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 June 19, 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 July 7, 1999: Class A Common Stock - 4,004,408 shares Class B Common Stock - 4,499,778 shares --------- 8,504,186 shares ========= PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MARSH SUPERMARKETS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) (Unaudited) 12 Weeks Ended ----------------------- June 19, June 20, 1999 1998 -------- -------- Sales and other revenues $394,266 $360,622 Cost of merchandise sold, including warehousing and transportation 296,183 271,213 -------- -------- Gross profit 98,083 89,409 Selling, general and administrative 82,806 75,705 Depreciation and amortization 5,457 4,897 -------- -------- Operating income 9,820 8,807 Interest and debt expense amortization 4,871 4,284 -------- -------- Income before income taxes 4,949 4,523 Income taxes 1,668 1,495 -------- -------- Net income $ 3,281 $ 3,028 ======== ======== Earnings per common share $ .39 $ .37 ======== ======== Earnings per common share - assuming dilution $ .36 $ .34 ======== ======== Dividends per share $ .11 $ .11 ======== ======== See notes to condensed consolidated financial statements. 2 MARSH SUPERMARKETS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 19, March 27, June 20, 1999 1999 1998 --------- --------- --------- (Unaudited) (Note A) (Unaudited) ASSETS Current assets: Cash and equivalents $ 24,263 $ 30,520 $ 29,874 Accounts receivable 39,978 36,096 30,828 Inventories, less LIFO reserve; June 19, 1999 - $12,216; March 27, 1999 - $12,141; June 20, 1998 - $15,144 109,079 107,336 100,004 Prepaid expenses 4,751 9,768 3,837 Recoverable income taxes -- 308 768 --------- --------- --------- Total current assets 178,071 184,028 165,311 Property and equipment, less allowances for depreciation 279,557 278,639 261,384 Other assets 50,044 47,016 44,161 --------- --------- --------- $ 507,672 $ 509,683 $ 470,856 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to bank $ 300 $ -- $ 5,300 Accounts payable 73,834 69,466 64,721 Accrued liabilities 46,204 45,507 46,030 Current maturities of long-term liabilities 3,133 2,990 2,612 --------- --------- --------- Total current liabilities 123,471 117,963 118,663 Long-term liabilities: Long-term debt 218,486 228,900 205,497 Capital lease obligations 13,344 12,820 5,653 --------- --------- --------- Total long-term liabilities 231,830 241,720 211,150 Deferred items: Income taxes 11,936 11,768 10,364 Other 13,522 13,752 12,586 --------- --------- --------- Total deferred items 25,458 25,520 22,950 Shareholders' Equity: Common stock, Classes A and B 25,393 25,239 24,784 Retained earnings 111,183 108,841 103,019 Cost of common stock in treasury (6,962) (6,710) (7,487) Deferred cost - restricted stock (2,223) (2,418) (1,887) Notes receivable - stock options (478) (472) (336) --------- --------- --------- Total shareholders' equity 126,913 124,480 118,093 --------- --------- --------- $ 507,672 $ 509,683 $ 470,856 ========= ========= ========= See notes to condensed consolidated financial statements. 3 MARSH SUPERMARKETS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) 12 Weeks Ended ---------------------- June 19, June 20, 1999 1998 -------- -------- OPERATING ACTIVITIES Net income $ 3,281 $ 3,028 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,457 4,897 Amortization of other assets 1,363 1,025 Changes in operating assets and liabilities 4,934 4,149 Other (774) 155 -------- -------- Net cash provided by operating activities 14,261 13,254 INVESTING ACTIVITIES Net acquisition of property, equipment and land (6,753) (19,349) Other investing activities (2,956) (225) -------- -------- Net cash used for investing activities (9,709) (19,574) FINANCING ACTIVITIES Proceeds from short-term borrowings 300 5,300 Proceeds from long-term borrowing 25,000 -- Repayments of long-term debt and capital leases (35,747) (1,505) Proceeds from sale/leaseback 1,000 -- Purchase of shares for treasury (422) (225) Cash dividends paid (940) (927) Other financing activities -- 5 -------- -------- Net cash provided by (used for) financing activities (10,809) 2,648 Net decrease in cash and equivalents (6,257) (3,672) Cash and equivalents at beginning of period 30,520 33,546 -------- -------- Cash and equivalents at end of period $ 24,263 $ 29,874 ======== ======== See notes to condensed consolidated financial statements. 4 MARSH SUPERMARKETS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share amounts, or as otherwise noted) JUNE 19, 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 27, 1999. The balance sheet at March 27, 1999, 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 "2000" and "1999" relate to the fiscal years ending April 1, 2000 and March 27, 1999, respectively. The condensed consolidated financial statements for the twelve week periods ended June 19, 1999 and June 20, 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 consolidated basis, the financial position, results of operations and cash flows for the periods presented. Certain items in the 1999 condensed consolidated financial statements were reclassified to conform with the 2000 presentation. Operating results for the twelve week period ended June 19, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 1, 2000. NOTE B - LONG-TERM DEBT AND GUARANTOR SUBSIDIARIES 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 $150.0 million of 8 7/8% Senior Subordinated 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 believes that such information is not material to investors. Summarized combined financial information for the Guarantors is set forth below: June 19, March 27, June 20, 1999 1999 1998 -------- -------- -------- Current assets $178,071 $178,504 $161,626 Current liabilities 114,820 111,778 109,859 Noncurrent assets 285,434 280,966 257,368 Noncurrent liabilities 61,647 71,249 38,182 12 Weeks Ended ---------------------------- June 19, June 20, 1999 1998 -------- -------- Total revenues $394,262 $360,619 Gross profit 98,079 89,406 Net income 6,520 6,352 5 NOTE C - 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: 12 Weeks Ended ---------------------------- June 19, June 20, 1999 1998 ------- ------- Numerator for earnings per share $ 3,281 $ 3,028 Effect of convertible debentures 214 216 ------- ------- Numerator for diluted earnings per share - income after assumed conversions $ 3,495 $ 3,244 ======= ======= Weighted average shares outstanding 8,511 8,421 Non-vested restricted shares (178) (151) ------- ------- Denominator for earnings per share 8,333 8,270 Effect of dilutive securities: Non-vested restricted shares 178 151 Employee stock options 26 108 Convertible debentures 1,290 1,290 ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 9,827 9,819 ======= ======= NOTE D - BUSINESS SEGMENTS The Company operates within two business segments; the retail sale of food and related products through supermarkets, convenience stores and food services, and the wholesale distribution of food and related products by CSDC, principally to unaffiliated convenience stores. Segment information is set forth in the following table: Retail Wholesale Consolidated ------ --------- ------------ Twelve weeks ended June 19, 1999 External revenues $314,495 $79,771 $394,266 Intersegment revenues 7,743 21,345 29,088 Income before income taxes 4,342 607 4,949 Twelve weeks ended June 20, 1998 External revenues $290,675 $69,947 $360,622 Intersegment sales 7,111 18,193 25,304 Income before income taxes 3,530 993 4,523 6 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 due to known and unknown risks and uncertainties which 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 matters, 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: First Quarter ----------------------------------------- Percentage of Revenues ----------------------- Percentage 2000 1999 Change ------ ------ ---------- Sales and other revenues 100.0% 100.0% 9.3% Gross profit 24.9% 24.8% 9.7% Selling, general and administrative 21.0% 21.0% 9.4% Depreciation and amortization 1.4% 1.4% 11.4% Operating income 2.5% 2.4% 11.5% Interest and debt expense amortization 1.2% 1.2% 13.7% Income taxes 0.4% 0.4% 11.6% Net income 0.8% 0.8% 8.4% SALES AND OTHER REVENUES In the first quarter of 2000, consolidated sales and other revenues increased $33.6 million, or 9.3%, compared to the first quarter of 1999, to $394.3 million. Supermarket revenues increased $16.1 million, Village Pantry revenues increased $5.8 million, CSDC revenues increased $9.8 million and Crystal Food Service revenues increased $1.8 million. Retail sales (excluding fuel sales) increased 7.0% from the prior year quarter. Sales in comparable supermarkets and convenience stores, including replacement stores and format conversions, increased 5.7% from the first quarter of 1999. Approximately 75% of the increase in supermarket revenues was attributable to comparable store gains with the remaining 25% from new stores. The increase in Village Pantry revenues was nearly evenly split between inside store revenues and gains in fuel gallons sold. The increase in CSDC revenues was essentially attributable to higher cigarette manufacturer prices passed on to customers. 7 GROSS PROFIT Gross profit is calculated net of warehousing, transportation, and promotional expenses. In the first quarter of 2000, consolidated gross profit increased $8.7 million, or 9.7%, to $98.1 million from $89.4 million for the year earlier quarter as a result of both increased sales and improved gross profit percentages. As a percentage of revenues, gross profit was 24.9% in the first quarter of 2000 compared to 24.8% for the prior year. Gross profit increased in supermarkets, Village Pantry and Crystal Food Service, but declined in CSDC. Gross profit as a percentage of revenues increased in supermarkets, declined in Village Pantry due to competitive pressures and as a result of higher fuel sales at a gross profit rate lower than that achieved on inside sales, declined in CSDC due to competitors' cigarette pricing and declined in Crystal Food Service. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the first quarter of 2000, selling, general and administrative (SG&A) expenses increased $7.1 million, or 9.4%, to $82.8 million from $75.7 million for the comparable quarter of 1999. As a percentage of revenues, SG&A expenses were 21.0% in both quarters. The higher expenses were primarily attributable to a $4.6 million increase in wage and fringe benefits costs, a $1.4 million increase in advertising and a $1.5 million increase in other store operating costs. Wage expense in stores open both quarters, excluding supermarket conversions to the LoBill format, increased 1.8% due to wage rate increases and increased labor hours resulting from same store sales gains. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense for the first quarter of 2000 was $5.5 million, compared to $4.9 million for the 1999 quarter. As a percentage of revenues, depreciation and amortization expense was 1.4% for both quarters. OPERATING INCOME Operating income (income from continuing operations before interest and taxes) increased $1.0 million to $9.8 million for the first quarter of 2000 from $8.8 million for the first quarter of 1999. Operations contributed $0.5 million of the increase, with $0.5 million resulting from the disposal of assets. Operating income, as a percentage of revenues, was 2.5% for the first quarter of 2000, compared to 2.4% for the first quarter of 1999. INTEREST EXPENSE Interest expense for the first quarter of 2000 was $4.9 million, compared to $4.3 million in the first quarter of 1999 and, as a percentage of revenues, was 1.2% in both quarters. INCOME TAXES For the quarter ended June 19, 1999, the effective income tax rate was 33.7% compared to 33.1% for the year earlier quarter. The first quarter effective rate is based on the overall expected rate for 2000. NET INCOME Net income for the first quarter of fiscal 2000 was $3.3 million, compared to $3.0 million for the first quarter of 1999. As a percentage of revenues, net income was 0.8% in both quarters. 8 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 quarter of 2000, the following stores were opened, acquired, remodeled, converted or were under construction: Square Store Type Category Feet Location Status ---------- -------- ---- -------- ------ Supermarket Replacement 64,000 Indianapolis, Ind. Open Supermarket New 65,000 Carmel, Ind. Under construction Supermarket Replacement 65,000 Brownsburg, Ind. Under construction LoBill Conversion 30,000 Indianapolis, Ind. Open LoBill Acquired 12,000 Pendleton, Ind. Open LoBill Acquired 17,000 Peru, Ind. Open Subsequent to the end of the quarter, the Company purchased two convenience stores in Indianapolis and agreed in principle to purchase two supermarkets in Richmond, Indiana. In 2000, the Company also plans to open a replacement supermarket, remodel one supermarket, open a new LoBill, open ten to 12 new convenience stores and acquire several sites for future development. The cost of these projects and other capital commitments is estimated to be $85.0 million. Of this amount, the Company plans to fund $15.0 million through equipment leasing, $40.0 million through sale/leasebacks and believes it can finance the balance with current cash balances and internally generated funds. As of June 19, 1999, the Company had expended $6.8 million for capital expenditures. The Company's plans with respect to store construction, expansion, conversion and remodeling may be revised in light of changing conditions, such as competitive influences, its ability to successfully negotiate 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 projects described above may not commence, others may be added, a portion of the planned expenditures with respect to projects commenced during the current fiscal year may carry over to the subsequent fiscal year, and the Company may use other or different financing arrangements. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities in the first quarter of 2000 was $14.3 million, compared to $13.3 million in the first quarter of 1999. The improvement in net cash provided by operating activities is due primarily to higher non-cash charges for depreciation and amortization and a decrease in prepaid expenses, net of a decrease in deferred income taxes. Working capital decreased $11.5 million from March 27, 1999. The significant changes in working capital were a $6.3 million decrease in cash and equivalents, a $3.9 million increase in accounts receivable, a $5.0 million decrease in prepaid expenses and a $4.4 million increase in accounts payable. At June 19, 1999, the Company's bank revolving credit agreements provided $50.0 million of available financing, of which $15.0 million was utilized. Commitments from various banks for short-term borrowings provided an additional $20.0 million available at rates at or below the prime rates of the committed banks, of which $0.3 million was utilized at June 19, 1999. The Company believes amounts available 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, debt service obligations and capital expenditures for the foreseeable future. 9 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: - ---------------------------------------------------------------------------------------------------------------------------- Project segment Remediation phase Testing phase Implementation phase - ---------------------------------------------------------------------------------------------------------------------------- IT areas: Mainframe and 90% complete 82% complete 77% complete central servers Expected completion Sept. 1999 Expected completion Sept. 1999 Expected completion Oct. 1999 Stores 100% complete 73% complete 65% complete Expected completion Aug. 1999 Expected completion Sept. 1999 Distribution 95% complete 89% complete 89% complete centers/other Expected completion Sept. 1999 Expected completion Sept. 1999 Expected completion Oct. 1999 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Non-IT areas 90% complete 90% complete 90% complete Expected completion Aug. 1999 Expected completion Aug. 1999 Expected completion Sept. 1999 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Third parties 25% complete Not applicable Not applicable Expected completion Sept. 1999 - ---------------------------------------------------------------------------------------------------------------------------- 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 $15.8 million, of which $15.5 million will be capitalized and $0.3 million will be charged to expense. The cost includes replacement of inventory procurement/distribution systems for both supermarkets and CSDC aggregating approximately $14.4 million. As of June 19, 1999, the Company had expended $12.6 million, of which $12.3 million was capitalized and $0.3 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. Such an event could have a material adverse impact on the Company's operating results and financial position. Contingency plans to address that risk have not been fully developed, however, the Company is scheduled to install Year 2000 compliant software in August 1999. No IT projects have been delayed as a result of the Year 2000 compliance effort that would have a material effect on the Company's operating results or financial position. 10 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 the quarter for which this report is filed. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 11 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. July 27, 1999 By: /s/ Douglas W. Dougherty ----------------------------------------- Douglas W. Dougherty Senior Vice President, Chief Financial Officer and Treasurer July 27, 1999 By: /s/ Mark A. Varner ----------------------------------------- Mark A. Varner Corporate Controller 12 Exhibit Index Exhibit 27 - Financial Data Schedule for the quarter for which this report is filed (for SEC use only). 13 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S 10-Q FOR THE PERIOD ENDED JUNE 19, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. S-X) and (ii) $82,806 of Selling, General and Administrative Expenses (Item 5-03(b)4 of Regulation S-X). -----END PRIVACY-ENHANC