the second quarter and twenty-eight week increases resulted from the
issuance of $150.0 million in principal amount of the Notes, consummated in
August, 1997, as previously discussed.
INCOME TAXES
For the second quarter of 1999, the effective income tax rate was 32.7%,
compared to 31.6% for the comparable quarter in 1998. For the twenty-eight
weeks of 1999, the effective income tax rate was 32.9%, compared to 29.9% for
the comparable weeks of the prior year. The year earlier effective rate was
lower due to the reversal of deferred tax accruals resulting primarily from
restructuring the Company's retail operations.
INCOME BEFORE EXTRAORDINARY ITEM
Income before debt extinguishment for the second quarter of 1999 was $2.5
million, compared to $1.8 million for the year earlier quarter. As a percentage
of revenues, income before debt extinguishment was 0.5% in 1999, compared to
0.4% in 1998.
For the twenty-eight weeks of 1999, income before debt extinguishment was $5.5
million, compared to $4.4 million in 1998. As a percentage of revenues, income
before debt extinguishment was 0.7% in 1999, compared to 0.6% in 1998.
EXTRAORDINARY ITEM: DEBT EXTINGUISHMENT
In August 1997, the Company consummated the issuance of $150.0 million in
principal amount of Notes, as previously discussed, and a portion of the
proceeds was used to repay $60.9 million in principal amount of senior
unsecured indebtedness and $5.0 million in related prepayment penalties. The
prepayment penalties, plus $0.2 million in unamortized debt acquisition costs,
were charged to income during the second quarter of 1998. The after tax charge
of $3.3 million was $.33 per diluted share for the twenty-eight weeks in 1998.
10
<PAGE> 11
NET INCOME (LOSS)
Net income for the second quarter of 1999 was $2.5 million, compared to a $1.4
million net loss for the second quarter of 1998. Net income, as a percentage of
revenues, was 0.5% in 1999, compared to (0.3%) in 1998.
For the twenty-eight weeks of 1999, net income was $5.5 million, compared to
$1.4 million in 1998. Net income, as a percentage of revenues, was 0.7% in
1999, compared to 0.2% in 1998.
CAPITAL EXPENDITURES
The Company's capital requirements have traditionally been financed through
internally generated funds, long-term borrowings and lease financings,
including capital and operating leases.
During the first twenty-eight weeks of 1999, the following stores opened or
were under construction:
<TABLE>
<CAPTION>
Square
Store Type Category Feet Location Status
---------- -------- ---- -------- ------
<S> <C> <C> <C> <C>
Supermarket Replacement 80,000 Carmel, IN Open
Supermarket Remodel 80,000 Lafayette, IN Complete
Supermarket Replacement 65,000 Indianapolis, IN Under construction
LoBill Conversion 28,000 Rushville, IN Open
LoBill New 31,000 Noblesville, IN Open
Convenience New 4,500 Cicero, IN Open
Convenience New 2,500 Kokomo, IN Open
Convenience New 4,500 Lafayette, IN Open
Convenience New 4,500 Zionsville, IN Open
Convenience Replacement 4,500 Muncie, IN Under construction
</TABLE>
In 1999, the Company plans to acquire several sites for future development and
has opened pharmacies in storerooms adjacent to three supermarkets. In
addition, the Company will replace its inventory procurement/distribution system
at a cost of $10.5 million. The cost of these projects and other capital
commitments is estimated to be $64.0 million. Of this amount, the Company plans
to fund $20.0 million through equipment leasing and believes it can finance the
balance with current cash balances and internally generated funds. As of October
10, 1998, the Company had expended $30.7 million for capital expenditures.
The Company's plans with respect to store construction, expansion and
remodeling are subject to a number of risks and uncertainties and may be
revised in light of changing conditions, such as competitive influences, the
Company's ability to negotiate successfully site acquisitions or leases, zoning
limitations and other governmental regulations. The timing of projects is
subject to normal construction and other delays. It is possible that some of
the projects described above may not commence, others may be added and a
portion of the planned expenditures with respect to projects commenced during
the current fiscal year may carry over to the subsequent fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the twenty-eight weeks ended
October 10, 1998 was $19.9 million, compared to $11.3 million for the
comparable period of the prior year. Cash flow growth from operating working
capital increased due primarily to the year-over-year change in inventory and
prepaid expenses, combined with increased net income and non-cash charges for
depreciation and amortization. Working capital decreased $10.1 million from
March 28, 1998. Cash and equivalents decreased $4.0 million and notes payable
to banks increased $8.5 million primarily to acquire fixed assets and for other
investing activities. Accounts receivable increased $8.7 million due to
seasonal activity. Inventory increased $4.4 million, but was more than funded
by a $6.5 million increase in accounts payable. Recoverable income taxes
decreased $3.4 million as a result of the tax liability from current year
earnings.
11
<PAGE> 12
At October 10, 1998, the Company's bank revolving credit agreements provided
$50.0 million of available financing, of which $10.0 million was utilized.
Commitments from various banks for short-term borrowings provided an additional
$20.0 million available at rates based upon the then prevailing federal funds
rate, of which $8.5 million was utilized at October 10, 1998.
The Company believes current cash balances, borrowings under its revolving
credit agreements and notes payable to banks, cash flows from operating
activities and lease financings will be adequate to meet the Company's working
capital needs, planned capital expenditures and debt service obligations for
the foreseeable future.
YEAR 2000 ISSUE
The Company has completed an assessment of its computer and other operating
systems to identify those which could be affected by the "Year 2000" issue. The
assessment included the review of business applications hardware and software
(information technology, or IT), non-IT areas such as microprocessors and
embedded chips, and third parties, including merchandise suppliers and service
providers. The Company is monitoring progress toward Year 2000 compliance
through the phases detailed in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Project segment Remediation phase Testing phase Implementation phase
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IT areas:
Mainframe and 60% complete 60% complete 60% complete
central servers Expected completion Sep. 1999 Expected completion Sep. 1999 Expected completion Oct. 1999
Stores 75% complete 50% complete 50% complete
Expected completion Aug. 1999 Expected completion Aug. 1999 Expected completion Sept. 1999
Distribution 75% complete 75% complete 75% complete
centers/other Expected completion Sep. 1999 Expected completion Sep. 1999 Expected completion Oct. 1999
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Non-IT areas 90% complete 90% complete 90% complete
Expected completion Aug. 1999 Expected completion Aug. 1999 Expected completion Sep. 1999
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Third parties 25% complete Not applicable Not applicable
Expected completion Sep. 1999
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The remediation phase includes modification to, or replacement of, software,
hardware or microprocessors, and obtaining assurances from third parties that
they have addressed the Year 2000 issue. Testing includes conducting trials
adequate to ensure compliance prior to the implementation, or installation, of
the compliant solution.
The estimated total costs, excluding internal costs, to complete compliance are
$13.2 million, of which $12.8 million will be capitalized and $0.4 million will
be charged to expense. As of October 10, 1998, the Company had expended $10.4
million, of which $10.2 million was capitalized and $0.2 million was expensed.
The Company does not separately track the internal costs incurred for the Year
2000 project; those costs are principally the payroll and related costs for its
information systems group. The costs of the project have been, and will
continue to be, funded through operating cash flows.
The Company believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As indicated above, the Company has not
completed all necessary phases of the Year 2000 project. Year 2000 risks for the
Company include unsuccessful testing of software changes, failed attempts to
obtain vendor software and failure on the part of suppliers and service
providers. The Company believes that under reasonably likely worst case
scenarios, CSDC would be unable to order product or to fill customer orders, and
certain supermarket automated data collection processes would revert to manual
processes. Such an event could have a material adverse impact on the Company's
operating results and financial position. Contingency plans to address those
risks have not been fully developed, however the Company intends to finalize its
contingency plan for those risks by May 1999.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSH SUPERMARKETS, INC.
November 25, 1998 By: /s/ Douglas W. Dougherty
----------------------------------------
Douglas W. Dougherty
Senior Vice President, Chief Financial Officer
and Treasurer
November 25, 1998 By: /s/ Mark A. Varner
---------------------------------------
Mark A. Varner
Chief Accounting Officer,
Corporate Controller
14
