<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 1999
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 January 12, 1999:
<TABLE>
<S> <C>
Class A Common Stock - 4,016,733 shares
Class B Common Stock - 4,488,765 shares
---------
8,505,498 shares
=========
</TABLE>
<PAGE> 2
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>
12 Weeks Ended 40 Weeks Ended
--------------------- --------------------------
January 2, January 3, January 2, January 3,
1999 1998 1999 1998
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Sales and other revenues $383,042 $356,206 $1,232,147 $ 1,165,779
Cost of merchandise sold, including
warehousing and transportation 288,596 268,164 927,364 879,090
-------- -------- ---------- -----------
Gross profit 94,446 88,042 304,783 286,689
Selling, general and administrative 80,157 76,182 260,308 248,890
Depreciation and amortization 5,180 4,669 16,789 14,980
-------- -------- ---------- -----------
Operating income 9,109 7,191 27,686 22,819
Interest and debt expense amortization 4,510 4,454 14,914 13,340
-------- -------- ---------- -----------
Income before income taxes
and extraordinary item 4,599 2,737 12,772 9,479
Income taxes 1,401 776 4,090 2,795
-------- -------- ---------- -----------
Income before extraordinary item 3,198 1,961 8,682 6,684
Extraordinary item, net of tax -- -- -- (3,278)
-------- -------- ---------- -----------
Net income $ 3,198 $ 1,961 $ 8,682 $ 3,406
======== ======== ========== ===========
Earnings per common share
Before effect of extraordinary item $ .38 $ .24 $ 1.05 $ .80
Extraordinary item -- -- -- (.39)
-------- -------- ---------- -----------
Net income $ .38 $ .24 $ 1.05 $ .41
======== ======== ========== ===========
Earnings per common share - assuming dilution
Before effect of extraordinary item $ .35 $ .22 $ .96 $ .76
Extraordinary item -- -- -- (.33)
-------- -------- ---------- -----------
Net income $ .35 $ .22 $ .96 $ .43
======== ======== ========== ===========
Dividends per share $ .11 $ .11 $ .33 $ .33
======== ======== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 2, March 28, January 3,
1999 1998 1998
--------- --------- --------
(Unaudited) (Note A) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 33,423 $ 33,546 $ 41,547
Accounts receivable 36,715 27,315 35,976
Inventories, less LIFO reserve: January 2, 1999 - $15,859;
March 28, 1998 - $15,084; January 3, 1998 - $17,814 100,766 98,828 96,355
Prepaid expenses 5,846 4,477 4,237
Recoverable income taxes 849 3,867 3,125
--------- --------- --------
Total current assets 177,599 168,033 181,240
Property and equipment, less allowances for depreciation 266,395 248,795 244,407
Other assets 56,640 43,211 38,112
--------- --------- --------
$ 500,634 $ 460,039 $463,759
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 8,440 $ - $ 2,650
Accounts payable 68,887 60,503 62,454
Accrued liabilities 49,470 45,294 47,910
Current maturities of long-term liabilities 2,985 2,806 2,792
--------- --------- --------
Total current liabilities 129,782 108,603 115,806
Long-term liabilities:
Long-term debt 215,238 206,004 207,603
Capital lease obligations 8,834 6,457 3,825
--------- --------- --------
Total long-term liabilities 224,072 212,461 211,428
Deferred items:
Income taxes 11,603 10,219 9,543
Other 12,901 12,677 11,906
--------- --------- --------
Total deferred items 24,504 22,896 21,449
Shareholders' Equity:
Common stock, Classes A and B 25,239 24,784 24,784
Retained earnings 106,827 100,917 99,088
Cost of common stock in treasury (6,710) (7,268) (6,311)
Deferred cost - restricted stock (2,613) (2,022) (2,157)
Notes receivable - stock options (467) (332) (328)
--------- --------- --------
Total shareholders' equity 122,276 116,079 115,076
--------- --------- --------
$ 500,634 $ 460,039 $463,759
========= ========= ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
40 Weeks Ended
---------------------------------
January 2, January 3,
1999 1998
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,682 $ 3,406
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,789 14,980
Amortization of other assets 3,214 3,819
Debt extinguishment costs -- 3,278
Changes in operating assets and liabilities 4,262 (3,086)
Other operating activities (145) (3,022)
-------- ---------
Net cash provided by operating activities 32,802 19,375
INVESTING ACTIVITIES
Net acquisition of property, equipment and land (35,233) (25,561)
Other investing activities (12,064) (5,447)
-------- ---------
Net cash used for investing activities (47,297) (31,008)
FINANCING ACTIVITIES
Proceeds (payments) of short-term borrowing 8,440 (8,105)
Proceeds of long-term borrowing 20,000 172,000
Payments of long-term debt and capital leases (10,807) (110,308)
Debt acquisition costs -- (5,718)
Debt extinguishment costs -- (3,278)
Purchase of shares for treasury (1,171) (2,061)
Stock options exercised 689 902
Cash dividends paid (2,779) (2,781)
-------- ---------
Net cash provided by financing activities 14,372 40,651
-------- ---------
Net increase (decrease) in cash and equivalents (123) 29,018
Cash and equivalents at beginning of period 33,546 12,529
-------- ---------
Cash and equivalents at end of period $ 33,423 $ 41,547
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
MARSH SUPERMARKETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts or as otherwise noted)
JANUARY 2, 1999
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 twelve and forty week
periods ended January 2, 1999 and January 3, 1998, 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 forty week period ended January 2, 1999 are not
necessarily indicative of the operating results that may be expected for the
full fiscal year ending March 27, 1999.
NOTE B - 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.
<PAGE> 6
Summarized combined financial information for the Guarantors is set forth below:
<TABLE>
<CAPTION>
January 2, March 28, January 3,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Current assets $172,478 $164,316 $178,408
Current liabilities 119,923 104,486 108,279
Noncurrent assets 274,457 244,400 230,636
Noncurrent liabilities 51,222 49,188 45,469
</TABLE>
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
--------------------------- -----------------------------
January 2, January 3, January 2, January 3,
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues $383,035 $356,195 $1,232,132 $1,165,767
Gross profit 94,439 87,922 304,768 286,568
Net income 6,509 5,259 19,763 11,190
</TABLE>
NOTE C -- INCOME TAXES
During 1997, the Company implemented a corporate restructuring pursuant to which
the Company's retail operations were organized as limited liability companies
and the Company's 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.
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of the numerators and
denominators used in the computation of earnings per share and diluted earnings
per share (amounts in thousands):
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
--------------------------- -----------------------------
January 2, January 3, January 2, January 3,
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 3,198 $ 1,961 $ 8,682 $ 6,684
Extraordinary item, net of tax -- -- -- (3,278)
-------- -------- ---------- ----------
Numerator for earnings per share 3,198 1,961 8,682 3,406
Effect of convertible debentures 224 231 729 754
-------- -------- ---------- ----------
Numerator for diluted earnings per share -
income after assumed conversions $ 3,422 $ 2,192 $ 9,411 $ 4,160
======== ======== ========== ==========
Weighted average shares outstanding 8,452 8,493 8,427 8,434
Non-vested restricted shares (125) (151) (140) (59)
-------- -------- ---------- ----------
Denominator for earnings per share 8,327 8,342 8,287 8,375
Effect of dilutive securities:
Non-vested restricted shares 125 151 140 59
Employee stock options 87 129 104 107
Convertible debentures 1,290 1,290 1,290 1,290
-------- -------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 9,829 9,912 9,821 9,831
======== ======== ========== ==========
</TABLE>
<PAGE> 7
NOTE E - 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.
<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
of operations 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>
Third Quarter Year - to - Date
--------------------------------- ----------------------------------
Percent of Revenues Percent Percent of Revenues Percent
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues 100.0% 100.0% 7.5% 100.0% 100.0% 5.7%
Gross profit 24.7% 24.7% 7.3% 24.7% 24.6% 6.3%
Selling, general and administrative 20.9% 21.4% 5.2% 21.1% 21.3% 4.6%
Depreciation and amortization 1.4% 1.3% 10.9% 1.4% 1.3% 12.1%
Operating income 2.4% 2.0% 26.7% 2.2% 2.0% 21.3%
Interest and debt expense amortization 1.2% 1.3% 1.3% 1.2% 1.1% 11.8%
Income taxes 0.4% 0.2% 80.5% 0.3% 0.2% 46.3%
Income before extraordinary item 0.8% 0.6% 63.1% 0.7% 0.6% 29.9%
Extraordinary item, net of tax - - - - (0.3%) -
Net income 0.8% 0.6% 63.1% 0.7% 0.3% 154.9%
</TABLE>
SALES AND OTHER REVENUES
In the third quarter of 1999, consolidated sales and other revenues of $383.0
million increased $26.8 million, or 7.5%, compared to the same quarter of 1998.
Supermarket revenues increased $17.5 million, Village Pantry revenues increased
$0.5 million, Convenience Store Distributing Company (CSDC) revenues increased
$8.4 million and Crystal Food Services revenues increased $0.4 million. Retail
sales, excluding fuel sales, increased 7.6%. Sales in comparable supermarkets
and convenience stores (including replacement stores and format conversions)
increased 7.0% from the year earlier quarter. The increase in supermarket
revenues was due largely to same store sales gains. Village Pantry inside store
revenues increased $1.8 million, but fuel sales decreased $1.3 million as a
result of average retail pump prices being $.15 per gallon lower than the
comparable year earlier quarter. The increase in CSDC revenues was primarily
attributable to passing on higher manufacturer cigarette prices to customers.
<PAGE> 9
For the forty weeks ended January 2, 1999, consolidated sales and other revenues
of $1,232.1 million increased $66.4 million, or 5.7%, compared to the same forty
weeks of 1998. Supermarket revenues increased $37.0 million and CSDC revenues
increased $29.6 million. Crystal Food Services revenues were the same in both
years, while Village Pantry revenues decreased $2.8 million. Retail sales,
excluding fuel sales, increased 4.8%. Sales in comparable stores (including
replacement stores and format conversions) increased 4.5% from the year earlier
period. Same store sales gains accounted for $30.3 million of the increase in
supermarket revenues. The increase in CSDC revenues resulted essentially from
passing on higher manufacturer cigarette prices to customers. Village Pantry
inside store revenues increased $3.4 million, but fuel sales declined $6.2
million due to average retail pump prices $.16 per gallon lower than the year
earlier period.
GROSS PROFIT
Gross profit is net of warehousing, transportation, and promotional expenses. In
the third quarter of 1999, consolidated gross profit increased $6.4 million, or
7.3%, from the comparable quarter of 1998. In November 1998, cigarette
manufacturers increased wholesale prices approximately 25% and cigarette
retailers immediately increased the retail shelf price accordingly. The increase
allowed the Company to realize a one-time gain, net of the estimated LIFO
impact, of $2.8 million. Excluding the cigarette price increase gain,
consolidated gross profit increased $3.6 million, or 4.1%, from the year earlier
quarter. As a percentage of revenues, consolidated gross profit was 24.7% in
both quarters. Excluding the cigarette price increase gain, consolidated gross
profit was 23.9% of revenues in the third quarter of 1999. Excluding the
cigarette price increase gain, gross profit, expressed as a percentage of
revenues, declined in the supermarkets and Village Pantry, but increased in CSDC
and Crystal Food Services.
For the forty weeks ended January 2, 1999, consolidated gross profit increased
$18.1 million, or 6.3%, from the year earlier period. Excluding the cigarette
price increase gain in the third quarter of 1999, consolidated gross profit
increased $15.3 million, or 5.3%, from the forty weeks ended January 3, 1998. As
a percentage of revenues, consolidated gross profit increased to 24.7% from
24.6% in the prior year. Excluding the cigarette price increase gain in the
third quarter of 1999, consolidated gross profit, expressed as a percentage of
revenues, was 24.5% for the current year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the third quarter of 1999, selling, general and administrative (SG&A)
expenses increased $4.0 million, or 5.2%, compared to the third quarter of 1998.
As a percentage of revenues, SG&A expenses decreased to 20.9% from 21.4% for
the year earlier quarter. The dollar increase in 1999 was attributable to
increases in wages and fringe benefits of $2.1 million, store occupancy and
other store operating costs of $0.9 million, advertising of $0.2 million, and
$0.8 million in administrative and general expenses. Wages in stores open both
quarters, excluding supermarket conversions to the LoBill format, decreased
0.2%. Labor scheduling techniques implemented in the current year resulted in
the reduction of labor hours. The Company believes the labor hour reduction has
not adversely affected customer service levels.
For the forty weeks ended January 2, 1999, SG&A expenses increased $11.4
million, or 4.6%, from the comparable forty weeks of 1998. As a percentage of
revenues, SG&A expenses decreased to 21.1% from 21.3% in the comparable period
of 1998. The current year increase was due to increases in wages and benefits of
$7.4 million, store occupancy and other store operating costs of $3.1 million,
advertising of $1.5 million, and $2.6 million in administrative and general
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 period did not recur in the current
year. Wages in identical stores increased 1.7% from the comparable forty weeks
of the prior year.
<PAGE> 10
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the third quarter of 1999 was $5.2
million, compared to $4.7 million for the year earlier quarter. As a percentage
of revenues, depreciation and amortization expense was 1.4% in the third quarter
of 1999 and 1.3% in the same quarter of 1998.
For the forty weeks ended January 2, 1999, depreciation and amortization expense
was $16.8 million, compared to $15.0 million for the year earlier period. As a
percentage of revenues, depreciation and amortization expense was 1.4% for the
forty weeks of 1999, compared to 1.3% for the comparable period of 1998.
OPERATING INCOME
Operating income (earnings from continuing operations before interest, taxes and
debt extinguishment costs) increased to $9.1 million for the third quarter of
1999 from $7.2 million for the comparable quarter of 1998. The cigarette price
increase gain, net of the expected LIFO impact, of $2.8 million, less a $0.4
million increase in bad check losses and a $0.5 million non-recurring charge to
administrative and general expenses accounted substantially for the increase in
the current quarter. Operating income as a percentage of revenues was 2.4%
compared to 2.0% for the year earlier quarter.
For the forty weeks ended January 2, 1999, operating income was $27.7 million,
compared to $22.8 million for the comparable year earlier period. The $4.9
million increase is comprised of the $2.8 million cigarette price increase gain
and an increase of $0.9 million from sales of real estate, as well as from
improved operations. Operating income as a percentage of revenues was 2.2%
compared to 2.0% for the year earlier period.
INTEREST EXPENSE
Interest expense was $4.5 million in the third quarter of both years, but was
1.2% of revenues in 1999 compared to 1.3% in 1998. For the forty weeks in 1999,
interest expense was $14.9 million, compared to $13.3 million in 1998. As a
percentage of revenues, interest expense for the forty weeks was 1.2% in 1999
and 1.1% in 1998.
INCOME TAXES
For the quarter ended January 2, 1999, the effective income tax rate was 30.5%,
compared to 28.4% for the comparable prior year quarter. For the forty weeks
ended January 2, 1999, the effective income tax rate was 32.0%, compared to
29.5% 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 was $3.2 million for the third quarter of
1999, compared to $2.0 million in 1998. As a percentage of revenues, income
before debt extinguishment was 0.8% in 1999, compared to 0.6% in the year
earlier quarter.
For the forty weeks ended January 2, 1999, income before debt extinguishment was
$8.7 million, compared to $6.7 million in 1998. Income before debt
extinguishment, as a percentage of revenues, 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 forty weeks in 1998.
<PAGE> 11
NET INCOME
Net income was $3.2 million for the third quarter of 1999, compared to $2.0
million in 1998. Net income, as a percentage of revenues, was 0.8% in 1999,
compared to 0.6% in the year earlier quarter.
For the forty weeks ended January 2, 1999, net income was $8.7 million, compared
to $3.4 million in 1998. As a percentage of revenues, net income was 0.7% in
1999, compared to 0.3% in 1998.
CAPITAL EXPENDITURES
The Company's capital requirements have traditionally been financed through
internally generated funds, long-term borrowing and lease financing, including
capital and operating leases.
During the first forty 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 Open subsequent to 1/2/99
</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 is replacing 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 $65.0 million. Of this amount, the Company plans to fund $15.0
million through equipment leasing and believes it can finance the balance with
current cash balances and internally generated funds. As of January 2, 1999, the
Company had expended $49.3 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.
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the forty weeks ended January 2,
1999 was $32.8 million, compared to $19.4 million for the year earlier period.
Cash flow growth from operating working capital increased due primarily to the
year-over-year change in inventory and prepaid expenses, less an increase in
accounts receivable, combined with increased net income and non-cash charges for
depreciation and amortization. Working capital decreased $11.6 million from
March 28, 1998. Cash and equivalents were essentially unchanged, but notes
payable to banks increased $8.4 million primarily to acquire fixed assets and
for other investing activities. Accounts receivable increased $9.4 million due
to seasonal activity and higher amounts due CSDC from customers resulting from
the November 1998 cigarette price increase. Inventory increased $1.9 million,
but was more than funded by an $8.4 million increase in accounts payable.
Recoverable income taxes decreased $3.0 million as a result of the tax liability
from current year earnings.
At January 2, 1999, 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 $8.4 million was utilized at January 2, 1999.
The Company believes current cash balances, borrowing 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 75% complete 67% complete 67% complete
central servers Expected completion Sep. 1999 Expected completion Sep. 1999 Expected completion Oct. 1999
Stores 78% complete 54% complete 54% complete
Expected completion Aug. 1999 Expected completion Aug. 1999 Expected completion Sept. 1999
Distribution 89% complete 84% complete 84% 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.
<PAGE> 13
The estimated total costs, excluding internal costs, to complete compliance are
$14.9 million, of which $14.5 million will be capitalized and $0.4 million will
be charged to expense. As of January 2, 1999, the Company had expended $12.2
million, of which $12.0 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.
<PAGE> 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults upon Senior Securities or Rights of Holders Thereof
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
Exhibit 27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
On December 24, 1998, the Company filed a Current Report on
Form 8-K with respect to the adoption of the Amended and
Restated Rights Agreement.
<PAGE> 15
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.
February 13, 1999 By: /s/ Douglas W. Dougherty
----------------------------------------
Douglas W. Dougherty
Vice President, Chief Financial Officer,
and Treasurer
February 13, 1999 By: /s/ Mark A. Varner
----------------------------------------
Mark A. Varner
Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10-Q FOR THE PERIOD ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-END> JAN-02-1999
<CASH> 33,423
<SECURITIES> 0
<RECEIVABLES> 36,715
<ALLOWANCES> 0
<INVENTORY> 100,766
<CURRENT-ASSETS> 177,599
<PP&E> 419,838
<DEPRECIATION> 153,443
<TOTAL-ASSETS> 500,634
<CURRENT-LIABILITIES> 129,782
<BONDS> 215,238
0
0
<COMMON> 8,505,498<F1>
<OTHER-SE> 97,037
<TOTAL-LIABILITY-AND-EQUITY> 500,634
<SALES> 1,232,147
<TOTAL-REVENUES> 1,232,147
<CGS> 927,364
<TOTAL-COSTS> 1,187,672<F2>
<OTHER-EXPENSES> 16,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,914
<INCOME-PRETAX> 12,772
<INCOME-TAX> 4,090
<INCOME-CONTINUING> 8,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,682
<EPS-PRIMARY> 1.05<F3>
<EPS-DILUTED> .96<F3>
<FN>
<F1>Number of Class A and Class B shares outstanding
<F2>Includes (i) $927,364 of Cost of Goods Sold (Item 5-03(b)2(a) of Regulation
S-X) and (ii) $260,308 of Selling, General and Administrative Expenses (Item
5-03(b)4 of Regulation S-X).
<F3>Multiplier is 1 for per share data.
</FN>
</TABLE>
