MARSH SUPERMARKETS INC - 10-Q Quarterly Report

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares outstanding of each class of the registrant’s common stock as of January 31, 2004:

MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)


	12 Weeks Ended					40 Weeks Ended

	January 3,		January 4,			January 3,			January 4,
	2004		2003			2004			2003

Sales and other revenues	$	388,417	$	382,305		$	1,275,382		$	1,278,522
Gains from sales of property		354		406			2,168			3,952

Total revenues		388,771		382,711			1,277,550			1,282,474
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		270,889		268,878			893,353			895,128

Gross profit		117,882		113,833			384,197			387,346
Selling, general and administrative		103,874		101,586			344,046			343,239
Depreciation		5,781		5,633			19,203			18,750

Operating income		8,227		6,614			20,948			25,357
Interest		4,268		5,416			14,763			18,249
Other non-operating income		—		(971	)		(961	)		(971	)

Income from continuing operations before income taxes		3,959		2,169			7,146			8,079
Income taxes		1,635		965			2,881			3,390

Income from continuing operations		2,324		1,204			4,265			4,689
Gain (loss) on disposal of discontinued operation, net of tax		—		25			—			(174	)

Net income	$	2,324	$	1,229		$	4,265		$	4,515

Basic earnings per common share:
Continuing operations	$	.29	$	.15		$	.54		$	.59
Gain (loss) on disposal of discontinued operation		—		—			—			(.02	)

Net income	$	.29	$	.15		$	.54		$	.57

Diluted earnings per common share:
Continuing operations	$	.29	$	.15		$	.53		$	.57
Gain (loss) on disposal of discontinued operation		—		—			—			(.02	)

Net income	$	.29	$	.15		$	.53		$	.55

Dividends per share	$	.13	$	.11		$	.39		$	.33


					January 3,			March 29,			January 4,
					2004			2003			2003

					(Unaudited)			(Note A)			(Unaudited)
Assets
Current assets:
	Cash and equivalents				$	36,609		$	28,313		$	36,634
	Accounts receivable					26,073			27,203			35,594
	Inventories					128,064			130,297			136,609
	Prepaid expenses					6,420			5,731			5,898
	Recoverable income taxes					2,764			—			—

			Total current assets			199,930			191,544			214,735
Property and equipment, less allowances for depreciation						299,150			311,469			308,258
Other assets						51,893			46,309			47,234

					$	550,973		$	549,322		$	570,227

Liabilities and Shareholders’ Equity
Current liabilities:
	Notes payable to bank				$	—		$	1,700		$	—
	Accounts payable					78,633			71,883			77,953
	Accrued liabilities					51,936			49,665			52,141
	Current maturities of long-term liabilities					3,364			3,452			3,389

				Total current liabilities		133,933			126,700			133,483
Long-term liabilities:
	Long-term debt					181,755			198,148			203,002
	Capital lease obligations					28,442			29,009			29,225

				Total long-term liabilities		210,197			227,157			232,227
Deferred items:
	Income taxes					15,501			9,606			19,297
	Pension and post-retirement benefits					45,748			40,824			23,439
	Other					16,592			17,226			18,215

				Total deferred items		77,841			67,656			60,951
Shareholders’ Equity:
	Common stock, Classes A and B					26,455			26,439			26,424
	Retained earnings					133,081			131,911			137,423
	Cost of common stock in treasury					(15,062	)		(14,928	)		(14,704	)
	Notes receivable – stock options					(74	)		(175	)		(173	)
	Deferred cost restricted stock					(14	)		(54	)		(80	)
	Accumulated other comprehensive loss					(15,384	)		(15,384	)		(5,324	)

		Total shareholders’ equity				129,002			127,809			143,566

					$	550,973		$	549,322		$	570,227

MARSH SUPERMARKETS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


		40 Weeks Ended

		January 3,			January 4,
		2004			2003

Operating activities
Net income		$	4,265		$	4,515
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation		19,203			18,750
	Amortization of other assets		855			1,161
	Changes in operating assets and liabilities		10,426			12,341
	Other operating activities		2,084			(1,152	)

Net cash provided by operating activities			36,833			35,615
Investing activities
Net acquisition of property, equipment and land			(7,070	)		(33,305	)
Other investing activities			(1,788	)		(349	)

Net cash used for investing activities			(8,858	)		(33,654	)
Financing activities
Payments of short-term borrowing			(1,700	)		(1,300	)
Proceeds from long-term borrowings			45,000			29,000
Payments of long-term debt and capital leases			(62,048	)		(64,036	)
Proceeds from sale/leasebacks			2,286			36,297
Purchase of shares for treasury			(177	)		(325	)
Cash dividends paid			(3,099	)		(2,630	)
Other financing activities			59			151

Net cash used for financing activities			(19,679	)		(2,843	)

Net increase (decrease) in cash and equivalents			8,296			(882	)
Cash and equivalents at beginning of period			28,313			37,516

Cash and equivalents at end of period		$	36,609		$	36,634

MARSH SUPERMARKETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts or as otherwise noted)

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 accounting principles generally accepted in the United States. This report should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended March 29, 2003. The balance sheet at March 29, 2003, 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 “2004” and “2003” relate to the fiscal years ending March 27, 2004 and March 29, 2003, respectively.

The condensed consolidated financial statements for the twelve and forty week periods ended January 3, 2004 and January 4, 2003, 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 amounts in the 2003 financial statements were reclassified to conform with the 2004 presentation.

Operating results for the forty week period ended January 3, 2004 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 27, 2004.

In October 2001, the Company completed the sale of certain assets of its wholesale division. The loss on disposal of discontinued operations reported in the condensed consolidated statements of income relates primarily to adjustments to accounts receivable and a workers compensation reserve attributable to that division. The remaining assets and liabilities from the discontinued operation included in the condensed consolidated balance sheet at January 3, 2004, were not material.

The following table sets forth the computation of the numerators and denominators used in the computation of basic and diluted earnings per common share:


		12 Weeks Ended						40 Weeks Ended

		January 3,			January 4,			January 3,			January 4,
		2004			2003			2004			2003

Income from continuing operations		$	2,324		$	1,204		$	4,265		$	4,689
Gain (loss) on disposal of discontinued operation			—			25			—			(174	)

Numerator for basic earnings per share			2,324			1,229			4,265			4,515
Effect of convertible debentures			—			179			—			620

Numerator for diluted earnings per share - income after assumed conversions		$	2,324		$	1,408		$	4,265		$	5,135

Weighted average shares outstanding			7,938			7,962			7,946			7,970
	Non-vested restricted shares		(3	)		(24	)		(4	)		(26	)

Denominator for basic earnings per share			7,935			7,938			7,942			7,944
Effect of dilutive securities:
	Non-vested restricted shares		3			24			4			26
	Stock options		42			80			56			163
	Convertible debentures		—			1,284			—			1,284

Denominator for diluted earnings per share - adjusted weighted average shares			7,980			9,326			8,002			9,417

The Company’s stock option plans are accounted for under the intrinsic value method of APB Opinion 25 and related interpretations. Since the exercise price of options granted under the plans is equal to the market price of the underlying common stock on the grant date, no stock-based compensation cost is recognized in net income.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123:


		12 Weeks Ended						40 Weeks Ended

		January 3,			January 4,			January 3,			January 4,
		2004			2003			2004			2003

Net income, as reported		$	2,324		$	1,229		$	4,265		$	4,515
Less compensation expense using the fair value method, net of tax			(184	)		(255	)		(610	)		(810	)

Pro-forma net income		$	2,140		$	974		$	3,655		$	3,705

Earnings per share, as reported:
	Basic	$	.29		$	.15		$	.54		$	.57
	Diluted		.29			.15			.53			.55
Earnings per share, pro-forma:
	Basic		.27			.12			.46			.47
	Diluted		.27			.12			.46			.46

During the forty weeks ended January 3, 2004, the Company purchased and retired $16.8 million of its 8 7/8% senior subordinated notes at less than face value resulting in gains of $1.0 million. The balance of senior subordinated notes at January 3, 2004, was $102.8 million.

In October 2003, the Company’s revolving credit facility was amended with the effect of a) decreasing permitted borrowings to $82.5 million from $95.0 million, b) increasing the carrying cost of land and buildings securing the facility to $73.5 million from $49.6 million, and c) modifying the measures of certain debt covenants.

Other than three minor 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 8 7/8% senior subordinated notes. The Guarantors are wholly owned subsidiaries of the Company.


			Guarantor		Consolidating
	Parent		subsidiaries		entries			Total

Sales and other revenues	$	1,131	$	388,419	$	(1,133	)	$	388,417
Gains from sales of property		—		354		—			354

Total revenues		1,131		388,773		(1,133	)		388,771
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—		270,889		—			270,889

Gross profit		1,131		117,884		(1,133	)		117,882
Selling, general and administrative		633		104,374		(1,133	)		103,874
Depreciation		88		5,693		—			5,781

Operating income		410		7,817		—			8,227
Interest		407		3,861		—			4,268

Income from continuing operations before income taxes		3		3,956		—			3,959
Income taxes		1		1,634		—			1,635

Income from continuing operations	$	2	$	2,322	$	—		$	2,324


				Guarantor		Consolidating
	Parent			subsidiaries		entries			Total

Sales and other revenues	$	1,169		$	382,298	$	(1,162	)	$	382,305
Gains from sales of property		—			406		—			406

Total revenues		1,169			382,704		(1,162	)		382,711
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—			268,878		—			268,878

Gross profit		1,169			113,826		(1,162	)		113,833
Selling, general and administrative		915			101,833		(1,162	)		101,586
Depreciation		321			5,312		—			5,633

Operating income (loss)		(67	)		6,681		—			6,614
Interest		391			5,025		—			5,416
Other non-operating income		(971	)		—		—			(971	)

Income from continuing operations before income taxes		513			1,656		—			2,169
Income taxes		208			757		—			965

Income from continuing operations	$	305		$	899	$	—		$	1,204


				Guarantor		Consolidating
	Parent			subsidiaries		entries			Total

Sales and other revenues	$	3,779		$	1,275,379	$	(3,776	)	$	1,275,382
Gains from sales of property		—			2,168		—			2,168

Total revenues		3,779			1,277,547		(3,776	)		1,277,550
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—			893,353		—			893,353

Gross profit		3,779			384,194		(3,776	)		384,197
Selling, general and administrative		2,096			345,726		(3,776	)		344,046
Depreciation		1,049			18,154		—			19,203

Operating income		634			20,314		—			20,948
Interest		1,388			13,375		—			14,763
Other non-operating income		(961	)		—		—			(961	)

Income from continuing operations before income taxes		207			6,939		—			7,146
Income taxes		85			2,796		—			2,881

Income from continuing operations	$	122		$	4,143	$	—		$	4,265


				Guarantor		Consolidating
	Parent			subsidiaries		entries			Total

Sales and other revenues	$	3,840		$	1,278,487	$	(3,805	)	$	1,278,522
Gains from sales of property		—			3,952		—			3,952

Total revenues		3,840			1,282,439		(3,805	)		1,282,474
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—			895,128		—			895,128

Gross profit		3,840			387,311		(3,805	)		387,346
Selling, general and administrative		2,399			344,645		(3,805	)		343,239
Depreciation		1,064			17,686		—			18,750

Operating income		377			24,980		—			25,357
Interest		1,587			16,662		—			18,249
Other non-operating expense		(971	)		—		—			(971	)

Income (loss) from continuing operations before income taxes		(239	)		8,318		—			8,079
Income taxes (benefit)		(100	)		3,490		—			3,390

Income (loss) from continuing operations	$	(139	)	$	4,828	$	—		$	4,689


						Guarantor
			Parent			subsidiaries		Total

Assets
Current assets:
	Cash and equivalents		$	—		$	36,609	$	36,609
	Accounts receivable			—			26,073		26,073
	Inventories			—			128,064		128,064
	Prepaid expenses			—			6,420		6,420
	Recoverable income taxes			743			2,021		2,764

		Total current assets		743			199,187		199,930
Property and equipment, less allowances for depreciation				33,005			266,145		299,150
Other assets				4,048			47,845		51,893

			$	37,796		$	513,177	$	550,973

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	—		$	78,633	$	78,633
	Accrued liabilities			9,335			42,601		51,936
	Current maturities of long-term liabilities			1,547			1,817		3,364

		Total current liabilities		10,882			123,051		133,933
Long-term liabilities:
	Long-term debt			112,566			69,189		181,755
	Capital lease obligations			—			28,442		28,442

		Total long-term liabilities		112,566			97,631		210,197
Deferred items:
	Income taxes			15,501			—		15,501
	Pension and post-retirement benefits			41,435			4,313		45,748
	Other			58			16,534		16,592

		Total deferred items		56,994			20,847		77,841
Amounts due parent from subsidiaries				(149,908	)		149,908		—
Shareholders’ Equity:
	Common stock, Classes A and B			26,455			—		26,455
	Retained earnings			11,341			121,740		133,081
	Cost of common stock in treasury			(15,062	)		—		(15,062	)
	Deferred cost — restricted stock			(14	)		—		(14	)
	Notes receivable — stock options			(74	)		—		(74	)
	Accumulated other comprehensive loss			(15,384	)		—		(15,384	)

		Total shareholders’ equity		7,262			121,740		129,002

			$	37,796		$	513,177	$	550,973


						Guarantor
			Parent			subsidiaries		Total

Assets
Current assets:
	Cash and equivalents		$	—		$	28,313	$	28,313
	Accounts receivable			—			27,203		27,203
	Inventories			—			130,297		130,297
	Prepaid expenses			—			5,731		5,731

Total current assets				—			191,544		191,544
Property and equipment, less allowances for depreciation				33,777			277,692		311,469
Other assets				4,484			41,825		46,309

			$	38,261		$	511,061	$	549,322

Liabilities and Shareholders’ Equity
Current liabilities:
	Notes payable to bank		$	—		$	1,700	$	1,700
	Accounts payable			—			71,883		71,883
	Accrued liabilities			6,317			43,348		49,665
	Current maturities of long-term liabilities			1,435			2,017		3,452

		Total current liabilities		7,752			118,948		126,700
Long-term liabilities:
	Long-term debt			130,367			67,781		198,148
	Capital lease obligations			—			29,009		29,009

		Total long-term liabilities		130,367			96,790		227,157
Deferred items:
	Income taxes			9,606			—		9,606
	Pension and post-retirement benefits			36,700			4,124		40,824
	Other			61			17,165		17,226

		Total deferred items		46,367			21,289		67,656
Amounts due parent from subsidiaries				(156,425	)		156,425		—
Shareholders’ Equity:
	Common stock, Classes A and B			26,439			—		26,439
	Retained earnings			14,302			117,609		131,911
	Cost of common stock in treasury			(14,928	)		—		(14,928	)
	Deferred cost — restricted stock			(54	)		—		(54	)
	Notes receivable — stock options			(175	)		—		(175	)
	Accumulated other comprehensive loss			(15,384	)		—		(15,384	)

		Total shareholders’ equity		10,200			117,609		127,809

			$	38,261		$	511,061	$	549,322


				Guarantor
	Parent			subsidiaries			Total

Net cash provided by operating activities	$	20,952		$	15,881		$	36,833
Net cash used for investing activities		(60	)		(8,798	)		(8,858	)
Financing activities
Repayments of short-term borrowings		—			(1,700	)		(1,700	)
Proceeds of long-term borrowings		—			45,000			45,000
Proceeds of sale leaseback/capital lease obligations		—			2,286			2,286
Repayments of long-term debt and capital leases		(17,689	)		(44,359	)		(62,048	)
Cash dividends paid		(3,099	)		—			(3,099	)
Other financing activities		(104	)		(14	)		(118	)

Net cash provided by (used for) financing activities		(20,892	)		1,213			(19,679	)

Net decrease in cash and equivalents		—			8,296			8,296
Cash and equivalents at beginning of period		—			28,313			28,313

Cash and equivalents at end of period	$	—		$	36,609		$	36,609


				Guarantor
	Parent			subsidiaries			Total

Net cash provided by operating activities	$	19,813		$	15,802		$	35,615
Net cash used for investing activities		(1,007	)		(32,647	)		(33,654	)
Financing activities
Repayments of short-term borrowings		—			(1,300	)		(1,300	)
Proceeds of long-term borrowings		—			29,000			29,000
Proceeds of sales leaseback/capital lease obligation		—			36,297			36,297
Repayments of long-term debt and capital leases		(15,812	)		(48,224	)		(64,036	)
Cash dividends paid		(2,630	)		—			(2,630	)
Other financing activities		(364	)		190			(174	)

Net cash provided by (used for) financing activities		(18,806	)		15,963			(2,843	)

Net decrease in cash and equivalents		—			(882	)		(882	)
Cash and equivalents at beginning of period		—			37,516			37,516

Cash and equivalents at end of period	$	—		$	36,634		$	36,634

In April 2002, the FASB issued Statement No. 145 (FAS 145), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” Certain provisions of FAS 145 were effective for the Company in fiscal year 2003. The remaining provisions became effective for the Company’s current fiscal year and had no effect on the Company’s results of operations or financial position for the current quarter.

In 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” The broad-based effective date of FIN 46 is deferred for public companies until the end of periods ending after March 15, 2004, for non-special purpose interests. The Company does not believe the issuance of FIN 46 will have a material impact on its financial position or results of operations.

In April, 2003, the FASB issued Statement No. 149 (FAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” FAS 149 is to be applied prospectively to contracts entered into or modified after June 30, 2003. The adoption of FAS 149 did not have a material impact on the financial position or results of operations of the Company.

In May 2003, the FASB issued Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). FAS 150 was effective for the Company in the current quarter and the adoption did not have a material impact on the financial position or results of operations of the Company.

EITF (Emerging Issues Task Force) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, became effective as to the Company on January 1, 2003. This issue addresses the appropriate accounting for consideration received from a vendor. As a result of this guidance, the Company has adopted a new policy for recognizing slotting allowances and similar consideration received from vendors. Allowances that are related to a specific purchase quantity will continue to be recorded as a component of the item cost of inventory and recognized in merchandise costs when the item is sold. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a systematic and rational methodology, which results in the recognition of these incentives when the related merchandise is sold. Under the Company’s previous accounting policy for vendor allowances, those credits were recognized as a reduction to cost of goods sold when the Company had fulfilled its obligations under the related contract. In connection with the implementation of this new accounting policy, the Company applied the provisions of EITF No. 02-16 prospectively, which resulted in deferring recognition of $5.6 million of allowances at March 29, 2003, and $4.4 million at January 3, 2004. This deferral reflects an adjustment of the Company’s inventory balance. The change did not have a material impact on the results of operations of the Company for the twelve weeks ended January 3, 2004.

At January 3, 2004, Marsh Supermarkets, Inc. (the “Company” or “Marsh”) operated through wholly-owned subsidiaries 113 supermarkets and 166 Village Pantry convenience stores in central Indiana and western Ohio. The Company believes that Marsh supermarkets have one of the largest market shares of supermarket chains operating in its market area and Village Pantry has one of the largest market shares of convenience stores in its market area. Marsh also owns and operates Crystal Food Services, which provides upscale and mid-level catering, vending, concession, coffee roasting and distribution, and business cafeteria management services, and McNamara, which operates six upscale retail floral shops under the name of McNamara and one business florist under the name Enflora.

Revenues from supermarket operations represented 80.0% of total revenues for the forty weeks ended January 3, 2004, while convenience stores and foodservices contributed 15.5% and 3.3% of revenues, respectively. Sales

are generally for cash. Data from various non-affiliated sources reported Marsh supermarkets market share at #1 or #2 in its marketing area as of August 2003.

The Company’s efforts to increase revenues have been affected primarily by competitive store openings and remodels and the challenging local economy. The rate of competitive store openings has slowed during the current year; at January 3, 2004, there were 8 major competitors’ stores opened or remodeled within the last 12 months, compared to 20 at January 2003 and 16 at January 2002. The Company believes the number of competitors’ new store openings has peaked, however it is expected that new stores will continue to be opened in the market. Employment in Indianapolis declined 1.2% from December 2002 to December 2003.

The Company’s ability to increase gross profit rates has been hindered by competitive pricing and promotional activity for the past several quarters. However, the Company’s promotional spending for the twelve weeks ended January 3, 2004 was significantly lower than the year earlier period. Future levels of promotional spending will be dictated primarily by competitive pressures.

Given the continued pressures on revenues and gross profit rates, the Company’s management has intensified efforts on merchandising plans, expense reduction, asset management and cash flow.

The Company believes it is differentiated from its competitors by its marketing and merchandising. Two new “lifestyle” supermarkets have been opened in the past ninety days, with one store in a new market. The Company believes product placement and presentation in the new stores is dramatically different from both the Company’s traditional supermarkets and competitors’ stores. The new lifestyle stores are designed to complement the Company’s emphasis on the fresh departments, which include meat, deli, bakery and produce, and also to better align category placement to customer shopping patterns. While it is too early to predict the success of the new format, customer acceptance, in the short term, has been good. The Company expects to take the new format to other select sites outside its current marketing area.

In January 2003, management identified a number of potential cost improvement initiatives that the Company pursued during its third and fourth quarters of fiscal year 2003 and continuing in fiscal year 2004. Those initiatives included seeking greater efficiencies in store labor scheduling, changes to employee medical benefits plans, lowering interest expense by replacing fixed rate debt with lower variable rate debt, improvements in warehousing and delivery logistics, and many others. The initiatives completed to date have partially offset other increases in non-controllable and other selling, general and administrative expenses.

Employee medical costs can vary considerably from period to period and can be difficult to estimate due to the effects of high dollar claims, healthcare industry trends and plan changes. The Company made plan changes beginning in its fourth quarter of fiscal 2004 that are expected to reduce future medical costs. The accuracy of near-term estimates for claim reserves, typically based on historical experience, may be impacted by the lack of relevant experience under the modified plan.

Notes and accounts receivable are periodically evaluated for collectibility and valuation reserves are adjusted accordingly.

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 of Revenues
							Percent									Percent
	2004			2003			Change			2004			2003			Change

Total revenues		100.0	%		100.0	%		1.6	%		100.0	%		100.0	%		(0.4	%)
Gross profit		30.3	%		29.7	%		3.6	%		30.1	%		30.2	%		(0.8	%)
Selling, general and administrative		26.7	%		26.5	%		2.3	%		26.9	%		26.8	%		0.2	%
Depreciation		1.5	%		1.5	%		2.6	%		1.5	%		1.5	%		2.4	%
Operating income		2.1	%		1.7	%		24.4	%		1.6	%		2.0	%		(17.4	%)
Interest		1.1	%		1.4	%		(21.2	%)		1.2	%		1.4	%		(19.1	%)
Other non-operating income		—			0.3	%		n/m			0.1	%		0.1	%		(1.0	%)
Income taxes		0.4	%		0.3	%		69.4	%		0.2	%		0.3	%		(15.0	%)
Income from continuing operations		0.6	%		0.3	%		93.0	%		0.3	%		0.4	%		(9.0	%)

In the third quarter of 2004, consolidated total revenues were $388.8 million, compared to $382.7 million in the third quarter of 2003. Supermarket revenues increased $1.8 million, Village Pantry revenues increased $3.4 million and Crystal Food Service revenues increased $0.5 million. Consolidated total revenues for the third quarter of 2004, excluding fuel sales, increased 1.0% to $361.4 million from the third quarter of 2003. Sales in comparable supermarkets and convenience stores were essentially the same in the third quarter of both 2004 and 2003 at $361.0 million. Sales in comparable supermarkets and convenience stores, excluding fuel, decreased 0.8% to $333.8 million from $336.3 million in the third quarter of 2003. The Company excludes fuel sales from its analysis of revenues and comparable store sales and believes it is useful information for investors and the Company because fuel prices fluctuate widely and frequently. A store is included in comparable stores beginning in the four-week period after the store has been in operation a full year. Replacement stores and format conversions are included in the comparable store sales calculation. Competitors’ new store openings and continued high levels of competitive promotional activity combined with a weak economy continue to affect adversely comparable store sales. Consolidated total revenues for the third quarters of both 2004 and 2003 included $0.4 million gains from sales of property in the normal course of business. Although results may vary from period to period, future real estate gains are not expected to equal or exceed historical levels due to the limited real estate holdings available for sale in the normal course of business, which could materially adversely affect the Company’s results of operations.

For the forty weeks ended January 3, 2004, consolidated total revenues declined 0.4% to $1,277.6 million from the same forty-week period of 2003. Supermarket revenues decreased $17.6 million, Village Pantry revenues increased $8.3 million, Crystal Food Service revenues increased $4.2 million and gains from sales of real estate decreased $1.8 million. Consolidated total revenues, excluding fuel sales, declined 1.3% to $1,185.6 million in 2004 from $1,200.7 million in 2003. Sales in comparable supermarkets and convenience stores declined 1.3% to $1,186.4 million in 2004 from 2003. Sales in comparable supermarkets, excluding fuel sales, decreased 2.3% to $1,094.8 million in 2004. Competitors’ new store openings and continued high levels of competitive promotional activity combined with a weak economy continue to affect adversely comparable store sales. Consolidated total revenues for the forty weeks of 2004 included $2.2 million in gains from sales of real estate compared to $4.0 million for the year earlier period.

Gross profit is calculated net of promotional expenses, and warehousing and transportation, excluding depreciation. In the third quarter of 2004, consolidated gross profit increased $4.0 million, or 3.6%, to $117.9 million from the third quarter of 2003. As a percentage of total revenues, consolidated gross profit was 30.3% for the third quarter of 2004 compared to 29.7% for the year earlier quarter. As a percentage of revenues, gross profit increased in all retail operating divisions. The gross profit improvement as a percentage of revenues was primarily attributable to reduced promotional costs.

For the forty weeks ended January 3, 2004, consolidated gross profit decreased $3.1 million, or 0.8%, to $384.2 million from the same period of 2003. Gains from sales of real estate in the normal course of business account for $1.8 million of the decline from 2003 with the remaining decline due to the sales shortfall compared to the prior year. Consolidated gross profit as a percentage of revenues was 30.1% in 2004 compared to 30.2% in 2003. Excluding fuel, consolidated gross profit as a percentage of revenues was 31.6% for the forty weeks of both 2004 and 2003. Gross profit as a percentage of revenues improved slightly in supermarkets, increased in Crystal Food Services and decreased in Village Pantry.

Selling, general and administrative (SG&A) expenses include stores expenses, administrative and corporate expenses, purchasing personnel costs and advertising. In the third quarter of 2003, consolidated SG&A expenses increased $2.3 million, or 2.3%, to $103.9 million from the third quarter of 2003. As a percentage of total revenues, SG&A expenses were 26.7% in the third quarter of 2004 compared to 26.5% for the third quarter of 2003. Increases in fringe benefits, rent, repairs and liability insurance account for the bulk of the increase. Additionally, the third quarter of 2004 included $0.5 million in new store opening costs; no opening costs were incurred in the third quarter of 2003. Total wage expense in supermarkets and convenience stores decreased 1.1% due to a reduction in both overtime and regular hours worked. Wage expense in stores open both quarters, excluding supermarket conversions to the LoBill format, decreased 3.2% due to a reduction in hours worked. The use of improved labor scheduling techniques and store specific labor profiles primarily accounted for the reduction in hours worked.

For the forty weeks ended January 3, 2004, SG&A expenses increased $0.8 million, or 0.2%, to $344.0 million from the comparable forty weeks in 2003. As a percentage of total revenues SG&A expenses increased to 26.9% in 2004 from 26.8% in 2003 due primarily to increases in those items cited above and lower comparable store sales. Total wage expense in supermarkets and convenience stores decreased 3.2%. Wage expense in stores open both quarters, excluding supermarket conversions to the LoBill format, decreased 4.2% due to a reduction in hours worked, as discussed previously.

Depreciation expense for the third quarter of 2004 was $5.8 million, compared to $5.6 million for the third quarter of 2003. Depreciation expense as a percentage of revenues was 1.5% for the third quarter of both years.

For the forty weeks ended January 3, 2004, depreciation expense increased $0.4 million, or 2.4%, to $19.2 million from $18.8 million for the forty weeks in 2003. Depreciation expense as a percentage of revenues was 1.5% for the forty weeks of both 2004 and 2003.

Operating income (income from continuing operations before interest and taxes) was $8.2 million for the third quarter of 2004, compared to $6.6 million for the third quarter of 2003, with the increase attributable primarily to the higher gross profit. Operating income as a percentage of revenues was 2.1% for the third quarter of 2004, compared to 1.7% for the third quarter of 2003.

For the forty weeks ended January 3, 2004, operating income was $20.9 million compared to $25.4 million for the year earlier period. Lower gross profit and gains from real estate sales, combined with both slightly higher SG&A expense and depreciation expense account for the decrease. Operating income as a percentage of revenues was 1.6% for the forty weeks of 2004 and 2.0% for the forty weeks of 2003.

During the quarter ended January 4, 2003, the Company purchased $15.0 million of its 8 7/8% senior subordinated debentures in various transactions at less than face value. The transactions resulted in a gain, net of pro rata issuance costs, of $1.0 million.

During the first forty weeks of both 2004 and 2003, purchases of senior subordinated notes at less than face value resulted in gains of $1.0 million.

Interest expense for the third quarter of 2004 was $4.3 million compared to $5.4 million for the third quarter of 2003, with the decline attributable to both a lower total debt level and a higher portion of lower variable-rate debt. Interest expense as a percentage of revenues was 1.1% for the third quarter of 2004 compared to 1.4% for the third quarter of 2003.

For the forty weeks ended January 3, 2004, interest expense was $14.8 million compared to $18.2 million for the forty weeks of 2003 due again to the past repurchases of debt. Interest expense as a percentage of revenues was 1.2% for the forty weeks of 2004 and 1.4% for the forty weeks of 2003.

For the third quarter of 2004, the effective income tax rate was 41.3% compared to 44.5% for the prior year quarter. For the forty weeks ended January 3, 2004, the effective income tax rate was 40.3% compared to 42.0% for the comparable weeks of 2003.

Income from continuing operations for the third quarter of 2004 was $2.3 million compared to $1.2 million for the third quarter of 2003. Higher operating income in 2004 combined with lower interest expense accounts for the increase. Income from continuing operations as a percentage of revenues was 0.6% for the third quarter of 2004 compared to 0.3% for the third quarter of 2003.

For the forty weeks of 2004, income from continuing operations was $4.3 million compared to $4.7 million for the forty weeks of 2003. Lower operating income in 2004 was partially offset by lower interest expense. Income from continuing operations as a percentage of revenues was 0.3% for the forty weeks in 2004 compared to 0.4% for the forty weeks of 2003.

During fiscal year 2002, the Company sold certain assets of its wholesale division. The discontinued operation reported nominal income/expense for the third quarter and forty weeks ended in 2003, resulting from adjustments to assets and liabilities remaining after the sale.

Deferred pension and post-retirement benefit obligations increased to $45.7 million at January 3, 2004, from $40.8 million at March 29, 2003. The liability for an unfunded supplemental executive retirement plan increased $2.2 million due to higher age and service periods of the participants. The liability for a deferred compensation plan increased $1.8 million as a result of plan earnings and employee contributions.

The Company’s capital requirements have traditionally been financed through internally generated funds, long-term borrowings and lease financing, including capital and operating leases.

During the first three quarters of 2004, one new Marsh supermarket was opened, one Marsh supermarket was remodeled, one LoBill Foods was acquired, one Marsh supermarket was converted to the LoBill format and construction continued on a new Marsh supermarket that opened subsequent to the end of the quarter. Also, the convenience store re-imaging project was completed. During the remainder of 2004, the Company also plans to convert one supermarket to the LoBill format and open one new McNamara florist shop. For 2004, the cost of these projects and other capital commitments is estimated to be $52-62 million. Of this amount, the Company plans to fund $40 million through sale/leasebacks, $15 million through equipment leasing and the remainder from internally generated funds. For the forty weeks ended January 3, 2004, the Company had capital spending, including operating leases, of $42 million.

The Company’s plans with respect to store construction, expansion, conversion and remodeling are subject to known and unknown risks and uncertainties and may be revised in light of changing conditions, such as availability and cost of financing, competitive influences, its 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 projects described above may not commence, others may be added, a portion of 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.

Net cash provided by operating activities for the forty weeks ended January 3, 2004 was $36.8 million, compared to $35.6 million for the year earlier period. There were no significant changes in the components of net cash provided by operating activities from year to year. Working capital increased $1.1 million to $66.0 million from March 29, 2003. Changes in working capital included an $8.3 million increase in cash and equivalents and a $6.8 million increase in accounts payable, both due primarily to the timing of purchase of and subsequent payment for inventory.

The Company has an amended revolving credit facility that permits total borrowings of up to $82.5 million. Amounts borrowed are for terms selected by the Company at the time of borrowing. Interest rates are based on LIBOR or floating prime rate, and principal and interest are payable at maturity. Commitment fees of 0.5% are paid on unused amounts and the facility matures in February 2006. The Company had borrowings of $43.0 million under the facility at January 3, 2004. The credit facility is secured by land and buildings having a net carrying cost of $72.7 million at January 3, 2004 and the facility contains certain debt covenants, including limits on future indebtedness, cash dividends, repurchases of common stock and disposition of assets. Under the most restrictive debt covenant, the Company would have had additional permitted borrowing of $26.0 million as of January 3, 2004.

During the forty weeks ended January 4, 2003 the Company purchased and retired $16.8 million of its 8 7/8% senior subordinated notes in various transactions at less than face value funded by variable rate bank debt. The transactions resulted in gains of $1.0 million. The balance of senior subordinated notes outstanding at January 3, 2004, was $102.8 million.

The preparation of financial statements requires management to make assumptions and estimates that could have a material impact on the reported results of operations. While management applies its judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from those assumptions and it is possible that materially different amounts would be reported using different assumptions.

The Company is self-insured for most healthcare claims, workers compensation claims, and general liability and automotive liability losses. Reported claims and related loss reserves are estimated by third party administrators. Claims incurred but not reported are recorded based on historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances.

Pension and other retirement benefits are evaluated with the oversight of the Company’s retirement committee. Outside actuaries are consulted to determine appropriate assumptions and are engaged to perform the calculation of estimated future obligations. In 1997, the Company froze benefit accruals under its qualified defined benefit pension plan.

Long-lived assets are depreciated over estimated useful lives based on the Company’s historical experience and prevailing industry practice. Estimated useful lives are periodically reviewed to ensure they remain appropriate. Long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist.

Income tax assets and liabilities are recognized generally based upon tax statutes, regulations and case law, but also include estimates. The estimated amounts are reviewed periodically and adjusted based upon factual changes and the related impact on management’s judgment.

The Company receives allowances and credits from many of the vendors whose products the Company purchases for resale. Allowances that are related to a specific purchase quantity are recorded as a component of the item cost of inventory and recognized in merchandise costs when the item is sold. Other allowances include consideration received for new item introduction, item shelf placement and temporary retail price reduction. Due to system constraints and the nature of certain of these allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a systematic and rational methodology, which results in the recognition of these incentives when the related merchandise is sold for transactions entered into on or after January 1, 2003.

Notes and accounts receivable are reviewed for collectibility on a regular and periodic basis. Valuation allowances are adjusted for small recurring type transactions based on past experience, while large notes and amounts receivable are reviewed and allowances adjusted on a specific transaction basis.

This report includes certain forward-looking statements (statements other than those made solely with respect to historical fact). Actual results could differ materially and adversely from those contemplated by the forward-looking statements due to known and unknown risks and uncertainties, many of which are beyond the Company’s control. The forward-looking statements and the Company’s future results, liquidity and capital resources are subject to risks and uncertainties including, but not limited to, the following: the entry of new competitive stores and their impact on the Company; softness in the local and national economies and the general retail food industry; the level of discounting and promotional spending by competitors; the Company’s ability to improve comparable store sales; the Company’s ability to implement its improvement initiatives; the ability of the Company to predict and respond to changes in customer preferences and lifestyles; food price deflation; uncertainties regarding future real estate gains due to limited real estate holdings available for sale; stability and timing of distribution incentives from suppliers; the Company’s ability to control cost including labor, medical, rent, credit card, and workers compensation and general liability expense; the impact of any acquisitions and dispositions; the level of margins achievable in the Company’s operating divisions; uncertainties regarding gasoline prices and margins; the success of the Company’s new and remodeled stores, including image and rebranding programs; the successful economic implementation of new technology; uncertainties associated with pension and other retirement obligations; uncertainties related to state and federal taxation and tobacco and environmental legislation; the ability to collect outstanding notes and accounts receivable; the successful integration of acquisitions; potential interest rate increases on variable rate debt, as well as terms, costs, availability of capital; the timely and on budget completion of store construction, expansion, conversion and remodeling; the ability to complete share

repurchases, and other known and unknown risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

The Company, as a policy, does not engage in significant speculative or derivative transactions, nor does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities. Based on interest rates at January 3, 2004, a 100 basis point change in interest rates would not have had a material impact on the Company.

The Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company would be made known to them by others within the Company on a timely basis.

There was no change in the Company’s internal control over financial reporting during the quarter ended January 3, 2004, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Current Report on Form 8-K furnished to the SEC on November 25, 2003 — Item 12 “Results of Operations and Financial Condition.”

Notwithstanding the foregoing, information furnished under Item 12 of the Company’s Current Report on Form 8-K, including the related exhibits, is not incorporated by reference into this quarterly report on Form 10-Q.

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.


INDIANA		35-0918179
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


Class A Common Stock -	3,801,689	shares
Class B Common Stock -	4,136,161	shares

	7,937,850	shares


PART I FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Part II Other Information
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


	MARSH SUPERMARKETS, INC

February 17, 2004	By:	/s/ Douglas W. Dougherty

		Douglas W. Dougherty Senior Vice President, Chief Financial Officer and Treasurer

February 17, 2004	By:	/s/ Mark A. Varner

		Mark A. Varner Chief Accounting Officer, Vice President — Corporate Controller

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9800 CROSSPOINT BOULEVARD INDIANAPOLIS, INDIANA (Address of principal executive offices)		46256-3350 (Zip Code)


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations


Item 3.		Quantitative and Qualitative Disclosures About Market Risk


Item 2.		Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


Item 4.		Submission of Matters to a Vote of Security Holders


Item 1.		Legal Proceedings


Item 5.		Other Information


Item 6.		Exhibits and Reports on Form 8-K