-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiBCsfbt7Bj/HEJ5W6xCqbyctxENmwtTe9OJ+dr7PucUvI32LnjbRdeGKKrPR3nC RUzsACQ9s4Fj+x20XBldvg== 0000950144-99-001830.txt : 19990217 0000950144-99-001830.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950144-99-001830 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSH SUPERMARKETS INC CENTRAL INDEX KEY: 0000062737 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 350918179 STATE OF INCORPORATION: IN FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01532 FILM NUMBER: 99540353 BUSINESS ADDRESS: STREET 1: 9800 CROSSPOINT BLVD CITY: INDIANAPOLIS STATE: IN ZIP: 46256 BUSINESS PHONE: 3175942100 10-Q 1 MARSH SUPERMARKETS, INC. 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: Class A Common Stock - 4,016,733 shares Class B Common Stock - 4,488,765 shares --------- 8,505,498 shares =========
2 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 40 Weeks Ended --------------------- -------------------------- January 2, January 3, January 2, January 3, 1999 1998 1999 1998 -------- -------- ---------- ----------- 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 ======== ======== ========== ===========
See notes to condensed consolidated financial statements. 3 MARSH SUPERMARKETS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
January 2, March 28, January 3, 1999 1998 1998 --------- --------- -------- (Unaudited) (Note A) (Unaudited) 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 ========= ========= ========
See notes to condensed consolidated financial statements 4 MARSH SUPERMARKETS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
40 Weeks Ended --------------------------------- January 2, January 3, 1999 1998 -------- --------- 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 ======== =========
See notes to condensed consolidated financial statements. 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. 6 Summarized combined financial information for the Guarantors is set forth below:
January 2, March 28, January 3, 1999 1998 1998 -------- -------- -------- 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
12 Weeks Ended 40 Weeks Ended --------------------------- ----------------------------- January 2, January 3, January 2, January 3, 1999 1998 1999 1998 -------- -------- ---------- ---------- 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
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):
12 Weeks Ended 40 Weeks Ended --------------------------- ----------------------------- January 2, January 3, January 2, January 3, 1999 1998 1999 1998 -------- -------- ---------- ---------- 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 ======== ======== ========== ==========
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. 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:
Third Quarter Year - to - Date --------------------------------- ---------------------------------- Percent of Revenues Percent Percent of Revenues Percent 1999 1998 Change 1999 1998 Change ---- ---- ------ ---- ---- ------ 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%
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. 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. 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. 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:
Square Store Type Category Feet Location Status ---------- -------- ---- -------- ------ 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
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. 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:
- ------------------------------------------------------------------------------------------------------------------------------ Project segment Remediation phase Testing phase Implementation phase - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
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. 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. 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. 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS MAR-27-1999 JAN-02-1999 33,423 0 36,715 0 100,766 177,599 419,838 153,443 500,634 129,782 215,238 0 0 8,505,498 97,037 500,634 1,232,147 1,232,147 927,364 1,187,672 16,789 0 14,914 12,772 4,090 8,682 0 0 0 8,682 1.05 .96 Number of Class A and Class B shares outstanding 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). Multiplier is 1 for per share data.
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