MARSH SUPERMARKETS INC - 10-Q Quarterly Report

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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, 2004

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.

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 July 21, 2004:

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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 DON E. MARSH SECTION 1350 CERTIFICATION
EX-32.2 DOUGLAS W. DOUGHETRY SECTION 1350 CERTIFICATION

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MARSH SUPERMARKETS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	June 19,			March 27,			June 21,
	2004			2004			2003
	(Unaudited)			(Note A)			(Unaudited)
Assets
Current assets:
Cash and equivalents	$	41,656		$	27,584		$	25,947
Accounts and notes receivable, net		22,924			23,864			28,704
Inventories		127,280			126,840			125,917
Prepaid expenses		3,829			6,495			4,019
Recoverable income taxes		3,289			5,400			—

Total current assets		198,978			190,183			184,587
Property and equipment, less allowances for depreciation		294,955			297,028			311,417
Other assets		52,801			55,194			44,998

Total Assets	$	546,734		$	542,405		$	541,002

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	76,333		$	80,614		$	70,842
Accrued liabilities		46,925			48,170			49,287
Current maturities of long-term liabilities		5,080			3,427			3,177

Total current liabilities		128,338			132,211			123,306
Long-term liabilities:
Long-term debt		181,163			174,161			191,312
Capital lease obligations		27,935			28,188			28,787
Pension and post-retirement benefits		43,766			42,725			41,684

Total long-term liabilities		252,864			245,074			261,783
Deferred items:
Income taxes		18,483			18,309			9,840
Gains from sale/leasebacks		15,337			15,238			15,329
Other		3,526			3,297			2,681

Total deferred items		37,346			36,844			27,850
Shareholders’ Equity:
Common stock, Classes A and B		26,588			26,570			26,443
Retained earnings		131,399			130,813			132,137
Cost of common stock in treasury		(15,724	)		(15,011	)		(14,917	)
Deferred cost — restricted stock		(191	)		(211	)		(39	)
Notes receivable – stock purchases		(11	)		(11	)		(177	)
Accumulated other comprehensive loss		(13,875	)		(13,874	)		(15,384	)

Total shareholders’ equity		128,186			128,276			128,063

Total Liabilities and Shareholders’ Equity	$	546,734		$	542,205		$	541,002

See notes to condensed consolidated financial statements.

MARSH SUPERMARKETS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)
(Unaudited)


	12 Weeks Ended
	June 19,		June 21,
	2004		2003
Sales and other revenues	$	399,396	$	378,010
Gains from sales of property		456		—

Total revenues		399,852		378,010
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		281,123		264,079

Gross profit		118,729		113,931
Selling, general and administrative		106,039		102,119
Depreciation		5,785		5,762

Operating income		6,905		6,050
Interest		4,283		4,570
Other non-operating income		—		(634	)

Income before income taxes		2,622		2,114
Income taxes		1,004		856

Net income	$	1,618	$	1,258

Earnings per common share:
Basic	$	.20	$	.16
Diluted		.20		.16

Dividends declared per share	$	.13	$	.13

See notes to condensed consolidated financial statements.

MARSH SUPERMARKETS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(Unaudited)


	12 Weeks Ended
	June 19,			June 21,
	2004			2003
Operating activities
Net income	$	1,618		$	1,258
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		5,785			5,762
Amortization of other assets		357			297
Changes in operating assets and liabilities		1,776			5,655
Other operating activities		606			1,629

Net cash provided by operating activities		10,142			14,601
Investing activities
Net acquisition of property, equipment and land		(13,670	)		(6,154	)
Other investing activities		115			(727	)

Net cash used for investing activities		(13,555	)		(6,881	)
Financing activities
Repayments of short-term borrowings		—			(1,700	)
Proceeds of long-term borrowings		30,000			5,000
Proceeds of sale/leasebacks		10,810			—
Payments of long-term debt and capital leases		(21,598	)		(12,333	)
Cash dividends paid		(1,032	)		(1,034	)
Purchase of common shares for treasury		(794	)		—
Other financing activities		99			(19	)

Net cash provided by (used for) financing activities		17,485			(10,086	)
Net increase (decrease) in cash and equivalents		14,072			(2,366	)
Cash and equivalents at beginning of period		27,584			28,313

Cash and equivalents at end of period	$	41,656		$	25,947

See notes to condensed consolidated financial statements.

MARSH SUPERMARKETS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except per share amounts, or as otherwise noted)

June 19, 2004

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 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 27, 2004. The balance sheet at March 27, 2004, 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 “2005” and “2004” relate to the fiscal years ending April 2, 2005 and March 27, 2004, respectively.

The condensed consolidated financial statements for the twelve-week periods ended June 19, 2004 and June 21, 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.

Operating results for the twelve week period ended June 19, 2004, are not necessarily indicative of the results that may be expected for the full fiscal year ending April 2, 2005.

Note B – Earnings Per Share

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


	12 Weeks Ended
	June 19,			June 21,
	2004			2003
Net income	$	1,618		$	1,258

Weighted average shares outstanding		7,924			7,949
Non-vested restricted shares		(17	)		(6	)

Denominator for basic earnings per share		7,907			7,943
Effect of dilutive securities:
Non-vested restricted shares		17			6
Stock options		126			61

Denominator for diluted earnings per share - adjusted weighted average shares		8,050			8,010

Note D – Long-Term Debt and Guarantor Subsidiaries

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 its 8 7/8% senior subordinated notes. The Guarantors are wholly-owned subsidiaries of the Company.

Balance sheet as of June 19, 2004:


				Guarantor
	Parent			subsidiaries		Total
Assets
Current assets:
Cash and equivalents	$	—		$	41,656	$	41,656
Accounts and notes receivable, net		—			22,924		22,924
Inventories		—			127,280		127,280
Prepaid expenses		—			3,829		3,829
Recoverable income taxes		3,289			—		3,289

Total current assets		3,289			195,689		198,978
Property and equipment, less allowances for depreciation		32,681			262,274		294,955
Other assets		3,349			49,452		52,801

Total Assets	$	39,319		$	507,415	$	546,734

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—		$	76,333	$	76,333
Accrued liabilities		10,864			36,061		46,925
Current maturities of long-term liabilities		1,612			3,468		5,080

Total current liabilities		12,476			115,862		128,338
Long-term liabilities:
Long-term debt		111,913			69,250		181,163
Capital lease obligations		—			27,935		27,935
Pension and post-retirement benefits		39,514			4,252		43,766

Total long-term liabilities		151,427			101,437		252,864
Deferred items:
Income taxes		18,483			—		18,483
Other		56			18,807		18,863

Total deferred items		18,539			18,807		37,346
Amounts due parent from subsidiaries		(148,962	)		148,962		—
Shareholders’ Equity:
Common stock, Classes A and B		26,588			—		26,588
Retained earnings		9,052			122,347		131,399
Cost of common stock in treasury		(15,724	)		—		(15,724	)
Deferred cost — restricted stock		(191	)		—		(191	)
Notes receivable — stock purchase		(11	)		—		(11	)
Accumulated other comprehensive loss		(13,875	)		—		(13,875	)

Total shareholders’ equity		5,839			122,347		128,186

Total Liabilities and Shareholders’ Equity	$	39,319		$	507,415	$	546,734

Balance sheet as of March 27, 2004:


				Guarantor
	Parent			subsidiaries		Total
Assets
Current assets:
Cash and equivalents	$	—		$	27,584	$	27,584
Accounts and notes receivable, net		—			23,864		23,864
Inventories		—			126,840		126,840
Prepaid expenses		—			6,495		6,495
Recoverable income taxes		5,400			—		5,400

Total current assets		5,400			184,783		190,183
Property and equipment, less allowances for depreciation		32,717			264,311		297,028
Other assets		3,247			51,947		55,194

Total Assets	$	41,364		$	501,041	$	542,405

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—		$	80,614	$	80,614
Accrued liabilities		8,722			39,448		48,160
Current maturities of long-term liabilities		1,587			1,840		3,427

Total current liabilities		10,309			121,902		132,211
Long-term liabilities:
Long-term debt		112,173			61,988		174,161
Capital lease obligations		—			28,188		28,188
Pension and post-retirement benefits		38,541			4,184		42,725

Total long-term liabilities		150,714			94,360		245,074
Deferred items:
Income taxes		18,309			—		18,309
Other		55			18,480		18,535

Total deferred items		18,364			18,480		36,844
Amounts due parent from subsidiaries		(145,664	)		145,664		—
Shareholders’ Equity:
Common stock, Classes A and B		26,570			—		26,570
Retained earnings		10,178			120,635		130,813
Cost of common stock in treasury		(15,011	)		—		(15,011	)
Deferred cost — restricted stock		(211	)		—		(211	)
Notes receivable — stock purchases		(11	)		—		(11	)
Accumulated other comprehensive loss		(13,874	)		—		(13,874	)

Total shareholders’ equity		7,641			120,635		128,276

Total Liabilities and Shareholders’ Equity	$	41,364		$	501,041	$	542,405

Statement of income for the 12 weeks ended June 19, 2004:


				Guarantor		Consolidating
	Parent			subsidiaries		entries			Total
Total revenues	$	1,152		$	399,833	$	(1,133	)	$	399,852
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—			281,123		—			281,123

Gross profit		1,152			118,710		(1,133	)		118,729
Selling, general and administrative		529			106,643		(1,133	)		106,039
Depreciation		320			5,465		—			5,785

Operating income		303			6,602		—			6,905
Interest		420			3,863		—			4,283

Income (loss) before income taxes		(117	)		2,739		—			2,622
Income taxes (benefit)		(42	)		1,046		—			1,004

Net income (loss)	$	(75	)	$	1,693	$	—		$	1,618

Statement of income for the 12 weeks ended June 21, 2003:


				Guarantor		Consolidating
	Parent			subsidiaries		entries			Total
Total revenues	$	1,135		$	378,008	$	(1,133	)	$	378,010
Cost of merchandise sold, including warehousing and transportation, excluding depreciation		—			264,079		—			264,079

Gross profit		1,135			113,929		(1,133	)		113,931
Selling, general and administrative		656			102,596		(1,133	)		102,119
Depreciation		411			5,351		—			5,762

Operating income		68			5,982		—			6,050
Interest		419			4,151		—			4,570
Other non-operating income		(634	)		—		—			(634	)

Income before income taxes		283			1,831		—			2,114
Income taxes		119			737		—			856

Net income	$	164		$	1,094	$	—		$	1,258

Statement of cash flows for the twelve weeks ended June 19, 2004:


				Guarantor
	Parent			subsidiaries			Total
Net cash provided by operating activities	$	2,265		$	7,877		$	10,142
Net cash used for investing activities		(284	)		(13,271	)		(13,555	)
Financing activities
Proceeds of long-term borrowings		—			30,000			30,000
Proceeds of sale/leasebacks		—			10,810			10,810
Repayments of long-term debt and capital leases		(235	)		(21,363	)		(21,598	)
Cash dividends paid		(1,032	)		—			(1,032	)
Purchase of common shares for treasury		(794	)		—			(794	)
Other financing activities		80			19			99

Net cash provided by (used for) financing activities		(1,981	)		19,466			17,485

Net increase in cash and equivalents		—			14,072			14,072
Cash and equivalents at beginning of period		—			27,584			27,584

Cash and equivalents at end of period	$	—		$	41,656		$	41,656

Statement of cash flows for the twelve weeks ended June 21, 2003:


				Guarantor
	Parent			subsidiaries			Total
Net cash provided by operating activities	$	10,772		$	3,829		$	14,601
Net cash used for investing activities		(79	)		(6,802	)		(6,881	)
Financing activities
Repayments of short-term borrowings		—			(1,700	)		(1,700	)
Proceeds of long-term borrowings		—			5,000			5,000
Repayments of long-term debt and capital leases		(9,674	)		(2,659	)		(12,333	)
Cash dividends paid		(1,034	)		—			(1,034	)
Other financing activities		15			(34	)		(19	)

Net cash provided by (used for) financing activities		(10,693	)		607			(10,086	)

Net decrease in cash and equivalents		—			(2,366	)		(2,366	)
Cash and equivalents at beginning of period		—			28,313			28,313

Cash and equivalents at end of period	$	—		$	25,947		$	25,947

Note E – Employee Benefit Plans

The components of net periodic benefit cost were as follows:


	Pension						Post-retirement
	June 19,			June 21,			June 19,			June 21,
	2004			2003			2005			2004
Service cost	$	223		$	200		$	120		$	129
Interest cost		1,039			1,017			63			71
Expected return on plan assets		(763	)		(652	)		—			—
Recognized actuarial loss		365			395			9			9
Amortization of prior service cost		85			85			(5	)		2

Benefit cost	$	949		$	1,045		$	187		$	211

Note F – Recent Accounting Pronouncements

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed. The Act allows a possible subsidy to retirement health plan sponsors to help offset the costs of participant prescription drug benefits. In 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Act”, which is effective for interim or annual periods beginning after June 15, 2004. Accordingly, the Company’s accumulated post-retirement benefit obligation does not reflect the effects of this Act. The Company believes that any future effect of the Act on its consolidated financial statements will not be material.

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

General

At June 19, 2004, Marsh Supermarkets, Inc. (the “Company” or “Marsh”) operated through wholly-owned subsidiaries 113 supermarkets and 164 Village Pantry convenience stores in central Indiana and western Ohio. Marsh also owns 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 McNamara and one business florist under the name Enflora.

Business Overview

Revenues from supermarket operations represented 77.8% of total revenues for the twelve weeks ended June 19, 2004, while convenience stores and foodservices contributed 17.5% and 3.8% 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 February 2004.

Market Trends

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 June 19, 2004, there were 8 major competitors’ stores opened or remodeled within the last 12 months, compared to 15 at June 21, 2003. Although the Company believes that the number of competitors’ new store openings has peaked, is expected that new stores will continue to be opened in the market. Employment in the five largest cities in the Company’s market area increased 0.7%, or about 8,000 jobs, from May 2002 to May 2004.

The Company’s ability to increase gross profit rates continues to be a challenge due to competitors’ pricing and promotional activity. Also, during the past few months there have been significant commodity price increases, particularly in beef, pork, poultry and dairy, creating additional pressures on gross profit rates.

Management Focus

Given the continued pressures on revenues and gross profit rates, the Company’s management continues its focus on merchandising plans, expense reduction, asset management and cash flow.

The Company’s merchandising plan is currently focused on pricing strategies and the enhancement of its price image, increasing sales of its private label products and the effective store execution of merchandising programs.

The Company continues to seek expense reduction initiatives, which were initiated in fiscal year 2003. Those initiatives included, among others, 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, and improvements in warehousing and delivery logistics. The initiatives completed to date have partially offset increases in non-controllable and other selling, general and administrative expenses.

Results of Operations

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:


	First Quarter
	Percent of Revenues
							Percent
	2005			2004			Change
Total revenues		100.0	%		100.0	%		5.8	%
Gross profit		29.7	%		30.1	%		4.2	%
Selling, general and administrative		26.5	%		27.0	%		3.8	%
Depreciation		1.4	%		1.5	%		0.4	%
Operating income		1.7	%		1.6	%		14.1	%
Interest		1.1	%		1.2	%		(6.3	%)
Other non-operating income		—			0.2	%		n/m
Income taxes		0.3	%		0.2	%		17.3	%
Income from continuing operations		0.4	%		0.3	%		28.6	%

n/m = not meaningful

Total Revenues

Consolidated total revenues were $399.9 million for the first quarter of 2005, compared to $378.0 million for the first quarter of 2004. Gasoline sales were $38.0 million for the first quarter of 2005 compared to $26.1 million for the first quarter of 2004, and consolidated total revenues excluding gasoline sales were $361.9 million and $351.9 million, respectively, for the first quarter of 2005 and 2004. The Company excludes gasoline sales from its analysis of revenues and comparable store sales and believes it is useful information for others because gasoline prices fluctuate widely and frequently. Sales in comparable supermarkets and convenience stores increased 3.2% in 2005 from 2004, but sales in comparable supermarkets and convenience stores excluding gasoline sales declined 0.4%. A store is included in comparable store sales beginning in the four-week period after the store has been in operation a full year, including replacement stores and format conversions. Competitors’ new store openings and continued high levels of competitive promotional activity continue to adversely affect comparable store sales.

Gross Profit

Gross profit is calculated net of promotional expenses and warehousing and transportation costs, but excludes depreciation. Gross profit as a percentage of revenues may not be comparable to other supermarket retailers because the Company does not include purchasing costs and advertising costs in the calculation. Consolidated gross profit was 29.7% of revenues for the first quarter of 2005 compared to 30.1% for the same quarter of 2004. The decline is solely attributable to an increase in gasoline sales at a margin rate significantly lower than the margin rates achieved in the Company’s other lines of business.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses include store expenses, administrative and corporate expenses, advertising and purchasing personnel costs. Consolidated SG&A expenses increased $3.9 million to $106.0 million from the year earlier quarter. The increase resulted from four supermarkets opened subsequent to the end of the year earlier quarter and higher advertising outlays. Consolidated SG&A expenses were 26.5% of revenues for the first quarter of 2005 compared to 27.0% for the first quarter of 2004. Total wage expense in supermarkets and convenience stores increased 0.4% as a result of the aforementioned store openings. Wage expense in stores open both quarters, excluding supermarket conversions to the LoBill format, decreased 3.0% due to a reduction in hours worked. The continued refinement of labor scheduling utilizing store specific labor profiles primarily accounted for the reduction in hours worked.

Depreciation Expense

Depreciation expense was $5.8 million for the first quarter of both 2005 and 2004. Depreciation expense as a percentage of revenues was 1.4% in 2005 and 1.5% in 2004.

Other Non-operating Income

During the quarter ended June 21, 2003, the Company purchased $9.5 million of its 8 7/8% senior subordinated notes in various transactions at less than face value. The transactions resulted in a gain, net of pro rata issuance costs, of $0.6 million.

Interest Expense

Interest expense was $4.3 million for the first quarter of 2005 compared to $4.6 million for the first quarter of 2004, with the decline attributable to a lower total debt level. Interest expense as a percentage of revenues was 1.1% for the first quarter of 2005 compared to 1.2% for the first quarter of 2004.

Income Taxes

The effective income tax rate was 38.3% for the first quarter of 2005 compared to 40.5% for the prior year quarter. The decline in the effective rate for the first quarter of 2005 is attributable to the increase in pre-tax income.

Pension and Post-retirement Benefits

Deferred pension and post-retirement benefit obligations increased $1.0 million to $43.8 million at June 19, 2004, from March 27, 2004. The increase is primarily attributable to the recognition of periodic expense for deferred pension plans.

Capital Expenditures

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 quarter of 2005, one Marsh supermarket was converted to the LoBill format and construction began on both a new Marsh supermarket and a new concept 21,000 square foot Arthur’s Fresh Market. Additionally in 2005, the Company plans to construct a Marsh “lifestyle” supermarket and one new LoBill Foods, remodel four supermarkets and construct one additional Arthur’s Fresh Market. The cost of these projects and other capital commitments is estimated to be $60 million. Of this amount, the Company plans to fund approximately $27 million through sale/leasebacks or build to suit arrangements, $13 million through equipment leasing and believes it can finance the balance with internally generated funds.

The Company’s plans with respect to store financing, 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 competitive influences, cost and availability of capital, 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 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 2005 was $10.1 million, compared to $14.6 million in the first quarter of 2004. Net cash provided by operating activities in the first quarter of 2005 was less than in the first quarter of 2004 due to a decline in inventory in the first quarter of 2004 and a decline in accounts payable in 2005, partially offset by declines in accounts and notes receivable and prepaid expenses in 2005. Working capital at June 19, 2004 increased $12.7 million to $70.6 million from March 27, 2004 due primarily to a $14.1 million increase in cash and equivalents.

The Company has a 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 $45.0 million under the facility at June 19, 2004. The credit facility is secured by land and buildings having a net carrying cost of $68.4 million at June 19, 2004 and the facility contains certain debt covenants, including limits on future indebtedness, and limitations on the ratio of long-term debt to EBITDA and on fixed charge coverage, 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 $37.5 million as of June 19, 2004.

During the quarter ended June 21, 2003 the Company purchased and retired $9.5 million of its 8 7/8% senior subordinated notes at less than face value. The purchase resulted in a gain of $0.6 million.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make assumptions and estimates that could have a material impact on the reported results of operations. Although 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 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 administered by the Retirement Committee of Marsh Supermarkets, Inc. and Subsidiaries. An independent financial consulting firm is engaged to advise the retirement committee and independent actuaries are consulted to assist in the determination of appropriate assumptions and are engaged to calculate estimated future obligations.

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 item cost 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 initial purchase of the related merchandise is sold.

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 adjusted on a specific transaction basis.

Cautionary Note Regarding Forward-Looking Statements

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; the Company’s ability to improve comparable store sales; the level of discounting and promotional spending by competitors; the stability and timing of distribution incentives from suppliers; the level of margins achievable in the Company’s operating divisions; softness in the local and national economies and the general retail food industry; the success of the Company’s new and remodeled stores, including image and rebranding programs; potential interest rate increases on variable rate debt, as well as terms, costs and the availability of capital; the Company’s ability to control employee medical costs; uncertainties regarding future real estate gains due to limited real estate holdings available for sale; the ability of the Company to predict and respond to changes in customer preferences and lifestyles; the ability of the Company to respond to commodity price fluctuations; uncertainties regarding gasoline prices and margins; the Company’s ability to control costs including labor, rent, credit card, and workers compensation and general liability expense; the Company’s ability to implement cost improvement initiatives; uncertainties related to state and federal taxation and tobacco and environmental legislation; the Company’s ability to collect outstanding notes and accounts receivable; uncertainties associated with pension and other retirement obligations; the successful economic implementation of new technology; the impact of any acquisitions and dispositions; the timely and on budget completion of store construction, expansion, conversion and remodeling; 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 June 19, 2004, a one percent change in interest rates would not have had a material impact on the Company.

Item 4. Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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.

Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended June 19, 2004, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable.

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

In July 1994, the Board of Directors announced a plan for the repurchase of its Class A Common Stock and/or Class B Common Stock. The amount originally authorized has been subsequently amended, most recently to $18.0 million. Share repurchases during the quarter ended June 19, 2004, were as follows:


			Class A shares				Class B shares
					Average				Average
Begin	End		Number		price		Number		price
03/28/04		04/27/04		1,700		14.48		300		13.30
04/28/04		05/27/04		51,300		14.76		—		—
05/28/04		06/19/04		599		13.78		—		—

Total				53,599		14.74		300		13.30

All of the share purchases during the quarter ended June 19, 2004 were made under the plan. At June 19, 2004, the maximum amount that may yet be purchased under the plan was $1.0 million. The plan does not have a specified termination date.

Item 3. Defaults upon Senior Securities

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:

	31.1	Rule 13(a)-14(a)/15(d)-14(a) Certification of Don E. Marsh.

	31.2	Rule 13(a)-14(a)/15(d)-14(a) Certification of Douglas W. Dougherty.

	32.1	Section 1350 Certification of Don E. Marsh.

	32.2	Section 1350 Certification of Douglas W. Dougherty.

(b)	Reports on Form 8-K


	MARSH SUPERMARKETS, INC.
August 2, 2004	By:	/s/ Douglas W. Dougherty
		Douglas W. Dougherty
		Senior Vice President, Chief Financial Officer and Treasurer



August 2, 2004	By:	/s/ Mark A. Varner
		Mark A. Varner
		Chief Accounting Officer Vice President – Corporate Controller

Class A Common Stock Class B Common Stock

3,743,090
4,153,675

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