EX-13 20 g83405exv13.txt EX-13 PORTIONS OF 2003 ANNUAL REPORT . . . EXHIBIT 13 FINANCIAL HIGHLIGHTS (in thousands, except per share amounts)
2003 2002 2001 ---------- ---------- ---------- Total revenues ...................................... $1,655,735 $1,642,599 $1,545,903 Income from continuing operations ................... 4,045 11,541 10,646 Diluted earnings per share from continuing operations ............................. $ .50 $ 1.31 $ 1.20 Dividends per share ................................. .46 .44 .44 Total assets ........................................ $ 554,880 $ 583,230 $ 577,814 Long-term liabilities ............................... 227,157 263,756 262,485 Shareholders' equity ................................ 131,448 140,797 138,276 Book value per share ................................ $ 16.54 $ 17.66 $ 16.96 Number of shares outstanding at year end ............ 7,947 7,972 8,155 Income from continuing operations as a percentage of: Sales and other revenues ......................... .2% .7% .7% Average shareholders' equity ..................... 3.0% 8.3% 7.9% Stores open at year-end: Supermarkets ...................................... 112 109 101 Convenience stores ................................ 167 191 187
Marsh(R) Supermarkets, Inc. was founded in 1931 with one store in Muncie, Indiana. In 1953, the Company went public with 16 stores. Today, it is a leading regional food retailer headquartered in Indianapolis, Indiana. The Company operates 67 Marsh(R) Supermarkets, 34 LoBill Foods(R), 8 O'Malia Food Markets(R), 167 Village Pantry(R) convenience stores, and 3 Savin*$ stores, all in Indiana and Ohio, Crystal Food Services(TM), a specialist in catering, office coffee, coffee roasting, business cafeteria management, vending and concessions, Primo Banquet Catering and Conference Centers, Floral Fashions, and McNamara Florist and Enflora(R) Flowers for Business. The 14,500 Marsh employees serve two million customers each week. SELECTED FINANCIAL DATA (in thousands, except per share amounts)
March 29, March 30, March 31, April 1, March 27, As of and for the year ended 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Total revenues ......................... $ 1,655,735 $ 1,642,599 $ 1,545,903 $ 1,423,736 $ 1,288,996 Income from continuing operations before income taxes ......................... 7,102 17,613 15,795 15,480 11,616 Income from continuing operations ...... 4,045 11,541 10,646 10,459 8,427 Discontinued operation: Income (loss), net of tax ............ -- (859) 1,290 1,807 3,154 Gain (loss) on disposal, net of tax .. (354) 2,726 -- -- -- ----------- ----------- ----------- ----------- ----------- Net income ............................. $ 3,691 $ 13,408 $ 11,936 $ 12,266 $ 11,581 =========== =========== =========== =========== =========== Basic earnings per common share: Continuing operations .............. $ .50 $ 1.45 $ 1.30 $ 1.25 $ 1.02 Discontinued operation ............. -- (.11) .16 .22 .38 Disposal of discontinued operation . (.04) .34 -- -- -- ----------- ----------- ----------- ----------- ----------- Net income ............................. $ .46 $ 1.68 $ 1.46 $ 1.47 $ 1.40 =========== =========== =========== =========== =========== Diluted earnings per common share: Continuing operations .............. $ .50 $ 1.31 $ 1.20 $ 1.16 $ .96 Discontinued operation ............. -- (.09) .13 .18 .32 Disposal of discontinued operation . (.04) .29 -- -- -- ----------- ----------- ----------- ----------- ----------- Net income ............................. $ .46 $ 1.51 $ 1.33 $ 1.34 $ 1.28 =========== =========== =========== =========== =========== Dividends declared per share ........... $ .46 $ .44 $ .44 $ .44 $ .44 Total assets ........................... $ 554,880 $ 583,230 $ 577,814 $ 567,005 $ 509,683 Long-term liabilities .................. 227,157 263,756 262,485 232,990 241,720 Total shareholders' equity ............. 131,448 140,797 138,276 132,912 124,480
SELECTED QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share amounts)
2003 2002 ----------------------------------------- ----------------------------------------- Fourth Third Second First Fourth Third Second First -------- -------- -------- -------- -------- -------- -------- -------- Sales and other revenues .................... $369,012 $382,305 $512,722 $383,495 $370,044 $385,064 $506,795 $374,799 Gains from sales of property ................ 4,249 406 1,875 1,671 3,239 771 1,435 452 -------- -------- -------- -------- -------- -------- -------- -------- Total revenues .............................. 373,261 382,711 514,597 385,166 373,283 385,835 508,230 375,251 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit ................................ 110,790 113,833 154,578 118,935 117,915 118,086 150,131 112,584 Selling, general and administrative ......... 102,241 101,586 138,739 102,914 103,367 101,587 133,488 97,255 Depreciation ................................ 5,714 5,633 7,527 5,590 5,407 5,779 6,941 4,756 -------- -------- -------- -------- -------- -------- -------- -------- Operating income ............................ 2,835 6,614 8,312 10,431 9,141 10,720 9,702 10,573 Interest .................................... 5,021 5,416 7,410 5,423 5,600 5,138 6,712 5,073 Other non-operating income .................. (1,209) (971) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes ....................... (977) 2,169 902 5,008 3,541 5,582 2,990 5,500 Income taxes ................................ (333) 965 578 1,847 1,442 1,837 941 1,852 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations ........... (644) 1,204 324 3,161 2,099 3,745 2,049 3,648 Discontinued operation: Income (loss) from operations, net of tax -- -- -- -- -- -- (1,122) 263 Gain (loss) on disposal, net of tax ....... (180) 25 (18) (181) (159) (390) 3,275 -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ........................... $ (824) $ 1,229 $ 306 $ 2,980 $ 1,940 $ 3,355 $ 4,202 $ 3,911 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings (loss) per common share: Continuing operations ....................... $ (.08) $ .15 $ .04 $ .40 $ .26 $ .47 $ .26 $ .46 Discontinued operation ...................... -- -- -- -- -- -- (.14) .03 Disposal of discontinued operation .......... (.02) -- -- (.02) (.02) (.05) .41 -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ........................... $ (.10) $ .15 $ .04 $ .38 $ .24 $ .42 $ .53 $ .49 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings (loss) per common share: Continuing operations ....................... $ (.08) $ .15 $ .04 $ .35 $ .24 $ .42 $ .25 $ .41 Discontinued operation ...................... -- -- -- -- -- -- (.12) .03 Disposal of discontinued operation .......... (.02) -- -- (.02) (.02) (.04) .35 -- -------- -------- -------- -------- -------- -------- -------- -------- Net income .................................. $ (.10) $ .15 $ .04 $ .33 $ .22 $ .38 $ .48 $ .44 ======== ======== ======== ======== ======== ======== ======== ======== Common stock prices (daily close): Class A - High ......................... $ 13.35 $ 12.49 $ 15.41 $ 15.88 $ 15.61 $ 15.03 $ 15.01 $ 15.53 Low .......................... 10.99 10.99 11.74 13.73 14.14 12.32 12.96 13.39 Class B - High ......................... 11.88 12.48 13.84 14.29 14.77 14.06 14.16 13.17 Low .......................... 9.64 11.33 11.33 12.46 13.00 12.31 11.97 10.16 Cash Dividend: Class A ...................... $ .13 $ .11 $ .11 $ .11 $ .11 $ .11 $ .11 $ .11 Class B ...................... .13 .11 .11 .11 .11 .11 .11 .11
Cash dividends have been paid on the common stock during each quarter for the past 43 years. Quarterly earnings per share are based on weighted average shares outstanding for the quarter; therefore, the sum of the quarters may not equal the full year earnings per share amount. The first, third and fourth quarters are 12 weeks. The second quarter is 16 weeks. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 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; 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 related to state and federal taxation and tobacco and environmental legislation; the successful integration of acquisitions; potential interest rate increases on variable rate debt; 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. STRATEGY In response to the current year decline in same store sales, combined with the expectation that certain expenses, particularly medical costs, workers compensation costs, credit card fees, utilities and insurance, will continue to increase, the Company's management identified a number of cost improvement initiatives that the Company began pursuing during the fourth quarter of 2003 and intends to pursue in fiscal year 2004. Those initiatives include 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, selective store closings, a reduction in headquarters expense and discontinuance of home delivery service. Given the difficult competitive environment, and known and unknown risks and uncertainties associated with these initiatives, there can be no assurances regarding the ultimate success or impact of these initiatives on the Company's results of operations or financial condition. RESULTS OF OPERATIONS 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:
Percentage of Revenues Year Ended Percentage Change -------------------------------- --------------------- March 29, March 30, March 31, 2003 2002 2003 2002 2001 vs. 2002 vs. 2001 --------- --------- --------- -------- -------- Total revenues ...................................... 100.0% 100.0% 100.0% 0.8% 6.3% Gross profit ........................................ 30.1 30.4 30.0 (0.1) 7.6 Selling, general and administrative ................. 26.9 26.5 25.8 2.2 9.1 Depreciation ........................................ 1.5 1.4 1.6 6.9 (6.2) Operating income .................................... 1.7 2.4 2.6 (29.8) 1.7 Interest ............................................ 1.4 1.4 1.5 3.3 (1.0) Other non-operating expense (income) ................ (0.1) -- 0.1 n/m n/m Income from continuing operations before income taxes 0.4 1.1 1.0 (59.7) 11.5 Income taxes ........................................ 0.2 0.4 0.3 (49.7) 17.9 Income from continuing operations ................... 0.2 0.7 0.7 (65.0) 8.4
n/m = not meaningful TOTAL REVENUES In 2003, consolidated total revenues of $1,655.7 million increased $13.1 million, or 0.8%, from 2002. Supermarket, convenience store and food service revenues accounted for 81%, 15% and 3%, respectively, of consolidated revenues. Sales and other revenues decreased in supermarkets 0.6%, but increased in convenience stores 3.5% and in food service 20.1%. In 2003, consolidated revenues excluding fuel sales increased 0.2%, but sales in comparable stores, including replacement stores and format conversions, decreased 3.1% from 2002. Comparable store sales for the fourth quarter of 2003 decreased 2.2% from 2002, following a 3.8% decline in the third quarter of 2003 from 2002. Increased competitive square footage and promotions, a weak economy and food deflation all contributed to the decline in same store sales. In 2003, comparable convenience store inside sales (retail sales excluding fuel sales) increased 4.4% and comparable store fuel gallons sold increased 5.4% in 2003 from 2002. Gains from sales of property in the normal course of operations were $8.2 million in 2003 compared to $5.9 million in 2002. Although results may vary from period to period, future gains from sale of properties 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 have a material adverse affect the Company's results of operations. In 2002, consolidated total revenues of $1,642.6 million increased $96.7 million, or 6.3%, from 2001. Supermarket, convenience store and food service revenues accounted for 83%, 14% and 3%, respectively, of consolidated revenues. Total revenues increased in supermarkets 7.9% and in food service 7.0%, but declined in convenience stores 2.9%. In 2002, consolidated sales excluding fuel sales increased 6.5% and sales in comparable stores, including replacement stores and format conversions, increased 2.5% from 2001. Comparable store sales increased over the respective year earlier quarter during each quarter of 2002 despite competitive activity and low rates of food price inflation. In 2002, convenience store inside sales (retail sales excluding fuel sales) decreased 1.2% and fuel gallons sold increased 3.6% from 2001. Gains from sales of property were $5.9 million in 2002 compared to $3.7 million in 2001. GROSS PROFIT Gross profit is net of warehousing, transportation and promotional expenses. Expressed as a percentage of revenues, consolidated gross profit was 30.1% of total revenues in 2003 compared to 30.4% in 2002, however, consolidated gross profit excluding fuel was 31.5% in both 2003 and 2002. Gross profit as a percentage of revenues declined in supermarkets and convenience stores, but improved in food service. In 2002, consolidated gross profit was 30.4% of revenues compared to 30.0% in 2001. Consolidated gross profit excluding fuel, expressed as a percentage of revenues, was 31.5% in 2002 compared to 31.3% in 2001. Consolidated gross profit in 2002 includes $1.3 million from the termination of a fuel supplier's agreement. Gross profit as a percentage of revenues improved in supermarkets and declined slightly in both convenience stores and food service. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In 2003, consolidated selling, general and administrative expenses were 26.9% of consolidated sales and other revenues compared to 26.5% in 2002. The increase, as a percentage of consolidated total revenues, was primarily attributable to higher medical benefits costs, building and equipment rent and repairs, workers compensation and credit card fees, partially offset by lower wage costs. Excluding supermarket format conversions, wages in stores open both years decreased 4.3% in 2003 from 2002 due to continued efforts to improve labor efficiency. During the fourth quarter of 2003, the Company announced a reorganization in headquarters staff, the discontinuance of its home delivery service and the closing of a LoBill supermarket. As a result of the headquarters staff reorganization, the Company took a $1.1 million charge against earnings in 2003. In 2002, consolidated selling, general and administrative expenses were 26.5% of consolidated sales and other revenues compared to 25.8% in 2001. Wages in stores open both years, excluding supermarket conversions to the LoBill format, increased 1.3% in 2002 from 2001. DEPRECIATION Depreciation expense was $24.5 million, $22.9 million and $24.4 million in 2003, 2002, and 2001, respectively. Expressed as a percentage of revenues, depreciation expense was 1.5% in 2003, 1.4% in 2002 and 1.6% in 2001. As a result of its periodic examination and review of its accounting policies and practices in 2001, the Company determined that a revision of the estimated useful lives used to depreciate buildings and land improvements, and leasehold improvements was appropriate in light of the Company's historical experience and its assessment of prevailing industry practice. The change was effected in the third quarter of 2001. The change resulted in a decrease in depreciation expense of $3.9 million and an increase in net income of $2.6 million, or $.32 per diluted share, for the year ended March 29, 2003, a decrease in depreciation expense of $4.5 million and an increase in net income of $2.9 million, or $.31 per diluted share, for the year ended March 30, 2002 and a decrease in depreciation expense of $2.4 million and an increase in net income of $1.6 million, or $.17 per diluted share, for the year ended March 31, 2001. INTEREST Interest expense was $23.3 million in 2003, $22.5 million in 2002, and $22.7 million in 2001. As a percentage of revenues, interest expense was 1.4% in both 2003 and 2002 and 1.5% in 2001. OTHER NON-OPERATING EXPENSE In 2003, the Company repurchased $30.5 million of its outstanding senior subordinated debentures on the open market at discounts to face value resulting in gains of $2.2 million, net of pro-rata debt issuance costs. INCOME TAXES The effective income tax rate was 43.0% for 2003, 34.5% for 2002, and 32.6% for 2001. The increase in the effective rate for 2003 over the prior years was due primarily to the decline in pretax income. The effective income tax rate for 2004 is expected to approximate 37%. CAPITAL EXPENDITURES Capital expenditures and major capital projects completed during the last three years consisted of:
2003 2002 2001 ------ ------ ------ Capital expenditures (millions) ............... $ 48.7 $ 66.0 $ 55.1 ====== ====== ====== Supermarkets New/acquired stores .................... 3 13 8 Closed stores .......................... 1 2 -- Major remodels/expansions .............. 3 2 -- Format conversions ..................... 1 6 -- Convenience stores New/acquired stores .................... -- 7 15 Closed stores .......................... 22 10 7
In 2003, the Company constructed one new supermarket, acquired two supermarkets, remodeled three supermarkets, began the remodel of one supermarket, converted one Marsh store to the LoBill format and opened two floral shops. The Company completed construction of a 119,000 square foot frozen food distribution facility that began operating in August 2002. Over 100 convenience stores were re-imaged with new exterior graphics and painting, new interior decor and new interior fixture layout. Twenty-two under performing convenience stores were closed during the year with the majority of the closings concurrent with lease expirations. During 2002, the Company disposed of its wholesale division in order to focus on its core retail businesses. Proceeds of approximately $14 million were used to reduce outstanding debt. In 2004, the Company plans to construct two new Marsh supermarkets and one new LoBill Foods, convert one Marsh supermarket to a LoBill Foods, remodel four to six supermarkets, continue the convenience store re-imaging and upgrade certain information systems. The cost of these projects and other capital commitments is estimated to be $40 million. Of this amount, the Company plans to fund approximately $20 million through sale/leasebacks, $10 million through equipment leasing and believes it can finance the balance with internally generated funds. 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 competitive influences, its ability to successfully negotiate site acquisitions or leases, zoning limitations and other governmental regulations. The timing of projects is subject to normal construction and other delays. It is possible that projects described above may not commence, others may be added, a portion of 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 financing arrangements. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities during 2003 was $38.4 million, compared to $37.7 million in 2002. During 2003, working capital decreased $13.8 million as cash decreased $9.2 million and accounts receivable decreased $6.4 million. For 2003, investing activities consisted primarily of $48.7 million in expenditures for acquisition of property, equipment and land for expansion, and proceeds of $11.4 million from disposals of property and land. The Company's capital requirements are traditionally financed through internally generated funds, long-term borrowings and lease financings, including capital and operating leases. The Company anticipates continued access to such financing sources. The Company's long-term debt and capital lease obligations, net of current maturities, were $227.2 million at March 29, 2003, compared to $263.8 million at March 30, 2002. During the fourth quarter of 2003, the Company retired $19.9 million of convertible debentures and repurchased $30.5 million of senior subordinated notes. At March 29, 2003, 82.3% of the long-term debt and capital lease obligations were at fixed rates of interest with a 9.3% weighted average rate, and 17.7% were at variable rates of interest with a 3.9% weighted average rate. In March 2003, the Company amended its revolving credit facility, changed the commitment to $95.0 million, extended the maturity to February 2006 and added security of land and buildings having a carrying cost of $49.6 million at March 29, 2003. At March 29, 2003, $41.0 million was borrowed on the revolving credit facility. A bank commitment for short-term borrowing provides an additional $3.0 million of available financing, of which $1.7 million was borrowed at March 29, 2003. Long-term financial obligations (in millions) as of March 29, 2003:
Payments due by period --------------------------------------------------- Less than 1-3 4-5 After 5 Total 1 year years years years ------ --------- ------ ------ ------- Long-term debt, including current maturities ............. $201.1 $ 2.5 $ 47.6 $125.6 $ 25.4 Capital leases ........... 64.7 4.4 8.8 8.8 42.7 Operating leases ......... 261.6 31.7 59.3 39.9 130.7 ------ ------ ------ ------ ------ Total .................... $527.4 $ 38.6 $115.7 $174.3 $198.8 ====== ====== ====== ====== ======
MARKET RISK - INTEREST The Company, as a policy, does not engage in speculative or leveraged 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 March 29, 2003, a 100 basis point change in interest rates would not have had a material impact on the Company. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires management to make assumptions and estimates that can 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, 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. REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of Marsh Supermarkets, Inc. is responsible for the preparation and integrity of the consolidated financial statements included in this annual report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and necessarily include some amounts based on management's best estimates and judgment. All financial information appearing in this annual report is consistent with that in the financial statements. The Company maintains a system of internal controls designed to provide reasonable assurance, on a cost-effective basis, that assets are safeguarded and transactions are properly authorized and recorded accurately in the financial records. The Company believes its control system is enhanced by its long-standing emphasis on conducting business in accordance with the highest standards of conduct and ethics. Independent auditors, Ernst & Young LLP, have audited the accompanying financial statements. Their report is included herein. Their audits, conducted in accordance with auditing standards generally accepted in the United States, included the review and evaluation of selected internal accounting controls for purposes of designing their audit tests. The Audit Committee of the Board of Directors meets periodically with the independent auditors to discuss the scope and results of their audit work, their assessment of internal controls, and the quality of financial reporting. The independent auditors are engaged by the Board of Directors, upon recommendation of the Audit Committee. Don E. Marsh Chairman of the Board and Chief Executive Officer Douglas Dougherty Senior Vice President, Chief Financial Officer and Treasurer Mark Varner Vice President - Corporate Controller REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Marsh Supermarkets, Inc. We have audited the accompanying consolidated balance sheets of Marsh Supermarkets, Inc. as of March 29, 2003 and March 30, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended March 29, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marsh Supermarkets, Inc. at March 29, 2003 and March 30, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 29, 2003, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Indianapolis, Indiana May 16, 2003 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
YEAR ENDED March 29, 2003 March 30, 2002 March 31, 2001 ---------- -------------- -------------- -------------- Sales and other revenues ......................................... $ 1,647,534 $ 1,636,702 $ 1,542,172 Gains from sales of property ..................................... 8,201 5,897 3,731 ----------- ----------- ----------- Total revenues ................................................... 1,655,735 1,642,599 1,545,903 Cost of merchandise sold, including warehousing and transportation 1,157,599 1,143,883 1,082,581 ----------- ----------- ----------- Gross profit ..................................................... 498,136 498,716 463,322 Selling, general and administrative expenses ..................... 445,480 435,697 399,475 Depreciation ..................................................... 24,464 22,883 24,400 ----------- ----------- ----------- Operating income ................................................. 28,192 40,136 39,447 Interest ......................................................... 23,270 22,523 22,741 Other non-operating expense (income) ............................. (2,180) -- 911 ----------- ----------- ----------- Income from continuing operations before income taxes ............ 7,102 17,613 15,795 Income taxes ..................................................... 3,057 6,072 5,149 ----------- ----------- ----------- Income from continuing operations ................................ 4,045 11,541 10,646 Discontinued operation: Income (loss) from operations, net of tax ...................... -- (859) 1,290 Gain (loss) on disposal, net of tax ............................ (354) 2,726 -- ----------- ----------- ----------- Net income .................................................. $ 3,691 $ 13,408 $ 11,936 =========== =========== =========== Basic earnings (loss) per common share: Continuing operations .......................................... $ .50 $ 1.45 $ 1.30 Discontinued operation ......................................... -- (.11) .16 Disposal of discontinued operation ............................. (.04) .34 -- ----------- ----------- ----------- Net income ..................................................... $ .46 $ 1.68 $ 1.46 =========== =========== =========== Diluted earnings (loss) per common share: Continuing operations .......................................... $ .50 $ 1.31 $ 1.20 Discontinued operation ......................................... -- (.09) .13 Disposal of discontinued operation ............................. (.04) .29 -- ----------- ----------- ----------- Net income ..................................................... $ .46 $ 1.51 $ 1.33 =========== =========== =========== Dividends declared per share ..................................... $ .46 $ .44 $ .44
See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares)
ASSETS March 29, 2003 March 30, 2002 ------ -------------- -------------- Current Assets Cash and equivalents .................................................... $ 28,313 $ 37,516 Accounts receivable, less allowances of $2,960 in 2003 and $2,494 in 2002 27,203 33,613 Inventories ............................................................. 135,855 132,940 Prepaid expenses ........................................................ 5,731 7,639 Recoverable income taxes ................................................ -- 1,021 --------- --------- TOTAL CURRENT ASSETS ............................................... 197,102 212,729 Property and Equipment Land .................................................................... 46,856 54,553 Buildings and land improvements ......................................... 187,942 206,822 Fixtures and equipment .................................................. 148,342 134,758 Leasehold improvements .................................................. 78,212 70,980 Construction in progress ................................................ 7,385 3,866 Property under capital leases ........................................... 31,923 27,754 --------- --------- 500,660 498,733 Accumulated depreciation ................................................ (189,191) (180,083) --------- --------- TOTAL PROPERTY AND EQUIPMENT ....................................... 311,469 318,650 Other Assets .............................................................. 46,309 51,851 --------- --------- $ 554,880 $ 583,230 ========= =========
See Notes to Consolidated Financial Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY March 29, 2003 March 30, 2002 ------------------------------------ -------------- -------------- Current Liabilities Notes payable to bank ................................... $ 1,700 $ 1,300 Accounts payable ........................................ 71,883 71,640 Employee compensation and other liabilities ............. 17,215 20,248 State and local taxes ................................... 16,351 14,779 Other accounts payable and accrued expenses ............. 9,686 11,668 Dividends payable ....................................... 1,035 880 Income taxes payable .................................... 5,378 5,247 Current maturities of long-term liabilities ............. 3,452 2,727 --------- --------- TOTAL CURRENT LIABILITIES ......................... 126,700 128,489 Long-term Liabilities Long-term debt .......................................... 198,148 237,823 Capital lease obligations ............................... 29,009 25,933 --------- --------- TOTAL LONG-TERM LIABILITIES ....................... 227,157 263,756 Deferred Items Income taxes ............................................ 11,525 16,472 Pension and post-retirement benefits .................... 40,824 20,863 Gains from sale/leasebacks .............................. 15,595 10,164 Other ................................................... 1,631 2,689 --------- --------- TOTAL DEFERRED ITEMS .............................. 69,575 50,188 Shareholders' Equity Series A Junior Participating Cumulative Preferred Stock: Authorized: 5,000,000 shares; Issued: None ........... -- -- Class A Common Stock, no par value: Authorized: 15,000,000 shares; Issued: 4,695,253 ..... 9,573 9,573 Class B Common Stock, no par value: Authorized: 15,000,000 shares; Issued: 5,265,158 ..... 16,866 16,830 Retained earnings ....................................... 135,550 135,534 Cost of Common Stock in treasury Class A: 2003 - 877,715; 2002 - 848,645 shares ....... (5,626) (5,224) Class B: 2003 - 1,135,479; 2002 - 1,139,296 shares ... (9,302) (9,285) Deferred cost - restricted stock ........................ (54) (270) Notes receivable - stock options ........................ (175) (1,037) Accumulated other comprehensive loss .................... (15,384) (5,324) --------- --------- SHAREHOLDERS' EQUITY ....................................... 131,448 140,797 --------- --------- $ 554,880 $ 583,230 ========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
Common Stock Other -------------------- Retained Treasury Comprehensive Class A Class B Earnings Stock Other Loss Total -------- -------- -------- -------- -------- -------- -------- Balance at April 1, 2000 ...................... $ 9,001 $ 16,454 $117,360 $ (7,858) $ (2,045) $ -- $132,912 Net income .................................. 11,936 11,936 Cash dividends declared ..................... (3,614) (3,614) Amortization of restricted stock grants ..... 844 844 Repurchase of 317,078 shares ................ (4,036) (4,036) Exercise of stock options - 49,200 shares ... 467 126 206 (530) 269 Other ....................................... 18 (37) 32 (48) (35) -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 2001 ..................... 9,468 16,598 125,645 (11,656) (1,779) -- 138,276 Comprehensive income: Net income ................................ 13,408 13,408 Minimum pension liability adjustment, less tax benefit of $2,867 .............. (5,324) (5,324) -------- Total comprehensive income .................. 8,084 -------- Cash dividends declared ..................... (3,519) (3,519) Amortization of restricted stock grants ..... 459 459 Restricted stock grant of 9,300 shares ...... 78 53 131 Repurchase of 252,600 shares ................ (3,368) (3,368) Exercise of stock options - 56,713 shares ... 27 214 436 677 Other ....................................... 18 26 13 57 -------- -------- -------- -------- -------- -------- -------- Balance at March 30, 2002 ..................... 9,573 16,830 135,534 (14,509) (1,307) (5,324) 140,797 Comprehensive income: Net income ................................ 3,691 3,691 Minimum pension liability adjustment, less tax benefit of $5,259 .............. (10,060) (10,060) -------- Total comprehensive income (loss) ........... (6,369) -------- Cash dividends declared ..................... (3,662) (3,662) Amortization of restricted stock grants ..... 216 216 Restricted stock grant of 6,200 shares ...... 92 92 Repurchase of 47,645 shares ................. (643) (643) Exercise of stock options - 11,875 shares ... 16 97 113 Reduction in notes receivable - stock options 899 899 Other ....................................... 20 (13) 35 (37) 5 -------- -------- -------- -------- -------- -------- -------- Balance at March 29, 2003 ..................... $ 9,573 $ 16,866 $135,550 $(14,928) $ (229) $(15,384) $131,448 ======== ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED March 29, 2003 March 30, 2002 March 31, 2001 ---------- -------------- -------------- -------------- OPERATING ACTIVITIES Net income ................................................... $ 3,691 $ 13,408 $ 11,936 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................. 24,464 23,034 25,058 Amortization of other assets ............................. 1,435 2,462 4,991 Loss (gain) on sale of discontinued operation ............ 354 (2,726) -- Increase (decrease) in deferred income taxes ............. (165) 2,785 1,914 Changes in operating assets and liabilities: Accounts receivable .................................... 10,996 17,775 (1,945) Inventories ............................................ (2,915) (10,865) (686) Prepaid expenses and recoverable income taxes .......... 2,929 (1,293) 346 Accounts payable and accrued expenses .................. (2,592) (5,875) 4,717 Other operating activities ............................... 155 (1,040) (464) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 38,352 37,665 45,867 INVESTING ACTIVITIES Acquisition of property, equipment and land held for expansion (48,673) (66,049) (55,076) Disposition of property, equipment and land held for expansion 11,387 4,587 4,788 Proceeds from sale of discontinued operation ................. -- 14,292 -- Other investing activities ................................... (813) (2,591) (13,679) --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES ................... (38,099) (49,761) (63,967) FINANCING ACTIVITIES Proceeds (repayments) of short-term borrowings ............... 400 1,300 (10,000) Proceeds of long-term borrowings ............................. 76,000 28,000 66,011 Proceeds of sales/leasebacks ................................. 34,537 33,594 31,577 Payments of long-term debt and capital lease obligations ..... (116,043) (38,486) (62,225) Purchases of Class A and Class B Common Stock for treasury ... (643) (3,368) (4,036) Cash dividends paid .......................................... (3,506) (3,537) (3,651) Stock options exercised ...................................... 113 677 234 Other financing activities ................................... (314) 175 12 --------- --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ............................................. (9,456) 18,355 17,922 INCREASE (DECREASE) IN CASH AND EQUIVALENTS ..................... (9,203) 6,259 (178) Cash and equivalents at beginning of year .................... 37,516 31,257 31,435 --------- --------- --------- CASH AND EQUIVALENTS AT END OF YEAR ...................... $ 28,313 $ 37,516 $ 31,257 ========= ========= =========
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share amounts or as otherwise noted) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in preparation of the consolidated financial statements are: FISCAL YEAR The Company's fiscal year ends on Saturday of the thirteenth week of each calendar year. All references to "2003", "2002" and "2001" relate to the fiscal years ended March 29, 2003, March 30, 2002, and March 31, 2001, respectively. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Marsh Supermarkets, Inc. and all majority-owned subsidiaries (the "Company"). Investments in partnerships in which the Company has a minority interest are accounted for by the equity method. Significant intercompany accounts and transactions have been eliminated. BUSINESS SEGMENTS The Company operates one business segment: the retail sale of food and related products through supermarkets, convenience stores and food services. RECLASSIFICATIONS Certain reclassifications have been made to prior periods to conform to current presentations. CASH AND EQUIVALENTS Cash and equivalents consist of highly liquid investments with a maturity of three months or less when purchased. The carrying amount approximates the fair value of those assets. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out method for the principal components of inventories, and by the first-in, first-out method for the remainder (see "Note 8"). PROPERTY AND EQUIPMENT Property and equipment are stated at cost, including amounts capitalized for interest. For financial reporting purposes, depreciation is computed by the straight-line method over the estimated useful lives of the assets, generally 33 years for buildings and 20 years for land improvements, five to 12 years for fixtures and equipment, and 20 years for leasehold improvements (see "Note 7"). For income tax purposes, accelerated methods and statutory lives are used to compute depreciation. CAPITALIZED LEASE PROPERTY Capitalized lease assets are amortized using the straight-line method over the term of the lease, or in accordance with practices established for similar owned assets if ownership transfers to the Company at the end of the lease term. Amortization is included with depreciation expense. INCOME TAXES Deferred tax assets and liabilities result from differences between financial reporting and tax bases of assets and liabilities, measured using enacted tax rates and laws expected to be in effect when the differences reverse. REVENUE RECOGNITION Revenue from retail sales is recognized at the time of sale. Vendor allowances are recognized as they are earned and reported as a reduction of cost of goods sold. Allowances for doubtful accounts are provided based on the Company's uncollectible account experience. EXCISE TAXES Sales and cost of merchandise sold include state and federal excise taxes on tobacco, gasoline and alcohol products of approximately $56 million in 2003, $41 million in 2002, and $40 million in 2001. ADVERTISING COSTS Advertising communication costs are expensed in the period incurred and production costs are expensed the first time the respective advertising is displayed. Advertising costs in the amounts of $22.3 million, $23.2 million, and $23.9 million were recorded and included in selling, general and administrative expenses for 2003, 2002, and 2001, respectively. COST OF OPENING STORES Non-capital expenditures associated with opening new stores are expensed as incurred. USE OF ESTIMATES Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include provisions for self-insurance losses. Actual results could differ from those estimates. ENVIRONMENTAL LIABILITIES Environmental liabilities are recorded when environmental assessments indicate remedial efforts are required and the costs can be reasonably estimated. The Company is aware of the existence of petroleum contamination at 28 sites and has commenced remediation at each of those sites. Current estimates of the total compliance costs to be incurred, net of estimated recoveries from an Indiana excess liability fund, are not material. Leak detection tests are performed at all petroleum dispensing sites more frequently than required by current environmental laws and regulations. STOCK OPTION PLANS The Company has employee stock benefit plans, which are described more fully in "Note 14". 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:
2003 2002 2001 ---------- ---------- ---------- Net income, as reported ........... $ 3,691 $ 13,408 $ 11,936 Less compensation expense using the fair value method, net of tax 970 534 416 ---------- ---------- ---------- Pro-forma net income .............. $ 2,721 $ 12,874 $ 11,520 ========== ========== ========== Earnings per share, as reported: Basic ........................... $ .46 $ 1.68 $ 1.46 Diluted ......................... .46 1.51 1.33 Pro-forma earnings per share: Basic ........................... .34 1.62 1.41 Diluted ......................... .34 1.46 1.29
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement was effective for the Company at the beginning of fiscal year 2003 and had no impact on the Company's financial statements for the current year. 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 May 15, 2002 and did not have a material impact on the Company. The remaining provisions become effective for the fiscal year beginning after May 15, 2002 (the Company's 2004 fiscal year). The Company early adopted the provisions of FAS 145 and classified gains from the fiscal year 2003 retirement of debt as other non-operating income. In June 2002, the FASB issued Statement No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." FAS 146 was to be applied prospectively to covered activities initiated after December 31, 2002. The Company applied the provisions of FAS 146 to the headquarters staffing reduction described in "Note 4." In November 2002, the FASB issued FASB Interpretation (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The recognition provisions of FIN 45 were effective for any guarantees issued or modified after December 31, 2002 and the disclosure requirements were effective for financial statements of periods after December 15, 2002. The interpretation had no effect on the Company's results of operations or financial position for the current year. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The statement amended FAS 123 and was effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of the Statement in the current year. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities" which was effective for new entities created after January 31, 2003 and for interim periods beginning after June 15, 2003 for variable interest entities created or acquired before February 1, 2003. The interpretation had no effect on the Company's results of operations or financial position for the current year and is not expected to have an effect on the Company's fiscal year 2004 financial statements. NOTE 3 - 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 (EPS). Convertible debentures have been excluded from the 2003 computation because the effect would have been antidilutive.
2003 2002 2001 -------- -------- -------- Net income - basic EPS numerator .. $ 3,691 $ 13,408 $ 11,936 Effect of convertible debentures .. -- 911 938 -------- -------- -------- Income after assumed conversions - diluted EPS numerator ......... $ 3,691 $ 14,319 $ 12,874 ======== ======== ======== Weighted average shares outstanding 7,965 8,021 8,279 Non-vested restricted shares .... (22) (54) (99) -------- -------- -------- Basic EPS denominator ............. 7,943 7,967 8,180 Effect of dilutive securities: Non-vested restricted shares .... 22 54 99 Employee stock options .......... 136 160 110 Convertible debentures .......... -- 1,284 1,290 -------- -------- -------- Adjusted weighted average shares - diluted EPS denominator ......... 8,101 9,465 9,679 ======== ======== ========
NOTE 4 - HEADQUARTERS RESTRUCTURING During 2003, the Company reduced staffing at its corporate headquarters resulting in the incurrence of $1.1 million in termination costs which is included in reported selling, general and administrative expense on the income statement. At March 29, 2003, the remaining liability related to the restructuring was $0.7 million. NOTE 5 - GOODWILL The Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142), effective April 1, 2001. FAS 142 discontinued the amortization of goodwill and prescribes future periodic testing of goodwill for impairment. The required annual impairment test was completed in January 2003, and resulted in no adjustment to recorded goodwill. Adjusted net income and net income per share were as follows:
2003 2002 2001 ---------- ---------- ---------- Reported net income ............. $ 3,691 $ 13,408 $ 11,936 Goodwill amortization, net of tax -- -- 537 Adjusted net income - basic ..... 3,691 13,408 12,473 ---------- ---------- ---------- Effect of convertible debentures -- 911 938 ---------- ---------- ---------- Adjusted net income - dilutive .. $ 3,691 $ 14,319 $ 13,411 ========== ========== ========== Basic earnings per share: Reported net income ............. $ .46 $ 1.68 $ 1.46 Goodwill amortization, net of tax -- -- .07 ---------- ---------- ---------- Adjusted net income ............. $ .46 $ 1.68 $ 1.53 ========== ========== ========== Diluted earnings per share: Reported net income ............. $ .46 $ 1.51 $ 1.33 Goodwill amortization, net of tax -- -- .06 ---------- ---------- ---------- Adjusted net income ............. $ .46 $ 1.51 $ 1.39 ========== ========== ==========
NOTE 6 - DISCONTINUED OPERATION In October 2001, the Company completed the sale of certain assets of its wholesale division. The sale included inventory, property, buildings and equipment, and certain other assets plus the assumption by the buyer of certain liabilities. Proceeds of $14.3 million from the sale were used primarily to reduce amounts outstanding under the Company's revolving credit facility. A gain of $4.2 million ($2.7 million net of tax) was recognized in 2002. The remaining assets and liabilities from the discontinued operation included in the consolidated balance sheet at March 29, 2003 are not material. Operating results of the discontinued operation were as follows:
2002 2001 --------- --------- Sales and other revenues .............. $ 140,869 $ 331,515 ========= ========= Income (loss) before tax .............. $ (1,322) $ 1,984 Income tax ............................ (463) 694 --------- --------- Net income (loss) ..................... $ (859) $ 1,290 ========= =========
NOTE 7 - CHANGE IN ESTIMATED USEFUL LIVES OF PROPERTY AND EQUIPMENT In 2001, as a result of the Company's periodic examination and review of its accounting policies and practices, the Company determined that a revision of the estimated useful lives used to depreciate buildings and land improvements and leasehold improvements was appropriate in light of the Company's historical experience and its assessment of industry practice. The change was effected in the third quarter of 2001. The change resulted in a decrease in depreciation expense of $3.9 million and an increase in net income of $2.6 million, or $.32 per diluted share, for the year ended March 29, 2003, a decrease in depreciation expense of $4.5 million and an increase in net income of $2.9 million, or $.31 per diluted share, for the year ended March 30, 2002, and a decrease in depreciation expense of $2.4 million and an increase in net income of $1.6 million, or $.17 per diluted share, for the year ended March 31, 2001. NOTE 8 - INVENTORIES Inventories are comprised of finished goods and goods held for resale. Inventories valued by the LIFO method represented approximately 66% and 70% of consolidated inventories at March 29, 2003, and March 30, 2002, respectively. Current inventory cost exceeded the carrying amount of LIFO inventories by $1.5 million at March 29, 2003, and $1.9 million at March 30, 2002. Valuation allowances related to inventories were $1.3 million at March 29, 2003, and $1.2 million at March 30, 2002. NOTE 9 - EMPLOYEE BENEFIT PLANS Historically, the Company provided a qualified defined benefit pension plan covering the majority of its non-union employees and an unfunded supplemental retirement plan for corporate officers designated by the Board of Directors. The plans provide for payment of retirement benefits on the basis of employees' length of service and earnings history. Plan assets consist principally of listed stocks, corporate and government notes and bonds. In 1997, the Company froze benefit accruals under its qualified defined benefit pension plan and concurrently amended one of the Company's defined contribution savings plans to permit discretionary Company contributions. The amounts recognized in the consolidated balance sheets were as follows:
Pension Postretirement 2003 2002 2003 2002 -------- -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year ......... $ 58,894 $ 55,535 $ 4,403 $ 3,316 Service cost ................ 687 579 434 337 Interest cost ............... 4,320 4,235 306 233 Amendments .................. -- -- -- 182 Actuarial loss .............. 7,915 1,193 371 590 Benefits paid ............... (2,496) (2,648) (383) (255) -------- -------- -------- -------- Benefit obligation at end of year ............... $ 69,320 $ 58,894 $ 5,131 $ 4,403 ======== ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year ...... $ 42,144 $ 43,698 $ -- $ -- Return on plan assets ....... (5,443) 915 -- -- Company contribution ........ 179 179 383 255 Benefits paid ............... (2,496) (2,648) (383) (255) -------- -------- -------- -------- Fair value of plan assets at end of year ............ $ 34,384 $ 42,144 $ -- $ -- ======== ======== ======== ========
The funded status of the plans were as follows:
Pension Postretirement 2003 2002 2003 2002 -------- -------- -------- -------- Funded status of the plan (underfunded) $(34,936) $(16,750) $ (5,131) $ (4,403) Unrecognized net actuarial loss .... 27,622 11,168 901 365 Unrecognized prior service cost ...... 1,505 1,876 174 182 -------- -------- -------- -------- Net amount recognized $ (5,809) $ (3,706) $ (4,056) $ (3,856) ======== ======== ======== ========
Amounts recognized in the consolidated balance sheets consist of: Accrued benefit liability ......... $(30,824) $(12,428) $ (4,056) $ (3,856) Intangible asset .... 1,505 531 -- -- Accumulated other comprehensive loss 23,510 8,191 -- -- -------- -------- -------- -------- Net amount recognized $ (5,809) $ (3,706) $ (4,056) $ (3,856) ======== ======== ======== ========
The components of net pension benefit expense and assumptions used were as follows:
2003 2002 2001 ------- ------- ------- Service cost ..................... $ 687 $ 579 $ 443 Interest cost .................... 4,320 4,235 3,990 Expected return on plan assets ... (3,498) (3,850) (4,570) Recognized actuarial (gain)/loss . 403 259 (117) Amortization of prior service cost 370 370 370 ------- ------- ------- Benefit cost ..................... $ 2,282 $ 1,593 $ 116 ======= ======= ======= Discount rate .................... 6.50% 7.60% 7.60% Expected return on plan assets ... 8.50% 9.00% 9.00% Rate of compensation increase for supplemental plan ......... 5.00% 5.00% 5.00%
The components of net postretirement benefits costs were as follows:
2003 2002 2001 ----- ----- ----- Service cost ............... $ 434 $ 337 $ 272 Interest cost .............. 306 233 214 Other ...................... 8 -- (24) ----- ----- ----- Benefit cost ............... $ 748 $ 570 $ 462 ===== ===== =====
The Company's assumed healthcare cost trend rate is 10.00% for 2003, decreasing gradually to 6.00% by 2014, and thereafter. The assumed healthcare cost trend rate can have a significant effect on the amounts reported. However, a one percentage point change in the assumed rate would not have a material effect on the benefit obligation or expense. The Company provides certain postretirement healthcare benefits for its non-union retirees and their eligible spouses. The plans are contributory with retiree contributions adjusted annually and certain other cost sharing features, such as deductibles and co-insurance. The Company provides a defined contribution savings plan that allows 401(k) contributions by employees who elect to participate and can satisfy minimum age and annual service requirements. The Company matches a portion of employees' contributions and may make a discretionary annual contribution depending upon the Company's profitability. Expense for the plan was $2.4 million in 2003, $3.8 million in 2002 and $3.7 million in 2001. The Company had provided a defined contribution plan for employees of the discontinued operation, for which expense was $0.2 million in 2001. The Company also participates in a multi-employer plan that provides defined benefits to its union employees. The Company expense for this plan amounted to $1.3 million in 2003, $0.9 million in 2002 and $0.8 million in 2001. NOTE 10 - DEBT Long-term debt consisted of the following:
2003 2002 --------- --------- 10.05% notes ............................... $ 12,678 $ 13,977 8.25% mortgage ............................. 15,985 16,411 8.95% mortgage ............................. 9,905 10,141 Revolving credit facility .................. 41,000 28,000 8 7/8% senior subordinated notes ........... 119,545 150,000 Less discount ........................ (421) (652) 7% convertible subordinated debentures ..... -- 19,909 Other ...................................... 1,998 2,081 Less current maturities .................... (2,542) (2,044) --------- --------- $ 198,148 $ 237,823 ========= =========
The 10.05% notes are payable in monthly installments (principal and interest) of $220,000 through 2009. Land and buildings with a net carrying amount of $20.7 million are pledged as collateral for the notes. The 8.25% mortgage is payable in monthly installments (principal and interest) of $147,000 and matures in January 2010. The mortgage is secured by land and buildings with a net carrying amount of $18.4 million. The 8.95% mortgage is payable in monthly installments (principal and interest) of $94,000 and matures in May 2010. The mortgage is secured by land and buildings with a net carrying amount of $7.7 million. The revolving credit facility permits total borrowings of $95.0 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. In March 2003, the revolving credit facility was amended to extend the maturity date to February 2006. Per the amendment, land and buildings with a net carrying amount of $49.6 million secure the credit facility. Interest on the 8 7/8% senior subordinated notes is payable semi-annually and the principal matures in August 2007. The effective interest rate is 9.0%. During 2003, the Company purchased $30.5 million of the notes on the open market. The gain recognized from the retirement of the notes is included in other non-operating income. The 7% convertible subordinated debentures matured in February 2003, and were retired with borrowings from the revolving credit facility. At March 29, 2003, the fair market value of the Company's long-term debt was approximately $187.0 million. The fair market value was estimated using quoted market rates for publicly traded debt and current incremental borrowing rates for non-public debt. The revolving credit facility and senior subordinated notes both require maintenance of minimum working capital and limit cash dividends, repurchases of common stock, future indebtedness, lease obligations and disposition of assets. The Company has a bank commitment for short-term borrowings of up to $3.0 million at rates based upon the then prevailing federal funds rate. At March 29, 2003, $1.7 million was borrowed against this commitment. Aggregate future principal payments of long-term debt outstanding at March 29, 2003 were: 2004............................. $ 2,542 2005............................. 2,375 2006............................. 45,206 2007............................. 2,868 2008............................. 122,722 Thereafter....................... 25,398
Interest expense consisted of:
2003 2002 2001 ------- ------- ------- Long-term debt ................. $19,742 $20,159 $20,878 Capital lease obligations ...... 3,518 2,317 1,781 Discontinued operation ......... -- 782 1,656 Other .......................... 10 47 82 ------- ------- ------- Total interest expense ......... $23,270 $23,305 $24,397 ======= ======= ======= Interest capitalized ........... $ 474 $ 744 $ 804 ======= ======= ======= Cash payments for interest ..... $23,472 $23,229 $24,433 ======= ======= =======
NOTE 11 - GUARANTOR SUBSIDIARIES Other than four inconsequential subsidiaries, all of the Company's subsidiaries (the "guarantors") have guaranteed on a joint and several basis the Company's obligations under the $150.0 million 8 7/8% senior subordinated notes. The guarantors are 100% direct or indirect wholly-owned subsidiaries of the Company. 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. Summarized combined financial information for the guarantors is set forth below:
2003 2002 -------- -------- Current assets ....................... $197,102 $207,530 Current liabilities .................. 119,351 121,229 Noncurrent assets .................... 312,831 331,074 Noncurrent liabilities ............... 154,378 120,997
2003 2002 2001 ---------- ---------- ---------- Total revenues ........ $1,653,760 $1,612,149 $1,545,183 Gross profit .......... 496,161 489,897 462,602 Net income ............ 12,804 24,163 23,065
NOTE 12 - LEASES Of the Company's 286 retail stores, 190 are leased under commercial lease agreements providing for initial terms generally from 15 to 20 years with options to extend the initial terms up to an additional 20 years. The Company also leases a portion of its transportation and store equipment for periods of three to eight years plus renewal and purchase options. Capitalized lease property consisted of store facilities having a net carrying cost of $26.2 million at March 29, 2003 and $23.9 million at March 30, 2002. Future minimum lease payments for capital and operating leases with terms in excess of one year, and the present value of capital lease obligations, at March 29, 2003 were as follows:
Capital Operating Leases Leases ------ --------- 2004........................................... $ 4,428 $ 31,684 2005........................................... 4,418 29,104 2006........................................... 4,385 30,205 2007........................................... 4,398 21,791 2008........................................... 4,398 18,147 Thereafter................................... 42,717 130,696 ======= ======== 64,744 $261,627 -------- Less: Amounts representing interest 34,825 ------- Present value of net minimum lease payments........................ $29,919 -------
Minimum annual lease payments will be reduced by $2.2 million from future sublease rentals due over the term of the subleases. Rental expense consisted of:
2003 2002 2001 -------- -------- -------- Minimum rentals ............. $ 37,224 $ 30,458 $ 27,912 Contingent rentals .......... 193 152 87 Sublease rental income ...... (1,514) (1,474) (1,732) -------- -------- -------- $ 35,903 $ 29,136 $ 26,267 ======== ======== ========
NOTE 13 - INCOME TAXES The components of deferred tax assets and liabilities were as follows:
2003 2002 -------- -------- Deferred tax assets: Compensation and benefit accruals ....... $ 14,306 $ 7,087 Self insurance reserves ................. 767 746 Other ................................... 5,421 6,417 -------- -------- Total deferred tax assets ............ 20,494 14,250 Deferred tax liabilities: Property and equipment, including leased property ...................... (26,979) (26,240) Prepaid employee benefits ............... (79) (1,173) Inventory ............................... (7,152) (6,929) Other ................................... (2,579) (1,627) -------- -------- Total deferred tax liabilities ....... (36,789) (35,969) -------- -------- Net deferred tax liability ................. $(16,295) $(21,719) ======== ========
Income tax expense consisted of the following:
2003 2002 2001 ------- ------- ------- Current - Federal ......... $ 3,000 $ 419 $ 3,154 State ........... 137 (43) 85 Deferred - Federal ......... (28) 5,678 1,890 State ........... (52) 18 20 ------- ------- ------- $ 3,057 $ 6,072 $ 5,149 ======= ======= ======= Cash payments .............. $ 1,272 $ 1,567 $ 3,145 ======= ======= =======
A reconciliation of income tax expense is as follows:
2003 2002 2001 ------- ------- ------- Federal statutory tax rate ......... $ 2,486 $ 6,165 $ 5,529 State and local, net of federal tax 55 (19) 68 Other .............................. 516 (74) (448) ------- ------- ------- Total income tax expense ........... $ 3,057 $ 6,072 $ 5,149 ======= ======= =======
NOTE 14 - SHAREHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS COMMON STOCK Class A Common Stock has one vote per share; Class B Common Stock is non-voting except with respect to certain matters affecting the rights and preferences of that class. Each class is entitled to equal per share dividends and consideration in any merger, consolidation or liquidation of the Company. A person who acquires 10% or more of outstanding Class A Common Stock without acquiring a like percentage of Class B Common Stock must make a public tender offer to acquire additional Class B Common Stock. Failure to do so results in suspension of the voting rights of the Class A Common Stock held by such person. CHANGES IN SHARES OUTSTANDING Changes in shares issued and treasury shares during the three years ended March 29, 2003 were as follows:
Class A Class B ------- ------- Issued shares: Balance at March 31, 2001, March 30, 2002, and March 29, 2003 ......... 4,695 5,265 ====== ====== Treasury shares: Balance at April 1, 2000 ................... 691 851 Repurchase of shares ..................... 111 206 Stock options exercised .................. (36) (13) Director stock purchases ................. -- (5) ------ ------ Balance at March 31, 2001 .................. 766 1,039 Repurchase of shares ..................... 95 157 Stock options exercised .................. (3) (53) Director stock purchases ................. -- (4) Restricted stock grant ................... (9) -- ------ ------ Balance at March 30, 2002 .................. 849 1,139 Repurchase of shares ..................... 35 12 Stock options exercised .................. -- (12) Director stock purchases ................. -- (4) Restricted stock grant ................... (6) -- ------ ------ Balance at March 29, 2003 .................. 878 1,135 ------ ------ Net outstanding at March 29, 2003 .......... 3,817 4,130 ====== ======
STOCK OPTION PLANS AND SHARES RESERVED The 1998 Stock Incentive Plan, as amended in 2002, reserves 1,500,000 shares of common stock, in any combination of Class A and Class B, for the grant of stock options, restricted stock and/or other stock-based awards. The option price for any incentive stock option may not be less than 100% of the fair market value of the Common Stock as of the date of grant and for any non-qualified stock option may not be less than 85% of the fair market value as of the date of grant. Options granted to date become exercisable pro-rata over three or four-year periods beginning one year from the date of grant and expire 10 years from date of grant. The 1991 Employee Stock Incentive Plan (as amended in 1995) reserves 750,000 shares of common stock, in any combination of Class A and Class B, for the grant of stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and/or other stock-based awards. Grants of options made under this plan are non-qualified. Substantially all grants were at the market value of the underlying common stock at date of grant. They become exercisable pro-rata over a four-year period beginning one year from date of grant and expire 10 years from date of grant. In December 1998, 65,000 shares of restricted Class A Common Stock were granted under the 1998 Stock Incentive Plan and in September 1997, 150,750 shares of restricted Class A Common Stock were granted under the 1991 Employee Stock Incentive Plan to certain key employees. The shares vested ratably on each of the first four anniversaries of the date of grant and are subject to restrictions on their sale or transfer. The 1999 Outside Directors' Stock Option Plan reserves 150,000 shares of common stock, in any combination of Class A and Class B, for the grant of stock options and restricted stock to non-employee directors. The Board of Directors administers the plan and determines the terms and conditions of the awards, subject to the terms of the plan. The option price may not be less than 85% of the market value as of the date of the grant. The 1992 Stock Option Plan for Outside Directors reserved 50,000 shares of Class B Common Stock for the grant of stock options and restricted stock to non-employee directors. The plan expired in August 2002. Options were granted upon election of each of the directors by the shareholders at the market value of the underlying common stock at date of grant. The options became exercisable and restrictions lapsed in equal installments, on the date of each of the two Annual Meetings following the date of grant and expire 10 years from date of grant. As of March 29, 2003, 97,675 shares in any combination of Class A and Class B were reserved for future awards under the 1991 Plan, 110,451 shares in any combination of Class A and Class B were reserved for future awards under the 1998 Plan, and 17,000 shares in any combination of Class A and Class B were reserved for awards under the 1999 outside directors plan. All equity compensation plans of the Company have been approved by its shareholders. Following is summary information for options outstanding and shares reserved for all plans:
Class A Class B ------- ------- Shares to be issued upon exercise of options ...................... 1,358 551 Weighted average exercise price ................. $14.13 $ 9.91 Shares available for future issuance ............ 225(a) --
(a) in any combination of Class A and Class B A summary of the Company's stock option activity follows: (price is weighted average; options are in thousands)
Class A shares Class B shares -------------------- -------------------- Price Options Price Options ----- ------- ----- ------- Outstanding at April 1, 2000 ........ $14.26 674 $12.25 297 Granted .................. -- -- 9.80 362 Exercised ................ 13.81 (36) 13.81 (14) Expired/forfeited ........ 14.23 (9) 13.72 (34) ------ ------ Outstanding at March 31, 2001 ....... 14.29 629 10.68 611 Granted .................. 13.17 394 13.00 46 Exercised ................ 13.50 (15) 11.18 (38) Expired/forfeited ........ 14.14 (37) 10.32 (31) ------ ------ Outstanding at March 30, 2002 ....... 13.86 971 9.93 588 Granted .................. 14.77 453 -- -- Exercised ................ -- -- 9.51 (12) Expired/forfeited ........ 14.51 (66) 10.44 (25) ------ ------ Outstanding at March 29, 2003 ....... $14.13 1,358 $ 9.91 551 ====== ======
Related stock option information is as follows: (options are in thousands)
2003 2002 2001 ------- ------- ------- Vested options at the end of the year Class A shares ................... 625 453 405 Class B shares ................... 363 282 248 Weighted average exercise price of vested options Class A shares ................... $ 13.99 $ 14.10 $ 13.91 Class B shares ................... 11.20 11.43 11.95 Weighted average exercise price of options granted during the year Class A shares ................... $ 14.77 $ 13.17 $ -- Class B shares ................... -- 13.00 9.80
At March 29, 2003, the range of option exercise prices for Class A shares was $13.01 to $15.38 and for Class B shares was $9.50 to $14.75 and the weighted-average remaining contractual life of those options for Class A and Class B shares was 7.0 years and 5.2 years, respectively. The fair value of granted options reported in "Note 1 - Significant Accounting Policies" was estimated using a Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001 -------- -------- -------- Dividend yield .................. 3.5% 3.0% 3.5% Volatility ...................... 21% 29% 34% Risk free interest rate ......... 5.2% 4.7% 5.5% Expected life in years .......... 10.0 10.0 9.0 Weighted average grant date fair value of options granted during the year Class A shares ............. $ 3.35 $ 3.96 $ -- Class B shares ............. -- 3.78 3.09
OTHER STOCK PLANS The 1998 Executive Stock Purchase Plan allows designated executives and officers to purchase issued and outstanding shares of the Company's common stock, in any combination of Class A and Class B, to an aggregate of 300,000 shares. The Company has arranged for each participant to obtain a bank loan to fund the purchase of shares and guarantees the repayment to the bank of all principal, interest and other obligations of each participant. The total amount of principal and interest owed by participants at March 29, 2003 was $3.7 million and at March 30, 2002 was $4.4 million. It is management's intent to enter into no further guarantees of these obligations. The Company presently holds notes receivable totaling $0.2 million for funds loaned to certain employees to exercise stock options granted under the 1987 Plan and under an expired 1980 plan. The notes were issued prior to July 30, 2002, bear interest at 6.0% or 6.6% per annum, are collateralized by the shares and are due on various dates, with the last maturing June 2003. The existing notes will not be renewed and management's intent is to execute no new notes of this type to executive officers. The amount of the receivable is shown on the balance sheet as a reduction of equity. The 1998 Outside Directors' Stock Plan provides outside directors the opportunity to use all or any portion of the fees paid by the Company for their services as directors to purchase Class B Common Stock from the Company in lieu of a cash payment of such fees. The plan authorized 100,000 shares of Class B Common Stock and shares issued pursuant to the plan may be authorized but unissued shares or treasury shares. Shares are purchased quarterly at market price. AMENDED AND RESTATED RIGHTS PLAN In December 1998, the Company announced that the Board of Directors had amended and restated the 1989 Shareholder Rights Plan, pursuant to which preferred stock purchase rights ("Rights") were previously distributed as a dividend at the rate of one Right for each common share held. Each Right entitles a shareholder to buy one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock of the Company at an exercise price of $65. The Rights will be exercisable only if a person or group acquires beneficial ownership of 20% or more of either class of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of either class of the Company's common stock. If the rights become exercisable, each Right not owned by such 20% shareholder or related parties will entitle its holder to purchase, at the Right's then-current exercise price, shares of common stock (or, in certain circumstances as determined by the Board, cash, property or other securities of the Company) having a value of twice the Right's exercise price. The Company will generally be entitled to redeem the rights at $.01 per Right, at any time until the 15th day following public announcement that a 20% position has been acquired. The Rights expire on December 24, 2008.